Capital Gains Tax in Australia
In any kind business or profession, gain or profit plays an important role. Capital gain is a part of such gain or profit. The term capital gain denotes the amount of profit cropped up from the transaction of capital asset. Any land, building, vehicles, intellectual property rights, leasehold rights and machineries are come into the purview of capital asset. However, certain taxes are levied on the total amount of capital gain that is known as capital gain tax. The tax amount is different in various states and implementation of capital gain tax is not mandatory in case of all the countries. In case of equities, it can be observed that the national and state legislations are accompanied with the fiscal obligations. Capital gain is included under the provision of taxable income. There are certain processes by which the capital gain of an individual can be calculated. A person has to pay the capital tax in each year and first step of the calculation includes the rate of amount paid by the individual in last year. The imposed tax rates can be of different types such as long-term, short-term and super-long-term. Countries that come under the definition of Organisation for Economic Co-operation Development or the OECD countries have introduced this tax system.
Australia is an OECD country. Development of capital gain tax has been introduced in Australia in the year 1985 during the governance of Keating government. Capital gain tax is applied on capital gain income along with certain specific exemptions such as family home. The operations of capital gain tax are derived from the capital gains and it can be observed that it makes the income as taxable income and it is calculated on each year basis. A discount up to 50% is available in case of the novice and superannuation funds of 33.3% can be available in such circumstances. Capital losses are simultaneous to the capital gain. If the person could not gain any profit from capital goods, the same will be treated as capital loss. The calculation of capital gain tax is quite well structured in Australia. The consumer price index plays an important role in the calculation of the capital gain tax. The cost of assets should be held for one year, as capital gain tax cannot be calculated if assessed for less than one year. According to section 102 of Income Tax Assessment Act 1997, when a person has gained or suffered loss due to CGT assets, the tax has been imposed at that time. The term capital asset denotes any property or any equitable rights that does not come under the definition of property.
Argument on Capital Gains Tax
Capital gain tax can be applied on all the assets however; there are certain exception to the rules that are given as follows:
- CGT will not impose on any goods that are from the pre-CGT stage that is manufactured before 1985.
- CGT will not levy on the residential complex of the taxpayer and the same will be applied on the first two hectares land adjacent to the main building.
- Assets like boats, furniture and digital goods that worth $10,000 should not be come under the purview of CGT.
- No tax should be applied on the personal use asset.
- Cars and motor cycles are excluded from the application of CGT.
- There are certain assets that are excluded from the provision of the income tax such as assets acquired from gambling. These assets are also not come under the shadow of CGT.
- Certain designated government schemes are excluded from the list of CGT.
According to section 104 of Income Tax Assessment Act 1997, there are total 52 CGT events present in Australia. The calculation of CGT depends on cost base. The cost base can be divided into three parts such as reduced cost base, simple cost base and indexed cost base. In Australia, the tax related to capital gain has played an important role and the share market of Australia was impacted by the capital gain on large basis. Rapid increase in the Australian Security Exchange has been observed in the year 2007 and a global financial crisis has been observed due to the evolutionary change in the net capital gains. It has been observed that the income acquired from the net capital gains are more volatile compare to the other income provisions.
The superannuation funds are also affected by CGT system and the share market of Australia was crashed due to this. The red bars are representing the unrealised capital gain; grey bars represent the net gain; blue bar represents capital losses and the net unrealised gains are presented as red circle.
Capital gain tax has secured an important position in the monetary market of every country and the share market and the dividends are quite depended on the same. However, there are arguments on the imposition and application of the same in different countries. McArdle had, in his book, mention about the concessional process of capital gains. According to him, the rate of the tax should be based on the capital income. However, this thought has been criticised by many scholars. According to Burton (2017), the people have no clear vision about the necessity of capital income in case of concessional rates. Further, objection has been made regarding the system where McArdle has mentioned that even the capital income of a rich person will be assessed in the similar way like the middle class people. One of the most discussed topics on capital gain is to identify the reasons for the imposition of lower tax rate in capital gain. Different conceptions have been made in this case and the argument is based on five categories mainly such as inflation, lock-in, double taxation, and mobile nature of the capital and consumption process.
Capital gain tax is depending on the valuation of the cost of the asset. It is obvious to state that the cost of the assets is high in case of inflation. Therefore, the rate of the capital gain tax is also increased along with the value of the assets. The concept of inflation is quite effective in case of deciding the rate of the capital gain tax. However, there is certain other conception regarding the imposition of capital gain tax. According to Easton (2018), if the investors will lost their interest in selling the assets they are holding, the rate of the capital gain tax will increase automatically. Tax avoidance will increase the tax burden and the position will be considered as the lock-in. The asset-holder are getting benefitted when the assets are upheld by them for a period of one year. Arguments on capital gain tax have been shunned on the basis of double taxation process. It has been observed in both Australia and New Zealand that the companies have to pay two types of tax on their income and profit. It has been observed that the companies are giving tax either on capital gain or dividends. High marginal rate of investment has helped the countries to acquire low rate of capital gain tax. It is important to avoid the double taxation system by making an investment pool for the companies where the extra profits can be saved and the same can be used in other sectors in legitimate way. McAedly was very much cautious about the imposition of tax on the wealthy people that will overburden in nature. He has focussed on the mobile nature of the capital gain tax. However, he has failed to discuss about the risk factors that can be cropped up during the money moving action. Therefore it has been observed that there are many arguments take place regarding the applicability of tax. It can be said that aligning capital gain tax rate will help to secure the high rate of amount from the rich with low negative consequences.
Capital Gains Tax and Smith’s Four Principles of Taxation
According to the political commentators of New Zealand, if the process of capital gain tax implemented in New Zealand, it will be regarded as political suicide. However, a recent spree has been observed among certain politicians who are supporting the introduction process of capital gain tax. In 2014, the Labour Party of New Zealand has announced that 15% CGT should be levied and the concept of CGT is a part of the political agenda in New Zealand. However, in this section, a brief discussion will be taken place that reflects the role of Adam Smith’s four principle of taxation in case of CGT regime.
The four principle of Smith are equitable, convenient, certain and efficient. According to equitable principle, every state should support the government and the state will be protected by the respective government. Further, it has been demanded that the rich should contribute more tax compared to the middle class families. The equity has been divided in two ways: horizontal and vertical. According to both the equities, the rate of tax will depend on the taxpayer’s ability to pay. It is necessary that the assessment process of tax should be easy and the tax should be collected straight forward. Te rate of tax are r4equired to be fixed and imposition of tax should not be over burdened. However, these four principle can be applied successfully if the following can be maintained in a proper way:
The rate of the tax should be assessed in such way that it can produce sufficient revenue for the government. The taxed money should be used for the purpose of achieving social and economic objectives. The inefficient allocation of resource must not be encouraged by the taxation system. Now, it is to be analysed whether the taxation of capital gain tax of New Zealand has followed the above mentioned principles or not. The policy statement of CGT in New Zealand is comprehensive in nature and it has been mentioned by certain tax expert that lack of proper application of CGT in New Zealand will cause complexity. The income tax rate of capital gain in New Zealand is 10.5% to 33%. At this point in the paper it is worth noting that although the capital gains tax rate proposed by Labour is lower than the tax rates on ordinary income, a situation which would not normally be viewed as increasing progressivity and meeting the vertical equity criterion (and is subject to criticism discussed following), since New Zealand presently does not tax capital gains, this is a move toward (vertical) equity. This fact is acknowledged by the New Zealand Treasury in July 2013 who observed that a CGT could have (positive) implications for both horizontal and vertical equity; with respect to the latter probably making the tax system more progressive.
References
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