When most people hear “capital gains tax changes”, they immediately think about property investors. That’s understandable. Property has traditionally been where the debate around CGT has been loudest.
But in practice, the changes reach much further than residential real estate.
From shares and managed funds through to small businesses and succession planning, the proposed reforms have the potential to change the way Australians invest, when they sell assets and even how businesses are structured.
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What I’m already seeing is investors trying to work out whether they should bring forward asset sales, while business owners are wondering whether they need to rethink long-term exit strategies. In many cases, however, the answer isn’t nearly as straightforward as people hope.
Investors may hold assets longer
One of the unintended consequences of increasing the effective CGT burden is that investors become more reluctant to sell.
Australia has always relied on the 50% CGT discount to encourage long-term investment. It recognised that inflation artificially increases capital gains over time and rewarded taxpayers who held assets for more than 12 months.
Once that concession becomes less valuable, the incentive to realise gains also diminishes.
Rather than selling an investment that’s performed well and reinvesting elsewhere, many investors will simply continue holding it.
MORE: CGT changes could usher in the rise of the ‘never sell’ investor
That might sound harmless, but it can actually reduce the efficient allocation of capital across the economy. Money becomes trapped in existing investments instead of flowing into newer opportunities with stronger growth potential.
I’ve already spoken with investors who are thinking of postponing selling profitable share portfolios because the projected additional tax means the numbers no longer stack up.
Property investors face a different equation
Property investors will naturally focus on how the changes affect residential real estate.
For many, the decision to invest was never solely about rental income. The long-term capital growth was a significant part of the investment case. If a larger portion of that future gain is eventually taxed, investors will inevitably reassess expected after-tax returns.
That doesn’t necessarily mean property suddenly becomes a poor investment.
Australia still has strong population growth, housing shortages and long-term demand drivers.
Read More: ‘More than just another tax change’
