methodology<\/a> that led to the transfer of payroll tax to the States, my knowledge of tenements, prospects was of considerable value. Given how large the gains often were, the ATO was asking investors to prove they were not traders even for those with only several past transactions.<\/p>\n\n\n\nUsing the resources available to me, with a rare exception or two colleagues were able to convince the ATO they were investors even for short holding periods. By providing supporting information about why the share was purchased (next to a discovery, metals in high demand , large acreage etc) and arguing that the investment was only sold (glory be) because the share price had risen above any realistic valuation, the ATO faced an uphill battle given the large number of taxpayers attracted by the boom. <\/p>\n\n\n\n
From the start, the Whitlam Government was interested in legislative change which amongst other things would have eased pressure on the ATO. Then-Treasurer Frank Crean assigned the ATO\u2019s Cliff Headford and me to design a capital gains tax (CGT) taking advantage of my IMF international experience. At a late stage in its development, Caucus or even possibly the PM himself replaced Mr. Crean by Jim Cairns as Treasurer. Convinced by the racing industry at a weekend event that a CGT would do untold harm to the livestock industry (already heavily subsidised by a tax provision allowing natural increase to be valued at $2 a head in annual tax assessments despite the much higher costs of looking after them), he shut down the project.<\/p>\n\n\n\n
Re-assigned to other duties for the brief period the new Treasurer lasted, Sir Frederick focussed my attention with the help of the ATO\u2019s Charles Rennie in proving the urgent need that high rates of inflation were creating for tax reform. The new Treasurer Bill Hayden wanted to return to the CGT after his first 1975-6 budget but never had the opportunity to do so.<\/p>\n\n\n\n
It takes minimum effort to assess what fertile territory shares and other asset trading was when \u201ccapital gains\u201d remained tax-free. Despite its major flaw of shunning taxing one of the currently most effective ways of accumulating capital, selling the family home at a profit, the 1987 CGT now often criticised as being too tough on the (believe it or not) highly successful improved the equity of our tax system.<\/p>\n\n\n\n
Even though the tax system crucifies fixed interest investors with a de facto wealth tax, the government recognised that allowing full inflation adjustment was crucial to gaining acceptance of the new tax. Admittedly there were major flaws, particularly the exemption of all assets bought before the start date from the tax. Shares in my investment company, for example, set up in the mid-1970s still have capital gains tax-free status providing double options to reduce tax payable on its ultimate liquidation: either paying out the retained fully franked dividends or selling the company for a tax-free capital gain. (Stay reading for the later exciting Chapter on imputation where I consider how to neuter these advantages of selling franking credits to keep\/ensure the integrity of the tax system).<\/p>\n\n\n\n
Especially now that housing prices are so high and so many well-off and social climbing families invest inordinate amounts of money in the family home, reviewing this exemption is long overdue. It encourages over-investment in the family home and delays and complicates achieving efficient construction and use of the existing and new housing stock. The U.S.A. for example allows only a modest life-time tax-free exemption and even starting off here with a high (for all families and taxpayers) an indexed life-time exemption of say $2million) based on the assessed market value at the time of introduction of the change would improve our system dramatically.<\/p>\n\n\n\n
Always believing in the efficient use of assets, I had an average decent quality house and large shareholdings paying large tax bills year after year. Fortunately, 11 years ago after 40 years I understood something clearly at last, sold shares reducing my tax bills and bought a harbor side house. That investment to the delight of us (dream place to live) and far better tax-free returns than shares or investment property has all cost the government heaps.<\/p>\n\n\n\n
Other than this increasingly important defect in the 1987 CGT, the Coalition could not resist reducing the tax bills of successful investors at the expense of those struggling o get ahead by keeping and protecting the real value of their assets. The spin doctors focussed on the complexity of indexing gains in lodging tax returns (probably because they used slide rules or abacuses). In realty, it was just another instance of concentrating help on those least needing it.<\/p>\n\n\n\n
Worse still and more worrying as far as equity is concerned, Treasurer Costello added to the penalties by not (as the 1987 changes did) grandfathering the changes. Overnight the government aided all successful investors with post-1987 investments and added to the tax bills of less successful ones. Dr. Chalmers\u2019 recent budget changes reinforced this discriminatory attitude towards ordinary investors adding to the discrimination against them.<\/p>\n\n\n\n
