The Albanese government’s new capital gains tax (CGT) rules aim to tax real profits by removing inflation-driven gains from the calculation. However, former Treasury official Geoff Francis warns the system may create a situation where investors pay more in tax than they earn in real returns because the rules treat individual assets separately rather than as a diversified portfolio.
The ‘Portfolio Gap’: Why Real Returns May Be Taxed at 60%
Under the proposed rules, the government intends to tax only “real” gains. While this sounds intuitive, the mechanism ignores how investors actually hold assets. According to Geoff Francis, a former Treasury official, the system taxes winners but doesn’t allow inflation-adjusted losses on other assets to offset those gains.
Francis illustrated this using a 20-year investment of $10,000 split across the four major banks: Commonwealth Bank (CBA), NAB, ANZ, and Westpac. Over two decades, inflation rose roughly 73%. To maintain purchasing power, shares needed to rise by more than that percentage.
CBA shares beat inflation, but NAB, ANZ, and Westpac did not. Although those three banks rose in dollar terms, they lost value in real terms. In a standard portfolio view, the investor made a real gain of about $1,250. However, the tax system isolates the CBA gain and ignores the real losses of the others.
For an investor on a 39% marginal tax rate, Francis calculates the tax bill could reach $1,850. This means the tax exceeds the real return, potentially pushing the effective tax rate on real returns to 60%.
Did you know? The situation occurs because the government views each share sale as a standalone event rather than looking at the total performance of a diversified investment portfolio.
The 30% Minimum Tax and the ‘Middle-Gain’ Penalty
A second friction point is the introduction of a 30% minimum tax on real capital gains. This specifically impacts people with low or no other income in the year they sell an asset, such as retirees or those between jobs.
Morningstar provided a scenario where an investor makes a $50,000 real capital gain with no other income. Under standard income tax scales, the tax would be $5,788. But the 30% minimum tax mandates a payment of $15,000, creating an additional tax burden of $9,212.
Morningstar’s analysis shows this “top-up” tax is not linear. The penalty peaks for gains between $45,000 and $135,000. Interestingly, the top-up disappears entirely once a stand-alone gain reaches $225,746, meaning mid-sized gains may be penalized more heavily than very large ones.
Impact on Australian Business Expansion and Jobs
Mark Bouris, Executive Chairman of Yellow Brick Road Home Loans, argues these rules create a direct chain reaction that could stifle industrial growth. When investors face higher tax bills, the net return on Australian assets drops.
According to Bouris, this makes it more expensive for local companies to raise capital. For example, an engineering firm needing $5 million for machinery and new hires may find investors demanding higher returns to offset the tax risk, or investors may shift their capital to global funds instead.
Bouris suggests this leads to scaled-back growth: a company might buy one machine instead of three, or hire 15 workers instead of 40, ultimately reducing Australia’s export capacity and job creation.
Global Capital Competition: Australia vs. The World
Investment capital is highly mobile. Bouris points out that Australia is competing against jurisdictions with different CGT structures:
- United States: The maximum federal rate on long-term capital gains is generally 23.8% (before state taxes).
- United Kingdom: The comparable general rate is 24%.
- New Zealand: Does not have a broad capital gains tax.
Pro Tip: If you are planning to sell long-held assets, consult a tax professional to model how the 30% minimum tax interacts with your other income for that financial year.
Housing vs. Productive Investment
Bouris notes that changes to negative gearing follow a different logic. New builds maintain more favorable treatment, while older properties are grandfathered. He argues that restricting concessions on existing housing is reasonable because buying an existing home doesn’t increase supply.
However, he contrasts this with business investment. While the government can limit housing concessions without harm, Bouris warns that making productive business investment less attractive risks losing the jobs and business growth that capital creates.
Frequently Asked Questions
What is the 30% minimum tax on capital gains?
It is a floor on the tax paid for real capital gains, ensuring a minimum 30% rate even if the investor’s other income is low enough to normally qualify for a lower tax bracket.
How does inflation affect the new CGT rules?
The government intends to tax “real” profits by ignoring gains that merely keep pace with inflation. However, because it applies this per-asset rather than per-portfolio, real losses on some assets cannot offset real gains on others.
Who is most affected by the minimum tax top-up?
According to Morningstar, those with real capital gains between $45,000 and $135,000 and little other income face the highest relative “top-up” payments.
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