FAAA proposes alternative to apportioning method for CGT changes

The Financial Advice Association Australia (FAAA) has called for a simpler alternative to the compounding growth-rate assumption proposed by the government as part of its changes to capital gains tax (CGT).

In a submission to the government’s consultation on the Tranche 2 legislation for the CGT and negative gearing changes, FAAA raised concerns about the complexity of the apportioning method proposed by the government for the transition to the new CGT regime.

The apportioning method can be used by investors to estimate a CGT asset’s value at the end of 30 June 2027, when the changes commence, by assuming the CGT asset grew at a compounding daily growth rate over the entire ownership period.

FAAA said it was concerned about the complexity of the apportioning method given, with the calculation for the apportioned gain requires a nine-step calculation process.

“This level of complexity is disproportionate for a mechanism intended to be a practical, lower-cost alternative to a formal valuation. It is likely that it will in practice increase reliance on professional advice, and therefore cost significantly more, even for taxpayers with comparatively simple, single-property holdings,” the association said.

“It is likely to force many to seek a valuation, which will be costly and probably difficult to arrange at the time when there will be a very high demand for valuation services.”

The association has also recommended that the government simplify the underlying calculation model, and provide a plain-English calculator or worksheet well ahead of the 1 July 2027 transition date so that taxpayers and advisers are not left to work through a nine-step process manually.

FAAA acknowledged that while investors have the option to obtain an actual market valuation of an asset effective 1 July 2027 as an alternative to using the apportioning method, this will be a costly exercise when valuers are in high demand.

This means that the default method must produce a fair result, it said.

“The apportioning method, as currently designed, assumes an asset grew in value at a constant, compounding rate across its entire ownership period,” the submission said.

"This assumption rarely matches the cyclical way property values actually move, and it is one that can materially disadvantage a taxpayer, depending on when in the ownership period growth actually occurred."

FAAA suggested to the government that investors instead be permitted to apportion a capital gain or loss on a straight-line basis, by reference to the number of days the asset was held both before and after 1 July 2027.

“We suggest that a day-count apportionment method would be simple to explain, easier for taxpayers and advisers to calculate and verify without specialist software, and would not require any assumption about the rate or pattern of an asset’s value growth over time,” it said.

“This would remove a significant source of unpredictability and potential unfairness from the default method. This would not be an unreasonable position to take as part of a fair transition arrangement that takes into account the complexity and cost of these reforms.”