Updated ,first published
Treasurer Jim Chalmers has opened the door to tax changes amid a backlash from business heavyweights who say cutting the capital gains discount will chill investment and productivity just as Labor is trying to kickstart growth.
The Coalition has started branding the replacement of a 50 per cent discount on capital gains to a model indexed to inflation with a minimum 30 per cent write-off, as a “tax on everything” that will hit smaller businesses, start-ups and younger Australians wanting to kick off job-creating firms.
Chalmers on Sunday said he understood tech start-ups in particular could face higher tax bills under the new inflation-adjusted model. This is because start-ups tend to have a low initial cost base, meaning a high-growth firm could be taxed up to 47 per cent compared with a maximum of 23.5 per cent now.
“We do recognise that start-ups and venture capital, and particularly the tech sector, have got a different kind of cost base calculation,” Chalmers said on ABC TV on Sunday. “We recognise there’s a different case here, and we will work through the sector.
“We actually were engaging with the sector before budget night because we recognised that.”
Some countries, including New Zealand, do not tax capital gains at all. The new scheme will place Australia as one of highest taxers of capital gains in the OECD, a league of rich nations.
After years of tax reform debate, the government ended generous tax concessions on capital gains in last week’s budget on the basis that negative gearing and the 50 per cent discount had fuelled property speculation and had driven up inequality.
But leading business figures, including Tanarra Capital’s John Wylie, have questioned why taxes were hiked for productive investments in businesses, rather than just on property.
A social media campaign has depicted an AI-generated Anthony Albanese shaking hands with founders, riffing on the prospect of a maximum 47 per cent capital gains tax for certain high-growth firms that could be allowed under the new regime. The images shared by entrepreneurs portray the government as effectively a business partner, given the high rate of taxation.
Seek founder Paul Bassat, now a venture capitalist who sits on the AFL commission, said the CGT change would have a “profound” effect on the economy. He said it was “clear that little or no thought went into the implications of this prior to the budget”.
“Investment is critical in driving growth and jobs and we want to incentivise investment towards the most highly productive areas. The budget does the opposite: it creates incentives to allocate capital towards less productive areas of the economy. It is a jobs destroyer,” he said.
Bassat, who runs the Square Peg fund, has been critical of the Victorian Labor government’s fiscal management. He recently created Amplify, a non-partisan group that aims to advance public debate and generate quality public policy.
Labor says its tax package will help narrow the wealth gap between generations, exacerbated in recent decades as Australia’s capital cities featured in the top 20 most expensive property markets in the world.
Bassat said Labor’s policies were poor in three respects: by removing the CGT discount for assets, investment in all areas would be hurt, not just property speculation; downsizing would be discouraged because the family home would become the most tax-favoured asset class; and the next generation of entrepreneurs would be taxed more heavily than their predecessors, making it more difficult for young people to become successful.
“The budget changes will result in Australia imposing a higher rate of tax on capital gains than essentially any other developed economy in the world. The government’s proposed policies are a bad idea at any time as they discourage the creation of start-ups and other small businesses but they are a particularly bad idea at the moment,” he said.
Coalition housing spokesman Andrew Bragg has labelled the CGT change a “tax on everything”, while shadow treasurer Tim Wilson held an investor roundtable on Sunday to create momentum for a campaign against Labor’s tax hikes.
“What’s clear from Tuesday’s budget is the government doesn’t understand the consequences of the new taxes they’re putting in place,” Wilson said at a doorstop press conference.
“They’re looking at start-ups, small businesses, and the self-starters of our country like a tax-milking cow when what we actually want is tax settings that encourage them to thrive.”
Not all members of the business world agree on the wisdom of Labor’s equity measures.
David Turner, who runs Empirical Legal, a firm that advises small businesses, said that, all else being equal, hiking CGT would slow investment. However, he said many people started businesses with a passion to solve a problem or to take advantage of a gap in the market, “not solely for capital appreciation”.
He said the budget included a suite of measures – including on R&D, tax treatment for venture capital, instant asset write-offs and a loss carry-back scheme – that were good news for people trying to build firms.
“What the government has chosen to prioritise in this budget are measures to support cashflow for start-ups rather than focusing on the tax treatment of their eventual exit,” he said.
Jessy Wu, who runs a communications agency and previously worked in venture capital, said Labor’s changes to venture capital tax incentives and the superannuation performance test would “dramatically increase the capital available to Australian risk-takers”.
“For people who want to start a business, the binding constraint isn’t the tax treatment of a hypothetical future windfall, it’s the availability of upfront capital and the ability to manage cash flow,” she said.
Chalmers said the Coalition plan to index Australia’s tax rates to tackle bracket creep – when wages rise over time with inflation and push people into a higher tax bracket – was one of the least responsible he had ever seen.
“Angus Taylor will be adding a quarter of a trillion dollars to national debt [by indexing the tax rates]. That would cost tens of billions of dollars in extra debt interest because he has an uncosted, unfounded tax announcement, which was all about trying to stave off One Nation,” he said.
Taylor dismissed modelling released by Labor on Friday that estimated the opposition’s tax proposal would cost $35 billion, not $22.5 billion, over four years.
“That is their tax hike, that is their planned income tax increase,” Taylor said on Sky News’s Sunday Agenda.
“If Labor wants to crow about their planned income tax increases, $200 billion, that is all coming away from the private sector”.
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