‘Blunt tool’: Why the capital gains tax change also risks punishing startups and investors

Treasurer Jim Chalmers’ plan to make property investment less tax-friendly could also leave ordinary shareholders and startups paying more when they sell their shares or businesses.

The Federal Government’s changes to capital gains tax have been framed as part of a broader housing affordability push, aimed at winding back the tax advantages enjoyed by property investors.

But the measures go well beyond housing.

They would replace the current 50 per cent CGT discount with an inflation-indexed system across all assets, including shares, managed funds and exchange-traded funds.

The Budget also proposes a 30 per cent minimum tax rate on capital gains — the part most alarming investor groups.

“Much of the public debate has focused on housing, but these measures also affect shareholders, small business owners, younger Australians saving and investing for a home deposit, working professionals building wealth outside the family home and self-funded retirees managing long-held investments,” said Rachel Waterhouse, chief executive of the Australian Shareholders Association.

“For many younger Australians, shares and ETFs are one of the practical ways they are trying to build a home deposit or create wealth when property ownership feels increasingly difficult. Tax changes should not make that pathway harder.”

Under the current system, investors who hold an asset for more than 12 months are generally taxed on only half the capital gain.

The ASA modelled a $20,000 share investment growing at 8 per cent a year over 10 years.

The investment would rise to about $43,178, producing a capital gain of $23,178.

Under today’s 50 per cent discount, $11,589 would be added to taxable income. The approximate tax an investor would pay is $1854.

Under the Budget proposal, the original purchase price would instead be adjusted for inflation. If inflation averaged 3 per cent a year, the investor’s $20,000 purchase price would be indexed up to about $26,878.

That would leave a taxable “real” gain of $16,300 that’s assessed without a discount.

If that was the end of the calculation, the investor would end up paying $2608 — or $754 more than they would now.

But the proposed 30 per cent minimum tax rate means they could face a minimum tax bill of about $4890 — leaving some $3036 worse off.

While tax math is confusing at the best of times, the end result is that the change could hit those who would otherwise pay a lower marginal tax rate, including retirees, part-time workers, people with variable income and younger investors who sell shares to fund a home deposit.

The 30 per cent floor is designed to stop investors from delaying asset sales until they are in a lower tax bracket, such as retirement, but Ms Waterhouse called it a blunt tool.

“This is not a simple return to the former indexation system of pre-1999,” Ms Waterhouse said.

“Indexation may protect investors from being taxed on inflationary gains, but the proposed minimum tax creates a very different outcome for investors on lower or variable taxable incomes.”

The changes could also reshape how Australians invest.

Ord Minnett head of private wealth research Simon Kent-Jones said higher effective taxation of capital gains would favour dividend-paying shares over pure growth stocks.

That could tilt portfolios back towards dividend stocks such as banks, infrastructure and consumer defensives, and away from high-growth companies, offshore equities and innovation-led strategies.

UBS research (shown in the graph below) explains the companies most likely effected on either side.

According to AMP economists Shane Oliver and My Bui, shares will still benefit relative to property because the changes to negative gearing do not apply to them.

But investment giant Vanguard Australia said the net effect is that investors would be worse off.

Vanguard Australia managing director Daniel Shrimski said the changes “could lead to fewer Australians investing in capital markets and building long-term wealth”.

“These changes should be paired with targeted measures to support investing, particularly for younger Australians trying to build wealth outside of super,” Mr Shrimski said.

Vanguard has proposed a tax-incentivised investment account for younger Australians, allowing them to invest up to $20,000 a year for at least two years. Returns from capital gains, dividends and interest would be tax-free, with the money able to be used for goals such as a home deposit or education.

Impact not confined to just shares

The other fallout from the CGT discount change is that it would apply to businesses — and particularly startups — when they are sold.

CPA Australia tax lead Jenny Wong said this “tax grab” would discourage investment and risk-taking.

“For anyone looking to invest, grow a business or take on risk, the message is clear – the Government will take at least 30 per cent, regardless of the outcome,” she said.

Russell Yardney, a startup investment expert and seasoned entrepreneur, said the CGT changes missed the “basic point” about startup investment.

“Start-ups are not like passive property investments,” he said.

“Most early-stage investments fail, return little, or take many years to realise. The ecosystem works because a small number of successes return five to ten times or more.”

Mr Yardney said those gains are not just private windfalls and instead become “the cash that funds the next generation of founders”. “An angel investor who turns $100,000 into $1m has not simply benefited from inflation. They backed risk. They tied up capital. They accepted a high chance of failure. If the after-tax return is materially reduced, there is less capital to recycle into future start-ups.”