That was the question that the Institute of Public Accountants asked me and three others for their ‘Public Accountant’ journal. My response was as follows:
“In my opinion, the CGT discount.
A good tax is one that is fair – imposing a higher burden on those with greater means to pay, efficient – imposing minimal distortions to the operation of the free market and simple – imposing minimal costs (in terms of time and advisor fees) on taxpayers. The CGT discount (and in particular the level it is set at) may be simple, but it is also too generous and, as a result, fails the first two of those tests miserably.
Capital gains are disproportionately made by wealthier Australians (who are more likely to have surplus funds to invest) and therefore they receive a disproportionate share of the benefits of the discount. This is illustrated by the fact that the two electorates that benefited most from the discount encompass Point Piper in Sydney and Toorak in Melbourne. I think that government funds could be better spent.
Furthermore, the CGT discount encourages taxpayers to structure their affairs in a way that favours capital investment over actions or investments that lead to other forms of income. When combined with negative gearing, this is a key driver of Australia’s red-hot property market. While there are good reasons to encourage investment, I don’t believe they are sufficient to justify a 50% discount after only 12 months.
How would I reform the CGT discount? There are a number of good options but one to consider would be to bring in a rough approximation of indexation. Apply the discount to capital gains at the rate of 5% per full year that the CGT asset is held, capped at 50% after 10 years. I believe would strike the right balance between encouraging investment without distorting the market too much or providing a free kick to those who need it least.”
If you’re interested to see a pdf of the article (and what the other three people said), I’d be happy to share a copy with you. Just send me a message.
P.S. Please feel free to share your thoughts on the topic in the comments section below. I’d be curious to hear from any readers.