Tax changes in the budget are supposed to help younger Aussies. But they could simply miss out on the benefits of those who came before them. (Source: Getty)
Tax concessions enjoyed by older Australians for a quarter of a century look set to be potentially removed in the coming days. The Labor government has signalled it will overhaul major tax rules in Federal Budget on Tuesday ostensibly in order to help younger people.
The government’s frequently cited motivation is intergenerational equity. But some economists say “the horse has bolted” and without comprehensive reform, including income tax cuts, the expected changes could risk entrenching the privilege of older generations.
“Baby Boomers and Gen X, and now Millennials, have got the benefit of those tax concessions, and then suddenly they’re being eliminated for younger people in the name of intergenerational equity,” AMP economist Shane Oliver told Yahoo Finance.
“That may make sense if you look at it at a point in time … but if you look at it through a lifespan, then this actually makes life harder for younger people, potentially,” he said.
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Labor is eyeing changes to the capital gains tax (CGT) discount, purportedly getting rid of the 50 per cent discount for assets held for more than a year, and reverting back to a pre-1999 system that taxes all real gains, as well as changes to negative gearing.
“Most older people have used it anyway. It’s too late, the horse has bolted,” Oliver said.
“Unfortunately, the outcome will be younger people don’t have the same access to it to generate their wealth. That would be my concern.”
The AMP chief economist noted that he ‘rentvested’ as a younger person to get into the property market. It’s an increasingly common strategy – and frequently touted by financial advisors – as a way for younger people to get into the market and build some wealth. But it could be about to become less appealing.
“I kind of agree the capital gains tax discount is too generous, and people who are negatively gearing multiple homes are rorting the system, and therefore there should be caps on that,” he said.
However Oliver argued the proposed changes wouldn’t improve intergenerational equity.
“Hanging it on generational equity, when those measures don’t actually work to improve intergenerational equity, I sort of think it’s a bit rich,” he said.
AMP’s chief economist Shane Oliver is skeptical about the stated impact on generational equity. (Source: AMP)
“I don’t think denying 20-something the opportunity to rentvest is the way to fix that up. The way to fix it is to get the balance right between housing supply and demand …. and that means lower immigration for a period and making it easier to supply homes and thinking more fundamentally about where the growth centres should be.
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“So I think solving those issues – boosting productivity, helping the economy grow faster, that’s where the focus should be.”
‘A backward step for Australia’
Fund manager Geoff Wilson AO received plenty of attention this week for railing against the proposed changes after leaks suggested the CGT discount would be removed across all asset classes, including shares and business investment capital.
“Australia already has a serious productivity and capital formation problem, and any move to materially increase the taxation on long-term investment capital deserves proper public debate before it is rushed through,” the chair of Wilson Asset Management told Yahoo Finance.
“Once you move into that territory, you are no longer just talking about housing affordability policy, you are talking about changing the incentive structure for entrepreneurship, risk-taking and long-term capital allocation across the entire economy,” he said, calling it as a “backward step for Australia”.
Wilson also rejected the premise of the changes doing anything to help intergenerational equity, describing the proposals as “theft from aspirational Australians under 40”.
If it comes to pass, more money would flow into the principal place of residence and superannuation, he said. “Once that occurs I’d say let’s see if the family home is on the government’s taxing menu,” he told Yahoo Finance.
Geoff Wilson lashed out at the proposed changes this week. (Source: Wilson Asset Management/Facebook)
Ron Hodge, the CEO of InvetSMART, described the expected changes as a double-edged sword for younger Australians.
“Changing the CGT concessions on shares and other assets does make sense, but it should be paired with indexation on the income tax brackets to be fair to young hard-working Australians,” he said.
“Taking a larger share of investors realised capital gains [on shares] will hit one of the few ways younger Australians use to build capital outside housing. More and more are turning to shares, building ETF portfolios and, for better or worse, even crypto, because wages growth alone is not enough to get ahead as tax brackets creep into pay rises.
“This may be sold as intergenerational fairness, but indexing tax brackets would be much more helpful, especially for younger Australians without the benefit of inherited wealth. It is taxing the young people still trying to build their own ladder.”
How much more tax would I pay under CGT changes?
The founder and CEO at Stockspot, Chris Brycki, said the upcoming budget is shaping up to include “the biggest tax changes in decades” if the government follows through.
Posting on social media on Friday, he touted a CGT calculator the company has built that estimates how much better or worse off people could be under the proposed rules.
He gave the following examples:
An ETF investor growing $100k over 10 years could end up with around $26k less after tax.
A property investor could lose more than $50k in after tax wealth.
A founder building and selling a business for $1m could lose more than $225k.
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