Changes to capital gains tax (CGT) and negative gearing rules, if applied only to latest investments, would “severely delay” crucial budget reforms and hinder economic growth, according to analysis from Deloitte.
The consulting firm estimated that limiting changes – specifically, reducing the CGT discount from 50% to 33% and abolishing negative gearing – to new investments would generate only $500 million in revenue over the first four years. This approach is known as “grandfathering” existing investments.
Still, phasing in the new tax settings for all investors over three years could significantly boost the budget, generating $18.8 billion over the first four years. Stephen Smith, a lead partner at Deloitte Access Economics, suggested this additional revenue could fund income tax cuts for Australian workers.
The potential revenue could also fund alternative tax reforms. One proposal involves increasing the tax-free threshold to $35,000, followed by a flat 33% tax rate on income up to $300,000 and a 40% rate for income exceeding that amount. Deloitte noted that a $35,000 tax-free threshold “would greatly improve (though not solve) the incentives for low-income and part-time workers to seize on additional work.”
Chalmers has emphasized the importance of considering past investment decisions, suggesting “transitional” arrangements may apply future tax settings only to gains on assets held when the rules change.
Smith acknowledged that shielding investors who made long-term investments from tax changes is a “politically palatable approach,” and that a transition period is key to avoid “unnecessary dislocation.” He added that investors could sell assets before the new CGT discount takes effect if it proves unfavorable.
Deloitte’s pre-budget analysis also predicted smaller deficits than previously estimated, due to higher commodity prices and inflation boosting company profits.
Savings from Labor’s reforms to the National Disability Insurance Scheme (NDIS) are also expected to contribute to budget improvements in subsequent years, though Deloitte described the overall budget as “structurally flawed.” The firm cautioned that the ultimate impact on the budget will depend on how the government allocates any resulting savings, noting the possibility of “reprioritising” funds to areas like fuel security.
Frequently Asked Questions
What impact would grandfathering have on revenue?
According to Deloitte, applying changes to the CGT discount and negative gearing rules only to new investments – a “grandfathering” approach – would generate $500 million in revenue over the first four years.
What is one potential use for the additional revenue generated by phasing in changes for all investors?
The $18.8 billion in revenue generated by phasing in the changes for all investors could be used to fund income tax cuts for Australian workers, according to Stephen Smith of Deloitte Access Economics.
What did Treasurer Chalmers say about changes to investor tax breaks?
Jim Chalmers warned that changes to investor tax breaks would not generate “a huge amount of revenue” in the coming years and indicated a desire to recognize past investment decisions through “transitional” arrangements.
As policymakers weigh these options, how might the balance between short-term revenue gains and long-term economic incentives shape the future of Australia’s tax system?
