Taxing Capital Gains : One Step Forwards or Two Steps Back?

The manner in which capital gains are taxed in Australia (and in other countries) has undergone fundamental reform in recent years. A "new" Capital Gains Tax ("CGT") regime based on the identification of (currently) 39 CGT events was legislated in Australia with effect from 1 July 1998. In addition, a 50% CGT discount has been introduced for certain taxpayers from 21 September 1999. At the same time averaging has been abolished, indexation has been frozen, and small business CGT concessions have been made significantly more generous. This article evaluates these recent CGT changes from a policy perspective. It draws upon revenue and other available statistics to identify the impact of the changes upon the capacity for revenue generation/protection and for the operating costs of the CGT system, and concludes that the recent changes do not deliver the benefits that have been claimed and anticipated. Efficiency arguments dominate, with some lip-service paid to the simplicity criterion (usually manifested by vague assertions about reducing compliance costs for taxpayers and administrative costs for the revenue authority). The integrity of the tax system, and in particular notions of equity and perceived equity, may suffer, and the supposed efficiency and simplicity gains may not materialise