A Review of the 1999 Australian Capital Gains Tax Reforms

Abstract

Whilst the current Australian tax system incorporates a somewhat progressive tax structure, loopholes in the income tax laws result in significant levels of tax avoidance and minimization. Thus, the tax system struggles to fulfill its critical goals of income distribution and economic efficiency. Specifically, it is contended that deficiencies in the Australian capital gains tax regime forms a significant weakness in the Australian income tax system. The recent Review of Business Taxation carried out by a committee of businessmen chaired by John Ralph , actually shifted the Australian capital gains tax regime further away from the comprehensive income ideal, with its capital gains tax discounts and other exemptions. Accordingly, the paper seeks to ascertain, whether the Ralph reforms optimised Australia’s capital gains tax? In doing so, the paper initially examines the tax policy criteria. The case for capital gains taxation is then made having regard to the three traditionally accepted canons of good taxation policy: equity, economic efficiency and simplicity. Also, fiscal adequacy is considered to be an essential criterion. The paper finds that capital gains tax is clearly justified on tax policy grounds although concerns about complexity and impact on investment are noted. Thirdly, the paper considers the design issues by comparing a comprehensive realisation and accruals CGT systems. Overall, the paper finds that accruals is well justified on tax policy grounds. However, given the liquidity concerns about accruals it is suggested that an accruals system be initially applied to marketable securities with a realisation system applying to other assets. After some experience with this system, it is further suggested that accruals be extended to other assets for taxpayers who do not have these liquidity issues. Fourthly, the paper provides a brief history of Australia’s capital gains tax prior to the introduction of the 1999 Ralph Australian capital gains tax reforms. Fifthly, the paper sets out the 1999 Ralph capital gains tax reforms. Finally, the paper reviews these reforms and finds that these reforms generally moved Australia further away from the ideal capital gains tax regime. The paper notes the tradeoffs and concludes that there is need for further capital gains tax reform and makes recommendations for implementing a comprehensive capital gains tax for Australia that includes an accruals capital gains tax for marketable securities. This study only covers some of the issues involved with the broad subject of capital gains tax. Indeed, this paper does not undertake a detailed examination of a number of aspects of capital gains tax, including: an international comparison of capital gains tax; international issues associated with capital gains tax; capital gains tax issues for partnership and trusts. The study though is sufficient to show the need for further capital gains tax reform in Australia. It also points to the need for further empirical and theoretical research on the impact of tax rules on income and wealth distribution, economic efficiency, simplicity and fiscal adequacy.