Henry report under fire over rumours of indexation return
OPPOSITION to an overhaul of capital gains tax rules intensified yesterday, with tax experts warning that the proposed changes would hurt investors and create havoc for dividend reinvestment plans.
The investment community is awash with talk that the Henry report, being considered by Wayne Swan, has recommended the reintroduction of indexation, a move likely to be greeted with widespread opposition.
KPMG tax partner Matt Hayes said yesterday that reverting to the old regime of indexation, effectively scrapped about 10 years ago, was contrary to the notion of trying to simplify tax return preparation.
He said for dividend reinvestment plans, indexation could be a “compliance nightmare” because investors needed to determine the capital gain based on inflation for every asset. Indexation can also be a headache for property or other non-managed fund investors who cannot rely on an administrator or fund manager to provide exact details of when the asset was bought and sold.
There has also been talk that the review, headed by Treasury secretary Ken Henry, is looking to ditch the 50 per cent capital gains tax discount for assets held for longer than a year for alternative options such as a standard flat rate on capital gains or a longer tenure-of-holding rule.
But Zurich Financial Services Australia acting head of technical services, Dimitri Diamantes, issued a warning that a longer period-of-holding rule represented a significant tax burden for investors who were forced to sell prematurely.
“A client who suffers a personal lifestyle crisis or who, because of economic events, needs to sell down investments, for example for a margin call, will be in a situation where they will have an added tax burden,” Mr Diamantes said.
One view is that the current 12-month holding rule does not encourage long-term investment and a sliding scale should be adopted whereby the capital gains rate reduces the longer an asset is held.
In its submission to the review, the Investment and Financial Services Association said a tiered discount based on years of ownership would be significantly more difficult for collective investment vehicles to administer and for individual investors to comply with.
One industry representative said fund managers were “up in arms” over the suggestion of extending the 12-month holding rule as very few held assets for longer than a year.
But there was also talk yesterday that the review may be looking to scrap the 50 per cent discount altogether as part of a plan to address the distortion in tax rates across the different classes of investments by introducing a standard flat rate.
