Changes to capital gains tax are 5 times more costly than negative gearing

Investopoly

The ALP's proposed ban on negative gearing has been well publicised and debated. However, its proposed changes to Capital Gains Tax (CGT) have received far less attention. I suspect that this is because investors tend to overestimate short-term consequences and underestimate more significant long-term outcomes. But, since most of us are long-term investors, I'd suggest that we should adopt a more balanced view. How does capital gain tax currently work? At the moment, only 50% of the net capital gain is included with your other taxable income (except for companies which are not entitled to the 50% discount) if you have owned the asset for more than 12 months. The net capital gain (or loss) is calculated as follows: Net sale proceeds - being sale price less any selling costs including agent fees and so on. Less Written-down acquisition cost - including purchase price, stamp duty, buyers' agent fees, legal fees, inspection fees and so on; less any depreciation claimed in prior years. Equals Net gross capital gain (or loss). This amount is discounted by 50%. The discounted amount is then added to your income and taxed according to individual marginal rates. What has the ALP proposed to change? The ALP has announced that if it wins the election on 18 May, it will halve the CGT discount from 50% to 25%. This effectively increases that amount of tax you'll pay by 50%. For example, under current arrangements, only $50 of a $100 capital gain would be added to your taxable income. If you are on the highest marginal tax rate of 47%, you would pay $23.50 in tax. However, under the ALP's proposed arrangement, $75 would be added to your taxable income and your tax payable would increase to $35.25 - an additional $11.75 or 50%. These CGT changes apply to investments, including property and shares, purchased on or after 1 January 2020 (for property, this is likely to be based on contract date, not settlement date). All investments made prior to 1 January 2020 will be fully grandfathered and entitled to continue to claim the 50% CGT discount. High growth assets will be impacted the most Unlike the changes to negative gearing, these changes to CGT will impact property and share investors to a similar extent. And investments that provide the majority of their total return in capital growth rather than income will be impacted the most by these changes. The two most popular (common) major asset classes are: Direct property According to REIA data, the average compounding capital growth rate of Australia's five largest capital cities since 1980 is 7.2% p.a. Investment-grade properties should generate a higher growth rate (than the median). However, property tends to generate only a small amount of income. Whilst gross rental yields can range from 2% and 5% p.a., after an investor pays for expenses such as management fees, maintenance, insurance, water and so on, the net rental yield is a lot lower - probably under 2% p.a. in most circumstances. In summary, property typically provides circa 80% of its total return in capital appreciate and 20% in income. International shares International equities also provide most of its return in capital growth. The MSCI World Index has appreciated in value by 7.83% between December 1987 when it began and March 2019. The average annual dividend yield of this index is currently only slightly above 2%. So, international investments also provide 80% of total return in growth and 20% in income. It is interesting to note however that Australian shares generate a lot more income. Almost 50% of their total...