Taxation of assets and asset income

Background comments

Chris Evans

Major types of asset taxation

1. Taxing the stock of capital/wealth• Capital levies (rare)• Annual wealth taxes• Land taxes• Council rates

2. Taxing the transfer of capital/wealth• Death and gift taxes (donor-based: estate

duty; or donee-based: inheritance tax)• Stamp duties

3. Taxing the appreciation of capital/wealth• Capital Gains Tax (CGT)

Major types of asset taxation in Australia

1. Taxing the stock of capital/wealth• Capital levies (no)• Annual wealth taxes (no)• Land taxes (yes)• Council rates (yes)

2. Taxing the transfer of capital/wealth• Death and gift taxes (donor-based: estate

duty; or donee-based: inheritance tax) (no)• Stamp duties (yes)

3. Taxing the appreciation of capital/wealth• Capital Gains Tax (CGT) (yes)

Capital Gains Tax (CGT)

• Second most widely introduced tax in latter half of 20th century (after VAT)

• Introduced for reasons of equity (horizontal and vertical) and efficiency (but not simplicity)

• Taxes gains on “assets” on a realisation basis (should be accruals)

• CGT regime riddled with preferences (exceptions, exemptions and deferrals)

• Currently affects roughly 1m taxpayers (mainly individuals) – about 10% of all taxpayers

• Volatile revenue which accounts for less than 5% of all tax receipts – but NB important integrity role

Revenue from CGT

0

2000

4000

6000

8000

10000

12000

1996 1998 2000 2002 2004 2006

CGT ($m)

Priorities for reform

1. The CGT regime• removal of preferences (equity/efficiency)

CGT discount grandfathered status of pre-85 assets (?) small business concessions (?) the main residence (?)

• introduction of an annual exempt amount (simplicity)

2. Death taxes• Should they be re-introduced? (don’t be kind

to the dead!)

3. Annual wealth taxes• Should they be introduced?