This time round the changes grandfather the Costello changes. After the speculation about a return to the 1987 full inflation adjustment rules, the budget dashed my hopes of improvement by confining the new sensible old rules to new investments. Labor is continuing the Coalition\u2019s policies of benefiting the successful at the expense of the less successful for all existing investments bought after 1987.<\/p>\n\n\n\n
Annoyed by such callousness, my LinkedIn posts (not well received generally) gave an uncomplicated way for Labor to reverse the Coalition\u2019s wrong. Following Mr, Costello\u2019s strategy they could apply the new (reinstalled 1987) rules to all post-1987 investments from the new legislation starting date. The next step would be to give all taxpayers a period of grace (eg 6 or 12 months) to sell or mark to market (and count the assets as sold) and pay tax under the Costello rules. I also suggested that the ATO give those with large tax bills on a mark to market basis a three-year inflation adjusted interest-free period to pay their bills.<\/p>\n\n\n\n
The advantage of this is that except for pre-1987 assets, the CGT rules would apply fairly and consistently to all taxpayers. Despite the winging about large tax bills on large capital gains, the net proceeds are still large. If the government considers they need more encouragement of risk taking, concentrating on helping the losers by more favourable treatment of losses calls for greater attention than adding to the wealth of the smaller number of winners.<\/p>\n\n\n\n
Please do not think my support of the 1987 legislation means that everything is right in the House of Rome when the government reintroduces full inflation protection for new investments in CGT legislation. It certainly is not for geared investments. When I started investing, the RBA rules prevented savings banks from lending for housing and share investors as distinct from owner-occupiers. As late as 1986, the RBA still forced them to lend up to $65,000 at a maximum 13.5% interest rate even when the cash rate was 18% (peak rate) to owner-occupiers.<\/p>\n\n\n\n
Treasury inspired deregulation changed all this within a brief time and today investors with more collateral and larger cash flows receive priority over struggling new owner-occupiers. The government is trying to address current distortions by changing negative gearing rules. My tentative assessment is that this is fiddling at the edges ignoring the major tax subsidies available to geared investors under the CGT.<\/p>\n\n\n\n
Reverting to full marginal tax rates on gains more than inflation will dampen the interest in new investments but unfortunately it will not reduce the CGT tax advantages of fully or largely gearing investments. Allowing an immediate (or deferred) tax deduction for interest costs already gives a deduction for inflation built into the interest rate. Put bluntly given the full current or future interest cost deduction, what is the reason for a second inflation adjustment of the cost base.<\/p>\n\n\n\n
A fully geared investor has provided no equity for the purchase, and the sensible and fair choice would be to only provide inflation adjustment for the actual money spent on the investment. To repeat, there is no justification for any inflation adjustment in assessing the capital gains of fully geared taxpayers. This massive tax subsidy has cost revenue dearly since the CGT started in 1987. More worrying, it provides a massive subsidy to the banks encouraging lending to well-heeled investors at the expense of owner-occupiers struggling to achieve homeownership.<\/p>\n\n\n\n
You can clearly see where I am coming from when I criticise the recent budget action changing access to immediate deductibility of negative gearing losses. The proposals partly follow long standing U.S.A. practice only allowing immediate write-offs against other property income. What the decision makers conveniently ignore is that the U.S.A. provides a generous immediate tax deduction for people buying their own home.<\/p>\n\n\n\n
Back to our cruel politicians giving no or low priority to these people. In what can only be window-dressing, the proposed changes reducing access to immediate write-offs to those with property income (as in USA) and others (including those wanting to use gearing to gain a foothold in the housing market) gearing a newly constructed property. HELLO. The government wants to put upward pressure on newly constructed property prices and encourage\/force younger Australians into more risky investments.<\/p>\n\n\n\n
The legislation will further increase the already large risks involved in buying apartments off the plan for many future home-seekers. Experience highlights the dangers of paying inflated prices and obtaining actual delivery of the promised product on time involved with off-the-plan purchases. Why should any government not allow the one category of taxpayers most in need of assistance freedom to choose their best available future housing options. The legislation will close off the option of the tax-subsidized purchase of an existing home with (hopefully) all the warts fully visible.Given my long standing interest since the US National Tax Journal published in 1970 my \u00c4 Consideration of the Theory of the Tax Deductibility of Interest from the Personal Income Tax Base\u201d, I cannot resist further exploring Australia\u2019s rules further in a later Chapter.<\/p>\n\n\n\n