CGT changes 'risk exacerbating Australia's weak productivity trend', tax specialist warns

Institute of Public Accountants senior tax adviser Tony Greco has warned that owners of high-productivity businesses would pay a higher effective tax rate than owners of lower-productivity businesses under the proposed changes to CGT, which could further worsen productivity.

In a submission to the economics legislation committee, Greco noted that Australia has been experiencing a prolonged period of weak productivity growth.

"The proposed CGT changes risk exacerbating this trend. After a decade of lost productivity growth, this is a retrograde step in the wrong direction," he said.

"Australia is already a high-cost jurisdiction and impeding entrepreneurship in any way risks further deteriorating our declining productivity."

Under the proposed inflation-adjusted indexation model, high-productivity businesses would pay a higher effective tax rate than owners of lower-productivity businesses.

"High-productivity businesses grow quickly, outpacing inflation and can support the distribution of higher wages over time," Greco said.

"By increasing the effective tax burden on high-growth, high-productivity businesses – where founders commonly rely on the long-term increase in goodwill as remuneration in lieu of immediate reward – the reforms may discourage capital flows into sectors that drive innovation and wage growth."

Greco warned that low-productivity businesses are more likely to shed jobs over time.

"Australia suffers from low investment and productivity which can translate into slower wage growth and decreased business competitiveness," the submission said.

"Reduced investment in productive businesses can translate into slower wage growth, less employment opportunities, reduced competitiveness, and weaker long-term economic performance."

The proposed reforms also treat franked dividends more favourably from a tax perspective than capital gains.

"Companies may favour paying more dividends over innovation, expansion and research and development as the after-tax outcomes are more favourable under the proposed indexation model," he said.

"Encouraging long-term capital is essential for supporting economic growth. The proposed model undermines this objective as it undercompensates for risk taking."

The IPA submission said the reforms weaken incentives to commit capital to businesses, innovation, and entrepreneurial ventures.

The proposed measures do not adequately reflect the risk differential between labour and capital. In addition, the tax rates on labour income do not form a good basis for comparison," it said.

Greco said the high personal tax rates on labour income were a direct result of an outdated tax system that relies heavily on personal taxes.

"The proposed changes do little to address the structural changes required to reduce costly over-reliance on income taxes."

"The rationale for reverting to using the indexation model for assets other than residential property is unconvincing. It is a fundamental principle that taxing capital, particularly active capital, lightly as compared to labour makes good economic sense. Indeed, there are many jurisdictions in the world that do not tax gains on capital assets."