In a comment article published in today’s AFR, tax partner Shaun Cartoon warns that if the government goes ahead and replaces the 50 per cent CGT discount, it would represent the most significant change to the taxation of private capital in a generation.
“Taxing inflationary gains is poor policy, so there is a respectable argument for indexation,” Shaun writes. “But tax systems are judged by behaviour, not theory. The question is what indexation does to risk capital, founders, employees and capital allocation.”
Start-ups are not ordinary investment, he explains. Most fail, and the few that succeed must compensate founders and early employees for years of below-market salaries, dilution and career risk.
“If Australia wants founders to take that risk here, the after-tax reward must be internationally competitive.”
Shaun illustrates the point using the example of an entrepreneur who incorporates a company with two $1 shares and later sells it for $1 billion. “Under the current discount, assuming the top marginal tax rate applies, the tax on the gain is about $235 million. Without the discount, and with indexation doing almost nothing to a $2 cost base, the tax is about $470 million.
“That changes the government from a tax collector into something closer to a 50:50 economic partner in every new start-up in the country, except without taking the early commercial risk, making payroll, raising seed capital or sitting through failed product launches.
Abolishing the CGT discount across the board would be a blunt instrument. If the government wants to change the rules, it should do so with precision.
“Otherwise, a reform sold as fairness may end up doing the most damage to the people Australia most needs to back: founders, risk-takers and employees with a genuine stake in the upside.”
To read Shaun’s article in the AFR, click here.
Shaun was also interviewed on the issue by SKY Business Editor Ross Greenwood. You can view the interview here (from 14:14).
