Mulino argues CGT changes end market distortions

Minister for Financial Services Daniel Mulino has defended sweeping changes in this week’s federal budget to capital gains tax across all asset classes and negative gearing, arguing it would end market distortions since its introduction over a quarter century ago.

Announced in Tuesday night’s FY27 budget by Treasurer Jim Chalmers, from 1 July 2027 the 50 per cent CGT discount will be replaced by cost-base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains.

Critics have argued the changes will distort investment decisions, but Mulino said the change will roll back distortions that have occurred since reforms were introduced in 1999, which led to falling rates of younger people owning a home.

“What we’re seeing is an accelerated worsening of a lot of trends for access to the housing market,” Mulino told a post-budget webinar briefing hosted by the Financial Services Council on Thursday morning.

Treasury modelling in the budget suggests the changes will support 75,000 first home buyers over the next decade, which Mulino said would be a direct shift from investor-owned properties.

Mulino acknowledged concerns that housing supply should be a greater part of the response to addressing the shortfall, but he countered the government has introduced the Housing Australia Future Fund, a range of social housing initiatives and $2 billion in the last budget for infrastructure to support new housing developments.

“Supply remains the focus but there are these additional levers that remain open to use and we feel that they now should be deployed because of the urgency of the issue,” Mulino said.

Mulino said these issues were raised in tax reviews done under the Prime Ministerships of William McMahon in 1975, as well as John Howard, Kevin Rudd and Tony Abbott.

“This is a budget that addresses a number of areas of tax reform that have been on the books for decades,” Mulino said.

“Some of the issues around trusts, CGT, negative gearing have been around for decades. The government is embracing the challenge of trying to deal with some of these long-standing issues.”

Investing in shares suffered collateral damage from CGT changes that most assumed would be aimed at slowing down housing growth, with the Financial Services Council – whose membership includes fund managers – calling the budget a “bait and switch”.

The changes are assumed to make dividend-paying ASX stocks more lucrative with franking credits being untouched, but Mulino said growth stocks would still have long-term benefits.

“Growth stocks will get, on average, higher returns, so they’ll still get more even after allowing for indexing,” Mulino said.

“If what you’re doing is focusing on real gains, I would argue what you’re doing is removing arbitrary distortions from the arrangements that were brought in ’99, that would be the overarching take on that.”

The changes in the budget would grandfather negative gearing for existing properties, but abolish it for new purchases with the exception of new builds to encourage investment.

“Highly-leveraged arrangements which are benefitting from negative gearing, particularly the way they might interact with capital gains tax, tends to skew people towards standalone houses and away from units,” Mulino said.

“There was a feeling that it was not just creating overall barriers but that it was creating skewness within the market in ways that weren’t healthy.”

There will also be a 30 per cent minimum tax introduced on taxable income from discretionary trusts from 1 July 2028, which is estimated to increase tax revenue by a further $4.5 billion over the five years.

Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

“You can have situations where high incomes end up with much lower rates of average taxation versus somebody on an average income paying it through PAYG,” Mulino said.

Mulino said that the government had sought feedback on tax during the third day of the Economic Reform Roundtable held last year.

“When you generally get a number of people in a room around tax, you get that many views from people on tax,” Mulino said.

“I was a bit surprised… by [the] unanimity on the notion we needed tax reform urgently on a range of fronts, but we also needed it to address intergenerational equity and productivity.”

Superannuation was spared any changes in the budget and Mulino said the government already has a full suite of policies to work through, including Division 296, changes to the Low Income Superannuation Tax Offset, payday super and mandated service standards.   “As far as I’m concerned there is a big agenda on super, a very robust and important agenda,” Mulino said.