‘Illogical and self-defeating’: Tranche 2 mechanics do not deliver on legislated policy

In a submission to the government’s capital gains tax (CGT) and negative gearing – Tranche 2 Legislation, Wilson Asset Management (WAM) stressed that the mechanics of the second tranche’s drafts do not deliver the policy that was legislated.

The draft amendments preserve existing negative gearing eligibility for new builds in certain circumstances, including the definition setting out eligibility.

The investment management firm said that the proposals in the bill’s exposure drafts produce avoidable outcomes.

WAM founder Geoff Wilson said: “I have spent more than 40 years watching how sensitive the supply of capital is to the incentives that govern it.”

“Taxing the return on productive risk capital more heavily than any other return in the economy is illogical and self-defeating. Australia cannot tax its way to higher productivity. It can only invest its way there."

In the firm’s August submission, Submission on the capital gains tax and negative gearing tranche 2 exposure draft, it concentrated on three potential outcomes that could arise from the proposals: gains taxed in the wrong period, an exemption for family succession that stops short of the family, and a tax preference for holding Australian companies through a pooled fund rather than directly.

To solve these issues, it recommended that capital losses are indexed on the same basis, an arm’s length transaction close at 30 June 2027 is accepted as evidence of market value, and that the appointment growth rate is derived from the full cost base.

“We have concentrated on those three because they are where a change would make the most difference to the people who will be impacted, and because we have already given evidence on each of them to the Parliament and to Treasury,” the submission said.

“None of the three alters the government’s stated policy objective, and all three can be implemented before commencement.”

The firm emphasised that there are not enough valuers to do the valuation work required for the cost of valuation as at 30 June 2027.

“Australia has an estimated 5,500 to 6,500 qualified active property and asset valuers. On our modelling, the exercise requires between three and five times the valuer capacity available before 1 July 2027.”

“Confirm that an arm’s length transaction involving the asset, or substantially identical interests in the same class, close to 30 June 2027 is sufficient evidence of market value without requiring a separate formal valuation,” the submission said.

The firm said that none of the recommendations that it makes can be made before 1 July 2027, and none of them requires the government to revisit a decision Parliament has already taken.

“An investor should be taxed on the gain they actually make, in the period it was actually made. A family passing on a farm should not be caught by a minimum tax that was never aimed at them. An Australian who wants to own shares in Australian companies should not pay more tax for holding them directly than through a fund managed offshore,” it said.

“Left as they are, the cost falls on the retiree with a share portfolio, the founder who built something over a decade, and the family passing on a farm. None of them designed this system, and none of them can restructure their way out of it.”