CGT discount reform: How much more tax will you pay?
Key takeaways
- The federal government seems likely to scrap the 50% Capital Gains Tax (CGT) discount in tomorrow's budget.
- Investors who sell shares, property or any investment asset at a profit will have to pay more in tax.
- What's next: The federal budget is announced tomorrow at 7:30pm.
Australian investors are going to pay more tax very soon.
The federal budget comes out tomorrow, and while we don't know the exact reforms, a shake up of the Capital Gains Tax discount and other measures have been confirmed by the ABC.
Capital… gains?
Right now, Australian investors pay tax on their investment profits when they dispose of an asset (like selling an investment property or cashing in your shares). If you've held the investment for 12 months or more, you get a 50% discount on this capital gain.
In simple terms, if your investment grew by $50,000, that's your capital gain. The discount cuts this down by half, meaning only $25,000 gets added onto your taxable income.
If the CGT discount is scrapped, you'd be looking at $50,000 being added to your taxable income, increasing your tax bill.
How much does this affect your share portfolio?
The average Aussie with a share portfolio has around $63,000 in investments, according to Finder's Consumer Sentiment Tracker. The average income for a full-time worker is around $106,000, according to the ABS.
For the sake of simplicity, let's assume you invested a lump sum of $30,000 5 years ago. Your share portfolio has performed very well, and you've now hit that $60,000 figure.
Ignoring fees, your cost base (the amount you spent to acquire the investment) is $30,000. You subtract this from the sale price to get a capital gain of $33,000.
Under the current rules, you only pay tax on half this, or $16,500.
This gets added to your taxable income in the year you sell it. Assuming a typical salary (according to the ABS) of $106,000, your taxable income under the current rules is $123,000.
Your taxable income with no CGT discount is $139,000.
Using Moneysmart's income tax calculator, the tax you pay is $32,768 without the discount. With the discount this falls to $27,538.
That's a $5,230 difference.
This includes the Medicare levy but no other taxes or deductions and is just an illustration.
How does the CGT discount work for an investment property?
The discount works in the same way for an investment property. Most investors hold an investment property for more than 12 months, so they qualify for the 50% discount.
Let's take an investment property bought 5 years for $650,000. Today, you sell it for $940,000 (about the current median Australian property's value).
That's a $290,000 capital gain.
For someone earning a typical income of $106,000, your taxable income is $251,000 with the CGT discount, and $396,000 without it.
Keeping in mind we're massively simplifying this, and ignoring many tax deductions you can make, you'd be looking at a tax bill of $79,088 with the CGT discount and $144,338 without it.
That's a difference of $65,250. Make sure you hire an accountant!
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