With the recently announced federal budget illustrating changes to negative gearing and the capital gains tax discount, there has been significant coverage and controversy.
Thanks. I need to re-read this. But, I thought I ought to point out my understanding that the 50% discount rule only applies to investment after 12 months, ie, not short term in the the sense of less than 12 months.
Well, we can argue about the meaning of short-term, but certainly for holding a property, I don’t think it is particularly long-term to hold it for 12 months and receive a 50% discount on capital gains when CPI may have been only 3%. And then there is the interaction with leverage, where a sudden surge in prices can cause a very high return on equity. If someone holds an asset for a long time, such as a higher yield property or a share for which the capital gain is only inflation over time, then the 50% CGT discount is punitive for that long-term investor, relative to a shorter-term investor where inflation is likely to be less than the 50% discount.
I wasn't thinking about CGT on housing, rather on investment. As an example if you invest in say options, most of which are sold in a month or two, you pay 100% . Whereas if you keep shares for 1 year+ you got the discount. Share investment is seen generally as aiding economic investment, unlike the unearned income from property sales, as opposed to new building.
I would say that asset trades help with liquidity and price discovery. These can be important economic functions. I think price discovery can be debatable, depending on whether you believe financial markets are particularly efficient or not.
The original logic behind the 50% CGT discount was that it would encourage more share market activity. Given that it applied across asset classes, it is not clear that it had this intended impact. But by the same token, changing the discount across all asset classes may mean that the desired effect is muted. So I see merit to that point.
As to whether securities trading leads to more investment, the mechanism is unlikely to be through a "loanable funds" logic but through indirect effects such as a wealth effect. Even in the case of capital raising the deposits used to purchase the shares are generated within the banking system. Investment creates savings as the production of capital goods swells the bank accounts of the recipients.
Although most consider negative gearing as a separate tax section. It is really just a part of the 'Deductions' section. Hence, it isn't explicitly about the losses on the actual property, its actually part of the whole income related costs and expenses. Whether a rental loss occurs or not, it still reduces the tax paid on total gross income, ie, reducing taxable income. in that sense it is not necessarily about rental loss. I want to see change in the deductions system. But because most, including economists, are unaware of the point above, they harp on about negative gearing, and meanwhile the multimillionaires will continue to pay minimal tax, and the low top tax rate encourages outrageous salary packages for CEO, etc that increase inequality.
Thanks. I need to re-read this. But, I thought I ought to point out my understanding that the 50% discount rule only applies to investment after 12 months, ie, not short term in the the sense of less than 12 months.
Well, we can argue about the meaning of short-term, but certainly for holding a property, I don’t think it is particularly long-term to hold it for 12 months and receive a 50% discount on capital gains when CPI may have been only 3%. And then there is the interaction with leverage, where a sudden surge in prices can cause a very high return on equity. If someone holds an asset for a long time, such as a higher yield property or a share for which the capital gain is only inflation over time, then the 50% CGT discount is punitive for that long-term investor, relative to a shorter-term investor where inflation is likely to be less than the 50% discount.
I wasn't thinking about CGT on housing, rather on investment. As an example if you invest in say options, most of which are sold in a month or two, you pay 100% . Whereas if you keep shares for 1 year+ you got the discount. Share investment is seen generally as aiding economic investment, unlike the unearned income from property sales, as opposed to new building.
I would say that asset trades help with liquidity and price discovery. These can be important economic functions. I think price discovery can be debatable, depending on whether you believe financial markets are particularly efficient or not.
The original logic behind the 50% CGT discount was that it would encourage more share market activity. Given that it applied across asset classes, it is not clear that it had this intended impact. But by the same token, changing the discount across all asset classes may mean that the desired effect is muted. So I see merit to that point.
As to whether securities trading leads to more investment, the mechanism is unlikely to be through a "loanable funds" logic but through indirect effects such as a wealth effect. Even in the case of capital raising the deposits used to purchase the shares are generated within the banking system. Investment creates savings as the production of capital goods swells the bank accounts of the recipients.
Although most consider negative gearing as a separate tax section. It is really just a part of the 'Deductions' section. Hence, it isn't explicitly about the losses on the actual property, its actually part of the whole income related costs and expenses. Whether a rental loss occurs or not, it still reduces the tax paid on total gross income, ie, reducing taxable income. in that sense it is not necessarily about rental loss. I want to see change in the deductions system. But because most, including economists, are unaware of the point above, they harp on about negative gearing, and meanwhile the multimillionaires will continue to pay minimal tax, and the low top tax rate encourages outrageous salary packages for CEO, etc that increase inequality.