Future Focus: The dangerous assumption behind the new CGT changes
Investing is not just a rich person’s sport anymore, and it’s dangerous tax policy to think it is.
In the aftermath of the Budget a vocal segment of our industry is declaring that innovation is dead due to capital gains tax reforms. The volume of these voices has distracted from another important conversation.
I believe that there needed to be a serious overhaul to our tax system, and in doing so, there will always be winners and losers. I wrote an article in 2023 about how the tax code is signalling how to build wealth.
Assets are treated much more favourably than wages by our tax system. The stated purpose of this budget was to even the playing field for the haves (those who own assets) and the have-nots (those looking to acquire assets). We have all but maintained this status quo by offering protection to those who already hold assets and with little to no thought for those looking to build or acquire assets.
The combination of the negative gearing and CGT policies have caused an immediate impact. Auction clearance rates have dropped significantly. In my pocket of Sydney, they were lucky to push just above 25% last weekend. In the very short period since the announcement, it seems to have caused the desired effect of making property less attractive.
Whether that will be a sustained reaction remains to be seen.
The way Australians build financial security has changed. For much of the post war period, security was primarily gained through wages. You could buy a reasonably affordable home and gradually pay down a mortgage. Secure employment was more prevalent and retirement was supported with a pension.
In the current environment housing prices are rising faster than wages, it is harder to save for a deposit, rent absorbs a larger portion of income and asset prices are a barrier to entry.
Little security is gained by putting your wages in a savings account. While we pursue fairer outcomes, we also need to ensure we do not burn the bridges that allow Australians to build a comfortable life.
People who have assets continue to grow wealth as they appreciate. Wealth increases passively through market appreciation, tax concessions, and compounding returns. Meanwhile, someone relying primarily on labour income faces a much steeper path to wealth accumulation. Care is needed when dismantling the tools to bridge these gaps.
The decision from Treasurer Dr Jim Chalmers to include CGT on shares was partly based on an assumption there would be little impact to younger investors. The focus was on asset owners who continue to compound their wealth and enjoy tax concessions. When speaking to the Daily Aus, Chalmers shared that Treasury data shows that only 1 in 10 people under the age of 35 owned shares. The Treasury analysis is based on ABS data that has not been updated since 2019/2020. Although only six years ago, this was a different world.
A study from Vanguard shows that nearly one in two Gen Z and Millennials report investing in shares, ETFs or other products. More than half of Gen Z non-investors are looking to start. Investors under 45 are the fastest-growing group on Vanguard’s Personal Investor platform.
Source: Vanguard
The ASX has similar data as Vanguard, with their last Investor Survey showing the proportion of 18–24-year-old individuals investing has doubled in the past five years.
It must be acknowledged that all surveys operate differently to ABS data, which encompass a much larger sample size and relies on objective data. The principle issue remains however - more Australians are relying on equity markets to improve their future, and that number is growing.
In a world where wage growth is barely keeping pace with inflation – and tax policy provides no amendments for bracket creep - keeping your money in a bank account won’t allow you to maintain the purchasing power of your money. It’s not going to allow you to grow your money to achieve financial goals, such as owning your own home. Investing in high growth assets such as equities is the vehicle that was being used to bridge these gaps and create a better life.
I understand that this article may present as biased from someone that benefits from young people investing. I am someone who will wear that proudly. The more young investors I can get into the market, the better I am doing my job, and the better their long-term outcomes and quality of life will be.
Part of my job involves working with Australians that may not look like your typical investors – those new to the country, high school students, women from lower socioeconomic backgrounds. They are all looking to use investing as a tool to improve their lives. I also built my assets when I was young and used equity markets to increase my quality of life. I did not have ‘a hand up or a handout’ and used investing to make my money work harder. I am not an anomaly. The data shows this.
What has struck me most in the aftermath of the announcement is the caricature that has emerged around who this policy impacts. I have been inundated with memes portraying wealthy investors upset about losing a small portion of their wealth. I cannot relate to those caricatures because they ignore a growing cohort of ordinary young Australians using markets not to preserve wealth, but to build it.
The anachronistic idea that investing is just for the rich is incorrect and this perception is dangerous when it informs tax policy.
It is peculiar that negative gearing was restricted for property and is allowed on equity investments, while CGT changes have been implemented across the board. There has also been a Budget carveout for those on means-tested government payments that they are not subject to the 30% minimum CGT floor.
This Budget carve-out is well intentioned and includes those on Disability support, Carer and Jobseeker payments. It also includes asset owners with significant assets on part-pensions who will avoid the 30% floor, while a 30-year-old who has used the equity markets to save for a house will incur the tax when looking to fund her deposit with a sale. My colleague Sim has written on this, and how the FHSSS through superannuation has become more attractive for this cohort.
The question is broader than housing alone. What if my goals don’t include buying a home? What if my goal is to fund further study, build financial security, take time away from work to care for family, or simply create optionality in a difficult economic environment?
The good news with this policy is that the median salaries for people under 54 sit on or under the 30% marginal tax rate. However, with no reform to marginal tax rates, the floor will push people into higher marginal tax brackets over time. This change is another hurdle for young people trying to maintain their quality of life or get closer to their financial goals while dealing with a candle burning at both ends - battling high inflation and low wage growth.
In an environment where just keeping up with the cost of living is a challenge, the changing of the goal posts is another disheartening set back. The Sisyphean boulder loses traction.
Younger Australians are participating in markets in far greater numbers than many policymakers appear to recognise. If we are going to reshape the tax system, and I believe we should, we need to make sure we are not designing policy around an outdated assumption that investing is only something wealthy Australians do.
This is the crux of the issue. The bridge to building a comfortable life is already becoming harder to cross. Make no mistake, investing is still attractive - and it is still an important method employed to maintain and growth the purchasing power of your money. Future tax policy should not unintentionally pull apart one of the few tools younger Australians have left to not just get ahead, but importantly, to keep up.
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