CGT, bracket creep and trusts: Alan Kohler on the budget debate | ABC NEWS

Well, it's been almost a week now since Jim Chalmers handed down the federal budget and there's been plenty of analysis on the proposed tax reforms.For his take on the policy options, I'm joined by ABC's finance presenter, Alan Coler.Good afternoon to you, Alan.Thank you for joining me.So I'm keen to speak to you about the different approaches from the Liberal and Labor parties with respect to tax policies.But if we can start with Labor's proposed changes to the CGT discount.

Can you firstly just remind us why it was firstly introduced, for which asset classes was it intended for and what impact it's had?

Capital gains tax was first introduced into Australia in 1985 and that was actually as a result of a review of taxation that came out in 1972 and no one did anything until 1995 when Hawke and Keating imposed a capital gains tax and the deal at that time was that you paid tax at your income tax rate on capital gains tax on any capital gain minus the impact of inflation during the time that you held the asset.So you've got to deduct the CPI increase over that period.In 1999, Peter Costello asked for another business tax review and he asked the members of the review to report on whether they should cap the capital gains tax at 30 per cent.But instead of answering that question, the people on the Business Tax Review said, actually, what we want to do is scrap the inflation adjustment and just impose or just provide a 50 per cent discount.That was their recommendation.And Peter Costello accepted that and did it later that year.

So that was actually legislated in December and began in the year 2000.Instead of having an inflation adjustment, you only paid tax on half of the capital gain.

And was that originally intended for a certain asset class or across all capital gains?

Well you can actually find thereport and the recommendations of this review in the National Trove, the archive, and what they said was the reason for changing that capital gains tax arrangement was to stimulate the share market.That was what they had in mind.And these blokes were all company directors.Two of them had 10 directorships between them.And the third was the former managing director of Westpac, Bob Joss.

And so they thought it would be great.What we need to do is to stimulate the share market and get ordinary people to start investing in shares more in Australia, which we tend not to do.But unfortunately for that, the share market crashed nine months later.in March 2000 because of the end of the dot -com bubble.And so the share market collapsed and the idea of stimulating the share market was out.No one wanted to invest in shares anymore.

So the whole thing was turned to real estate.

Will changing the way that this capital gains is taxed, you know, throwing out the 50 % CGT discount to this inflation index tax, is it going to help more younger people get into the housing market?

Well, look, the idea is that it should result in a bit less investment in real estate.I mean, the whole reason that capital gains tax discount was so powerful back in the year 2000 was because of the combination with negative gearing.A 50 % discount on capital gains tax really makes negative gearing work because in order to, so the way negative gearing works is that you get to deduct the losses on your investment as you're going along.So if you end up paying more in mortgage interest than you're getting in rent, then that loss can be deducted against your other income.your salary and so on.So the only reason that works is if you make a capital gain at the end, because otherwise why would you want to lose money on your investment as you're going along?

The only reason to do that is because you're going to make a capital gain and the 50 % discount makes the capital gain even better at the end.And so it's really the combination of the capital gains tax discount and the negative gearing that makes it work so well.And the idea is that But if you combine the shifting of the capital gains tax discount back to inflation adjustment and also confine negative gearing only to new housing, then that will mean that the sort of the flow of investing and the focus of investing is on new houses, not just existing ones.And so that's the that's the proposition.And I think that I think it's a good idea.

What about the claims, though, Alan, that come from younger people?I'm looking at a headline in The Fin right now, and there's been plenty of analysis on this over the last week, that CGT changes on shares will hurt young Australians.We read of all these stories about young people who are on low incomes that are funnelling away what they can into ETFs that give them an exposure into the share market, that they're actually then going to be taxed more than what they would have originally.And the whole point of them investing in the share market now is to save a deposit for their home for later.

Yeah, well that might be true, that's true.The question is, you've got to weigh the costs and the benefits.Tax reform is never one way, right?There's always kind of losers and winners.And the question is, are the few losers, which there aren't many young people who are investing large sums in the share market in order to save for a house.I mean, that's just not true.

really happening much, to be honest.And anyway, they're not actually losing they're entirely losing the discount on the capital gains tax.They're just shifting from a 50 % discount to inflation adjustment.And the longer they hold the investment, the closer those two things are.

Yeah, yeah.The Coalition, before I let you go, Alan, because they want to return to a system of adjusting income tax scales for inflation to address bracket creep.Is that good policy, good economic policy?

Oh yeah, it's good economic policy.It's terrible politics.I mean, Malcolm Fraser did it in 1976.He campaigned on it in 1975 at the election.He promised it.And then he did it in 1976.

And it was fine, except that he gave it away.Two years later, he wound it back to half that.And in 1982, he completely abolished the whole thing because no one thanked him for it.Because the thing about indexing tax scales is, because it removes any bracket creep, right?Well, bracket creep is a secret tax increase.And you want tax increases to be secret, don't you?

As a politician, that's what you want.

If you're in charge, yes, I guess.

That's right.And what happens when you index the tax scales so you don't have bracket creep, what you have is secret tax cuts.Because usually the way it works is that you have bracket creep and then every now and again the government puts out a press release saying we're going to have a tax cut.And everyone says, oh, thanks very much.But actually, all they're doing is giving back bracket creep.So, you know, it's bad politics.

Look, I know that you looked at all of this in your online article today.But just before I let you go, I just wanted to ask you about how the microscope is really focusing in on testamentary trusts here.The government is coming under fire.The Prime Minister has defended the changes and he denies that it's a death tax.In your view, the changes to discretionary testamentary trusts and trusts, are people in these structures going to be paying more tax?

Yeah, I suppose.I mean, look, it depends.So the whole thing about trust is you get to, you get to income to income splitting and they're saying, no, let's make it 30 % minimum.I mean, the way it's supposed to work at the moment, I mean, I'm not, I'm not an expert on all this testamentary trust and everything, but I do know that the way the tax office operates, if you're income splitting to your spouse or your children, the spouse and the child are supposed to be working for you.I mean, you're not supposed to distribute income to somebody who's not doing anything.I mean, that's not the way it works.

And in fact, if you do it, you know, you get into trouble.So, really, making a 30 % minimum just means that, you know, it's kind of doing what the tax office says you're supposed to be doing.But everyone's trying to, everyone's fiddling it anyway.

Well, there's a lot of different angles that have come out of what has been a pretty big budget from last week and I'm sure we'll talk again about another angle next week.Alan Collar, thank you.

No worries, Kath.