Interview with Peter Stefanovic, First Edition, Sky News

Peter Stefanovic:

Joining us live is the Assistant Treasurer, Dan Mulino, the Shadow Home Affairs Minister, Jonathon Duniam. Gentlemen, good morning to you. Help me understand something, Dan, because I don’t think this has been explained well at all. Why have you included all asset classes, including shares, in your capital gains changes if it’s supposed to be about housing?

Daniel Mulino:

Thanks very much for having me on this morning, Pete. And look, the changes to capital gains tax are partly about housing and the relationship between CGT and negative gearing is critical there.

But there’s also been a long‑lasting distortion introduced into CGT taxes in ‘99. When capital gains tax was introduced by the Hawke-Keating government, they included indexation for inflation, and the reason was because we were aiming to tax real capital gains. That’s something the OECD has acknowledged, that it’s reasonable to compensate or adjust for inflation.

Now what happened in ‘99 was there was an arbitrary 50 per cent discount introduced. Now the rationale for that policy was to encourage investment in shares, but what we’ve seen since 1999 is a steady and dramatic reduction in the number of taxpayers who have filed with dividends and an increase in the number of taxpayers who have filed with highly‑leveraged –

Stefanovic:

I understand that.

Mulino:

– stand‑alone property, so it hasn’t worked.

Stefanovic:

Well, if what you’re saying is that the share market has been under‑utilised, why increase taxes then?

Mulino:

Well, no, so it’s actually introducing a more sound and coherent indexation.

Stefanovic:

Well, what does that mean?

Mulino:

If you look at – so if you look at the Treasury papers, it’s Table 4.9, and what it shows with shares in fact is that when you introduce an arbitrary discount, a 50 per cent flat discount, there are periods where shares are over‑compensated relative to their real gains and periods where they’re under‑compensated, and the taxpayer won’t have a clue when they’re investing and when they’re disposing of those assets whether that’s the case.

What we’re saying is that whether it’s houses or shares, what you should be compensated for is inflation so that you’re paying tax on the real gain. And the Budget papers make clear that across all asset classes this is the sound way to do it. If you don’t do it this way you’re creating distortions across asset classes.

Stefanovic:

I think this is why you’re losing control of the message, Dan, because that doesn’t make sense. Can you explain that in a simple way? Jonno, did that make sense to you?

Jonathon Duniam:

No, it didn’t. Much as I love Dan, that was not sound and coherent, because it’s not sound or coherent policy. The reality is that if they’re about applying equity across the board means everyone’s going to be worse off, they’re all going to be paying more tax. And those memes you were talking to Frank Greeff about before, they’re humorous, but there is a very, very harsh reality behind that. And that is these people that invest and do well who are now being disincentivised will pay half what they accrue in wealth in tax to this government when they didn’t before.

So how this helps people get into a house, I have no idea, it’s just a tax grab, and everyone’s going to be worse off.

Stefanovic:

Yeah. That –

Duniam:

That’s the [inaudible], I think.

Stefanovic:

In simple terms that’s what it appears to be, Dan. Can’t you just call it a revenue raise?

Mulino:

No, well, see, the adjustment that we’re making means that if there are periods of high inflation, under the new arrangements you’ll get compensated or adjusted for that high inflation. You won’t get fully compensated for that with an arbitrary 50 per cent change.

The other thing is that across different asset classes, where you’ve got a low‑return asset, so that could be a unit, for example, versus a stand‑alone house, you don’t get fully compensated under the 50 per cent reduction.

And so what we’re introducing is a means of compensation or adjustment which is more equal and more neutral across all asset classes.

Stefanovic:

Okay. I mean it’s taking away from the share market though. Is it not true that if you had a share and you dispose of it and you’re a high income earner, above 47 per cent tax rate, and you dispose of it say within 6 months so you don’t qualify for much of an inflation, you’re getting punished at one of the highest CGT rates in the world, is that right?

Mulino:

No, well, actually, Treasury released analysis this morning which showed that if you look at the impact of capital gains on people in the highest tax bracket Australia ends up being broadly middle of the pack comparable to a lot of European jurisdictions and California –

Stefanovic:

We’re actually at the highest end, are we not though? 47 per cent is at the highest end.

Mulino:

Well, no, but when you look at the capital gains taking account indexation, it ends up in the mid‑30s for the highest –

Stefanovic:

But that’s still pretty high.

Mulino:

– the [inaudible] assets and low 30s –

Stefanovic:

That’s higher than Singapore, that’s higher than New Zealand, it’s higher than the United States. I mean are you going to bleed investment over there?

Mulino:

But if you look at the table in the Treasury analysis that was released today, there are some jurisdictions higher than us and some lower. They looked at a range of European and US jurisdictions –

Stefanovic:

Okay.

Mulino:

– and we were lower than some, higher than others. But broadly, for the people in the highest tax bracket it ended up in the mid 30s, some low 30s, some high 30s. So we’re very comparable on that front.

Stefanovic:

Okay. Just following an interview I just had with a founder, Dan, I mean the business community, the start‑up sector founders, they appear to be panicked because you say you are working on alternative measures to calm investors, but why wasn’t this sort of thing worked out before the Budget, why not have proper consultation, because frankly it looks half‑cocked?

Mulino:

No. So what we have is a very sound basis for the new indexation, and we’re basically returning, as I said, to the Hawke‑Keating indexation which was the original way in which this tax was framed for very good reason.

We do understand that start‑ups are a special case because their cost base is very low, or in some cases zero or near zero.

And so this was always a situation that we acknowledged would require some consultation with the sector. So that was flagged by the Treasurer on Budget Day and at his major address at the Press Club the day after, and we’ve started that consultation.

Stefanovic:

Would you consider reversing the CGT changes to housing only, Dan?

Mulino:

I think what we’ve done with the change to indexation for inflation is take the CGT back to its original design which is the sound design.

Stefanovic:

Okay.

Mulino:

The other thing is, Pete, if we were to do that, it would create integrity measures in that people could undermine the housing policy by purchasing properties through corporate structures. And so it’s important to do this in a holistic way.

Stefanovic:

I didn’t even get a chance to talk about trusts this morning, I’m running out of time. But Jonno, you haven’t had much of a say. Have you got a closing thought?

Duniam:

I do, I do. Look, I mean we talk about undermining structures there. I mean we are undermining people’s ability to get ahead, their desire to actually make a dollar. Shame on them. This is a shameless tax grab. And I mean within a couple of hours of the Budget being handed down last week, I was talking to a venture capitalist here in the stairwell of my building yesterday morning. He was getting ads on LinkedIn from New Zealand saying, ‘Hey, come on over, come across the ditch, we’ll take your money’. That is going to be the net effect, and I think Dan deserves a medal for his valiant attempt to sell what is unsellable policy, that it’s going to be bad for our country and our economy.

Stefanovic:

Okay. We’ll see how his boss, Jim Chalmers, goes later on. As he said, as Dan pointed out there, there’s going to be some attempt at an explanation with notes from Treasury about how they came up to all this.

Dan Mulino, Jonno Duniam, as always, I appreciate you trying to answer the questions today.