The rise of the capital gains tax

It seems likely, judging by the continued Government hints, that the effective rate of tax applied to capital gains on assets held by superannuation funds is going to be increased. Probably this will be announced on Budget night in May and take effect from 7:30pm that night.

As usual, the language is distorted by the politicians to try to twist the truth. I wrote about that in an earlier post. This time around, they say that superannuation funds enjoy a capital gains tax discount. They say the discount results in a remarkably low rate of tax. Hence they are perfectly justified in reducing the discount and making the funds pay a fairer rate of tax. It’s all rubbish, of course. Lies and deception.

The rate of tax on capital gains on assets held by super funds is 15%. When the tax was introduced, in 1988 as a reminder for the young reader, the tax was levied on real gains only – that is, the cost base of the asset was inflated using a CPI measure and only the real gain was taxable. It was sensible tax policy, but complicated to work out. So, a policy change later removed the concept of indexation of the cost base and settled on a 33% ‘discount’ as an average. Pretty pragmatic, don’t you think? For a given gain, on average, 2/3rds was considered real and taxed accordingly. (For simplicity, I’m ignoring how assets held for less than 1 year were treated.)

Fast forward to Malcolm Turnbull’s era and he decries this as an unreasonable discount. It’s not a discount Malcolm. It is simply a convenience to avoid a more complicated way of calculating the real gain.

If the rumours are true, the end result will be a higher effective rate of tax on investment returns. Lower end benefits to the savers, more tax to the federal government to waste and churn on questionable endeavours. Dismal stuff coming out of Canberra, I’m afraid.