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Capital gains changes hard to sell

The recent yelling from the rooftops about changes to capital gains tax has captured the minds, and particularly the hearts, of traders and small investors alike as we try to understand the proposed changes.

The Ralph review proposed a few changes to the system and some of these have received the highest endorsement from the Prime Minister on his mission to America.

One proposal the review suggested was a lower tiered capital gains tax regime. It was also suggested that investors holding assets for longer than a year be rewarded in some fashion.

The American system is based on a tiered scale. Assets held for five years or longer attract a tax of only 18 per cent.

Compare this to our system that taxes individuals at 48.5 per cent in the top tax bracket and corporations at 36 per cent.

As US investment adviser Richard Radez, said at the Asia Society lunch for the Prime Minister in New York, US pension funds and the like could create a new Silicon Valley in Australia if the tax regime was changed.

His view is shared by US IT venture capitalists Larry Lopez and David Blumberg. Both have expressed interest in investing in Australian IT ventures but find the Aust-ralia’s CGT regime to be too harsh. They were actually encouraging Australian IT firms to consider moving to the US to attract investment.

The legal treatment of these collective investment vehicles and capital gains taxation has, in effect, meant that American investors would have to have a return on an Australian venture capital fund investment that would be more than fifty per cent higher than they could earn from a similar investment in an American venture capital fund.

Whilst it must be said that lowering of the capital gains tax rate could, in itself, probably provide a much needed boost to the investment markets, we must be vigilant to ensure that it is not the only reform to business taxation that is undertaken.

There are a host of other issues that the Ralph Committee identified as needing change. Unfortunately, a lot of them appear to have disappeared into the ether, never to be seen again.

The other aspect of the lowering of the rate that would apply to capital gains was highlighted by the Australian Society of Certified Practising Accountants.

As they see it, lowering the rate of tax to apply to capital gains would distort investment choice by favouring capital over income and thus open up a major avenue for tax avoidance.

The superannuation industry has also expressed concern about the removal of indexation from the calculation of capital gains. Their estimate of the increase in tax liabilities for superannuation funds around Australia is $125 million a year.

This all suggests that Prime Minister Howard’s ringing endorsement of the changes to capital gains tax rates may have been a little premature. It may be a difficult exercise to sell the changes to the public.

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