Treasurer Jim Chalmers’ Budget mantra was tackling intergenerational inequality but the capital gains tax overhaul designed to make housing fairer could also make it more expensive for young Australians to build wealth outside property.
The Federal Government’s Budget measures would replace the current 50 per cent capital gains tax discount with an inflation-indexed system across all assets, including shares, exchange-traded funds and even the sale of businesses.
The proposal also includes a 30 per cent minimum tax rate on capital gains, a measure investor groups say could increase tax bills for some Australians.
For 23-year-old Curtin engineering student Ronnie Fellows-Smith, the reform captures the tension facing many young Australians.
He wants housing to become less attractive as an investment vehicle, but he is also trying to build a career, buy a home and possibly launch a startup of his own.
“I’m at that jumping-off point where I’m making big life decisions about my financial position, where I should be putting my money, and where I should be focusing my career,” Mr Fellows-Smith said.
“A big factor in that is definitely what’s happening in the economy around us.”
A fourth-year Curtin Bachelor of Engineering Honours student and Curtin Entrepreneurs alumni, Mr Fellows-Smith is renting in Waterford while finishing a double degree in mechatronics and computer science.
He graduates in about three weeks and is already looking at buying a home by using the First Home Super Saver Scheme.
“I voluntarily contribute quite a significant portion of my income into super to help buy my first home. That’s where my deposit is coming from.”
Yet Mr Fellows-Smith, who is on Youth Allowance and has supported himself through part-time work for much of his university years, is broadly supportive of changes that make property less tax-advantaged.
“My hope is that changes to negative gearing and capital gains tax means more properties come onto the market, and that could make housing more affordable for young people.”
The Budget changes go beyond property. Under the current system, investors who hold an asset for more than 12 months are generally taxed on only half the capital gain.
But according to Australian Shareholders Association modelling, the new framework could leave some investors thousands of dollars worse off.
The change will particularly hit those on lower marginal tax rates, including retirees, part-time workers, people with variable income and younger investors who sell shares to fund a home deposit.
Mr Fellows-Smith said he understood the trade-off: “I think the system has to change, and for it to change, someone ends up bearing some of the burden.”
“I understand it may make it more expensive for me if I have to sell assets or shares, but I’m also conscious of the generations that come after me,” he said.
Others, such as 26-year-old ETF investor William, who didn’t want his surname printed, was less impressed.
“It’s quite disappointing. It feels a little bit like the old men in the Labor party have made their money already and they’re pulling out the ladder behind them,” he said.
“The ETFs are part of long-term financial planning for retirement and it’s apparent that the gains on that in 30 to 40 years down the line are going to be impacted in a relatively significant manner.”
Asked if he agreed with Dr Chalmers that it would fix intergenerational equity, William said: “No. In combination with the changes to negative gearing it’s going to make it significantly more difficult for more young people to be able to build wealth using property.”
He doesn’t own any properties but said: “A purpose of (owning ETFs) is potentially to be able to reach into it to put together a deposit when I need to.”
Tobey Chadd, a 29-year-old IT professional who owns an investment property along with his main residence, welcomed the changes.
“I think a majority of low-income people are not using shares and the sale of shares to invest. For most ‘average’ people, it’s things like voluntary super contributions or term deposits,” he said.
Mr Chadd said “average folks” using shares as an investment — rather than speculation — tend to be in it for a longer term, so CGT has an increasingly reduced impact the longer you’re in the market.
“If capital gains are a type of income, then they should be taxed as income, in the same way that my nine-to-five is,” he said. “Plus, CGT discounts disproportionately benefit upper classes, where compensation is less about income and more about compensation packages, such as shares.”
The startup sector is another potential bystander of this hit to the capital gains tax discount.
Productivity Commission chair Danielle Wood said the Budget contained a credible package of productivity reforms, but warned the CGT overhaul risked unintended consequences for startups.
“Overall, the impact on housing prices is pretty modest,” Ms Wood told Bloomberg Television.
She said the greater concern was “probably more in terms of startup community impacts”.
For Mr Fellows-Smith, the extra cost to startup may not be theoretical soon.
He has spent about 10 years building racing drones and is now working on hardware and software for GPS-denied navigation, a project he believes could become a small business.
But he is also about to graduate into a more secure engineering role.
“I’m at a fork in the road,” he said.
On one side is the risk and potential reward of a startup. On the other is the stability of a graduate job at a time when higher interest rates, rising property prices and the pressure to enter the housing market are already shaping his career choices.
“A big deciding factor for me is the pressure I feel from the economy,” he said.
If he had to choose, Mr Fellows-Smith said he would prefer capital gains tax changes to be aimed at property rather than shares or business sales.
“Among people my age, the real concern is primarily house prices,” he said. “That has been the focus, more than other assets.”
“I think I would support changing capital gains tax for property more than for investments or business sales. But I’m not opposed to a broader capital gains tax change across the board. I’d need to do more research on that.”
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