Tax Reform: What Investors Need To Know

Australians are hearing more about “tax reform” and for good reason. Our tax system was largely designed for a different Australia: younger, faster growing, and with many workers supporting relatively few retirees. That’s no longer the case. 

From population ‘pyramid’ to ‘cylinder’ 

Traditionally, Australia’s population looked like a pyramid, lots of younger people at the base, fewer older people at the top. Today, the shape is closer to a cylinder. People are living longer, birth rates are lower, and the proportion of older Australians is steadily rising. 

This has a direct impact on the budget. More Australians are relying on Centrelink age pensions, health care and aged care services, while the number of workers paying income tax to fund those benefits is shrinking. Put simply, there are fewer workers for every retiree than there used to be and that ratio is expected to keep falling. 

Why this puts pressure on the tax system 

Australia relies heavily on personal income tax. A relatively small share of the population carries a large part of the tax burden, particularly higher income earners. As our population ages, relying so heavily on income tax becomes less sustainable. 

At the same time, a growing share of national wealth is held in capital; investment properties, shares, superannuation and businesses. Yet capital is often taxed more lightly, or more inconsistently, than employment income.  

This fuels the ongoing debate regarding ‘fairness’ between:

• Workers who pay income tax on every dollar earned, and
• Investors and retirees who may benefit from discounts and concessions on capital gains, super and other assets. 

The focus of proposed tax changes 

This is why we’re seeing more discussion (and decisions being made) about income tax thresholds and brackets, taxation of capital gains and investment income, and superannuation tax concessions (click here to read Chris Colman’s blog regarding the recently amended Division 296 tax). 

The central question is how to share the load fairly between income from work and income from investments – and between current workers and future generations. 

Balancing reform with fairness for older Australians 

While there is a clear need for tax reform, it shouldn’t come at the expense of older Australians who have built their financial strategies in good faith, based on the rules in place at the time. Many retirees and pre retirees have made long term decisions about saving, investing and retiring, assuming those settings would broadly continue. 

Any serious reform will need to consider: 

• How changes are phased in,
• The extent to which existing arrangements are “grandfathered”, and
• The impact on those already retired or close to retirement, who have limited capacity to adapt their strategy. 

Why reform matters for investors 

Changes to the way income and investments are taxed can influence: 

• After tax income and net returns from portfolios
• The relative attractiveness of different asset classes
• The optimal structure for holding wealth (personal, company, trust or super) 

Thoughtful reform should aim to create a system that is simpler, fairer and sustainable, one that supports productive investment while recognising the realities of an ageing population and the legitimate expectations of older Australians. 

As the Budget approaches and proposals evolve, our role is to help you navigate the detail, understand how changes may impact your personal situation, and adjust your strategy if and where needed: Start a Conversation