Removing CGT discount on all assets will make tax system fairer: Chalmers

Treasurer Jim Chalmers said changes to the capital gains tax (CGT) is fundamentally about reducing distortions in the tax system as a whole and to introduce a more fair and neutral system in place of the current one.

Speaking at the Bloomberg Forum for Investment Managers event in Sydney, Chalmers addressed concerns on the application of CGT on all assets such as shares and not just real estate.

Chalmers explained the CGT changes are about more accurately compensating investors for inflation and to help ensure investment decisions are driven by economic outcomes, not tax outcomes.

"We recognise that a distorted tax system means distorted investment decisions," Chalmers said.

"We want to encourage investment for good economic reasons and not necessarily just for good tax reasons."

He noted the impact of the changes will depend on multiple factors such as the rate of return, the inflation rate and marginal tax rates. This would inherently mean some investments will do better under the new arrangement than under the current arrangement, he said.

However, Chalmers said if there is a comparison of the average impact of the current arrangement versus that of the new arrangement in the last 20 years, investors in shares would have been equal to or a bit better off with a discount based on indexation compared to the existing policy.

"Making changes to the CGT settings for one type of asset and not another type of asset, we think would just introduce new distortions, and ultimately that's bad for investors and for the economy," he said, noting if a company generates high returns from capital gains it will still generate a better post-tax return than a company with lower returns.

On the comparison of the effective capital gains tax compared to other jurisdictions in the world, Chalmers said it overlooked the difference between tax rates on real gains versus nominal gains.

"Even for an asset with gains of 10% the effective tax rate on the nominal gain after adjusting for inflation in the past decade would be less than 37%," he said.

"That's less than the rate in other jurisdictions, including California, which is a bit higher than 37% on average."

Chalmers added standalone housing tends to have strong capital gains relative to other assets, as well as more scope for leverage, which has been a recipe for the kinds of distortion seen in recent decades.

"The combination of our changes to CGT and negative gearing will reduce the incentives for excessive leverage to buy established housing, and this will help balance the system, not just towards new housing, which is obviously very important, but also to investments like shares and new businesses, where leverage doesn't play as big a role," he said.