 You may have heard about recent discussions to ditch the 50% CGT discount, but what does it mean, and how will it impact you? What are Capital Gains? Capital gains are the difference between selling or disposing of an asset and what they cost you to obtain.  For example, if you purchase a property for $320k and sell it for $540k, you would have made a $220k capital gain. The opposite of this is a capital loss. For example, if the property was instead sold for $300k, it would be a capital loss of $20k.  Capital losses can reduce your capital gains and can be carried forward to future financial years. You can learn more here. How are Capital Gains taxed? The tax paid on the disposal of assets is referred to as Capital Gains Tax (CGT), but it is not a ‘separate’ tax. It’s included in your income tax for the financial year that you disposed of the asset.  Capital gains are taxed at your individual income rate. This means that if you had a $220k capital gain, and your income was $220k, your new taxable income would become $440k. Note that CGT only applies to the profits on investments, shares, and crypto assets. It does not apply to the sale of your residential property. There are also exceptions to when these rules apply, such as the six-year rule. What is the CGT discount? The CGT discount was introduced in 1999 by the Howard government to encourage long-term investments. At the time, short “churn and burn” trading was popular, and the government wanted to incentivise holding onto capital (especially shares) for longer periods. The discount ensures that if you sell or dispose of an asset that you owned for at least 12 months (and are an Australian resident for tax purposes) your CGT tax is cut in half.
Why do people want to change it? In early 2000, shortly after the CGT discount was introduced, the Dot-com bubble burst, frightening investors into the perceivably more stable property market and away from shares. This created a shift toward property investment.  The discussion to repeal this discount is primarily focused on housing affordability. The idea is that property investment would be less desirable, and therefore free up supply for first home buyers.
Other criticisms include that the discount skews more to higher income earners and that investment properties (and their associated tax incentives) have been used as vehicles to shelter wages from income tax. What does this mean for me? Some reports have said that the discount may remain, but at 33% rather than 50%. The treasury is also considering applying this change retroactively. This means that if you currently own an investment property you may not get the full discount, or any, if the Treasury decides to scrap it entirely. This may push investors who have been holding onto properties to sell sooner rather than later, amid the tight timeframe for the reform budget on May 12. Alternatively, if the discount is scrapped for property but retained for shares, we may see a spike in share investing such as ETFs and managed funds. What should I do now? No decisions have been made yet. We will need to wait for the May budget to get firm answers. In the meantime, it might be wise to review the ownership structure of your assets. For example, trusts can be used to spread out tax liabilities. Individual ownership may no longer be right for you come May. And if the CGT is applied retroactively, investors may want to get their discount while they can. If you are considering disposing of assets prior to the CGT discount changes, we would recommend seeking advice on how to limit your taxable income through tax planning. You can contact us here to discuss more about how these changes may impact you. Comments are closed.
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