As sweeping tax reforms reshape the investment landscape, advisers are grappling with what the proposed changes to capital gains tax could mean for clients, structures and long-term planning strategies.
We sat down with TEN The Education Network's Chief Executive, Robert Clemente, to unpack who stands to be most affected, why valuations will become increasingly contentious, and what these changes could mean for investors, retirees and business owners alike.
Q: How will capital gains be taxed under the new system?
A: Well, for most taxpayers, gains will be taxed differently after 1 July 2027. For most, the simple 50% CGT discount will go. At the moment, provided you’ve held an asset for more than a year, 50% of the capital gain is included in your assessable income. Assuming you’re paying tax at the top marginal rate, your effective rate of tax is 23.6%%, being half of the top rate plus the Medicare levy (45% plus 2%).
Q: The Government’s going back to the old indexation system as I understand it.
A: Yes, that’s right but with some important changes. What you’re indexing is the cost base of the asset. So let’s say you buy listed shares in Profit Ltd for $100,000 on 1 July 2027 and sell them on 1 July 2030 for $200,000. Let’s assume inflation is 5% per annum. The cost base on 1 July 2028 will be $105,000 and on 1 July 2029, $110,250. The gain would be $88,750. That would be included in your assessable income and assuming the top marginal rate again, your tax would be $41,477.50 – about 41.5% of the gain on the unindexed cost base. Under the current system, the tax would be $23,500. So, for assets held for a short period of time – shares are a great example of this, the effect will be quite dramatic.
Q: The Government is also proposing a minimum tax rate on capital gains – how will that work?
A: The minimum tax rate is 30%. In our example above, the minimum rate is exceeded, as the taxpayer is on the maximum marginal rate. For large gains, the minimum rate will have no effect on the tax paid, because the taxpayer’s average rate of tax will be above 30%. I mean let’s say you sell your business for $1 million and your cost base indexed is $500,000. The gain included in your assessable income is $500,000 and your tax is $191,000 approximately – this is 38% of the gain, so the minimum tax rate would be exceeded.
Q: Alright but let’s say the gain is split between four taxpayers, each with no other income apart from say, a super pension, which is non-assessable non-exempt income.
A: ’m glad you raised that. In this case, the tax would be about $28,000, about 22%. So in this case, the minimum rate would apply, and tax of $37,500 would be payable.
Q: So it seems to affect those making smaller gains.
A: You’re right. It does. You could see a self-funded retiree taking a pension from her SMSF selling a few shares and making a gain of, say, $20,000. Normally this would be mostly tax free as it’s under the threshold. Under this new system, tax of $6,000 would be payable.
Q: Are gain on assets held as at the start date grandfathered at all?
A: Sort of. Gains accruing prior to 1 July 2027 will be subject to the 50% discount and gains accruing after that date will be dealt with under the new rules. Valuations as at 1 July 2027 will therefore not only be important but they’ll be a battleground: the Commissioner will be angling for a lower value if that means more tax.
Q: What will all this mean for long-term holds – let’s say 25 years?
A: The differences are not as great under the new system. Let’s say you purchased $100,000 of shares in 2000 and sold them 25 years later. Assume the indexation system applied over that period: the indexed cost base would be somewhere north of $190,000. The shares might be worth $270,000 based in the movement in key ASX indices over that time period. So the gain would be, say, $80,000, under the new system and you’d pay at least $24,000 in tax (using the 30% rate) plus the Medicare levy. Under the old system, the gain would be $170,000 and $85,000 would be included in your assessable income and assuming no other income your tax would be $16,000 – less but the difference is not as great.
But if you were on the top marginal rate under the old system, you’d be paying more – around $39,000.
Q: It’s a complex system, Rob. How can professionals find out more?
A: BDO partner Mark Molesworth will examine this and much more (including all the negative gearing changes) in his upcoming webinar Capital Gains Tax Reimagined – The Incentives for Investors Just Changed Substantially, available live and on demand.
