Labor's capital gains changes will hurt those on less than $80,000, Josh Frydenberg says. Is that right?

Updated

The claim

The Coalition has long warned that Labor's proposed 50 per cent capital gains tax increase will not only hit the economy but also taxpayers on low-to-middle incomes, including teachers, nurses and emergency services workers.

In a recent tweet, Treasurer Josh Frydenberg said the policy targeted "aspiration and entrepreneurship".

"With 60%+ of taxpayers who had a capital gain having a taxable income under $80,000, Labor will discourage Australians to save & invest & punish those who do!" Mr Frydenberg tweeted.

Is it correct that 60 per cent of taxpayers who declared a capital gain had taxable incomes of less than $80,000?

And is it reasonable to suggest the policy will mostly hurt those on low-to-mid incomes?

The verdict

Mr Frydenberg's claim is misleading.

He points out that more than 60 per cent of taxpayers declaring a capital gain in a given year were on taxable incomes of less than $80,000.

However, this paints a distorted picture.

Taxable income is a poor indicator of household wealth, as noted by leading tax and economic modelling experts and previously reported by Fact Check in January and November.

Relatively well-off individuals (and households) can reduce taxable incomes in a variety of ways.

They can negatively gear investment properties, offset income against other business losses or transfer assets to family members, for example.

Moreover, Mr Frydenberg referred to the number of taxpayers who declared a capital gain.

This effectively treats small capital gains in the same way as very large capital gains.

Experts told Fact Check that a more meaningful set of numbers is the value of capital gains declared by various income groups.

Those on higher incomes are overwhelmingly the biggest beneficiaries in both dollar terms and as a proportion of the total, as analysis by Fact Check confirms.

But the situation is somewhat complicated because capital gains are by their nature often "lumpy".

This raises the possibility that an individual who might normally have a relatively modest income could be recorded as having a high income in the year in which an asset is sold.

Fact Check adjusted Tax Office's sample file containing the de-identified records of about 270,000 taxpayers by removing declared net capital gains from their taxable incomes.

This provided an estimate of what might be described as "normal" income.

This adjustment shows a disportionately large share of total net gains is clustered in the very low income range ($6,000 or less).

One explanation – posited by one leading expert who undertook a similar analysis – is that many households are transferring assets to spouses on low incomes to reduce their tax liability.

Another is that assets are often being sold during retirement, when people are receiving tax-free income from superannuation and have low or zero taxable incomes.

The taxation of capital gains

A capital gain occurs when a person makes a profit on the sale of an asset such as shares or an investment property.

This is generally treated by the Australian Taxation Office (ATO) as a form of income.

Under rules introduced by the Howard government in 1999, 50 per cent of the capital gain on most assets held by individuals for more than a year is not subject to capital gains tax.

However, this discount has been criticised as being overly-generous and distortionary, with income derived from asset sales generally taxed at a lower rate than income from other sources, such as wages or interest.

According to Treasury data, the lost revenue from the concession (for individuals and trusts) has risen steadily, from $6.3 billion in 2014-15 to an expected $9.4 billion in 2018-19.



Labor's proposal

Labor's argument is that the discount has failed to achieve its stated aims, is skewed towards high income earners and investors at the expense of aspiring home buyers, and is unaffordable.

It is proposing to cut the discount from 50 per cent to 25 per cent for all assets held for longer than a year.

Put another way, under Labor's proposal, 75 per cent of a capital gain would be subject to tax, rather than the current half.

Labor has not yet said when the policy would begin, or how much additional revenue it expects it to raise.

It is, however, promising the changes will be "fully grandfathered", meaning assets purchased prior to the introduction of the new rules will not be affected.



What the Government says

In an opinion piece published by The Australian in January, Mr Frydenberg referred to economic modelling by the Centre for International Economics, estimating the change would reduce Australia's gross domestic product by $3.7 billion a year, reduce wages by 0.7 per cent and cut construction activity, among other things.

He also suggests the changes will harm those on more modest incomes.

"These are not necessarily high-income individuals," Mr Frydenberg wrote.

"Just as the tax data on negative gearing showed two-thirds of the people using this concession had a taxable income under $80,000 a year, so too with the capital gains tax discount there will be many teachers, nurses and emergency services personnel [affected] who are making modest investments to build their nest egg."



Capital gains by taxable income

According to the latest tax data from the ATO, almost 662,000 taxpayers declared a net capital gain in 2015-16.

Of these, nearly two-thirds (413,866, or 63 per cent) had taxable incomes of $80,000 or less.

This accords with Mr Frydenberg's assertion that 60-plus per cent of taxpayers who declared a capital gain had a taxable income under $80,000.

However, as experts consulted by Fact Check indicated, this analysis tells us little about the distributional effects of the discount.

Indeed, some transactions recorded in the numbers would be relatively small involving the sale of a few shares, for example, while some would be large, involving the sale of investment properties.



What about the value of capital gains declared?

A further analysis of the data shows that those with a taxable income of $80,000 or less received just 16 per cent of all net capital gains.

On the other hand, 84 per cent of the total went to those people on taxable incomes of more than $80,000.

Of this group, those earning above $250,000 received 56 per cent of the total declared, while those with taxable incomes of over $1 million received 37 per cent.





It's complicated ...

Income earned from capital gains is, by its nature, "lumpy".

For example, a taxpayer who sells a property may appear to have a very high income in the year of the sale, but a more modest income in other years.

Fact Check used a de-identified sample file of almost 270,000 taxpayers provided by the ATO to rank taxpayers after removing capital gains from their taxable incomes.

This provides an approximation of what might represent more "normal" income levels for those individual taxpayers.

It is then possible to examine the proportion of total capital gains that was received by these adjusted income groups.





As can be seen, almost a quarter of total benefits went to taxpayers with taxable incomes of $6,000 or less.

Two academics who undertook a similar analysis — Ben Phillips and Matthew Gray, from the Australian National University's Centre for Economic Policy Research — described this cluster as "odd".

"The clue lies in what they are at the bottom of," they wrote in The Conversation. "They are at the bottom of the taxable income scale."

According to Professor Phillips' calculations, the bottom 10 per cent of capital gains taxpayers declared an average of $161,000 each, more than any other income group, including the top 10 per cent.

Professor Phillips speculated this was likely because many of the taxpayers in the lowest taxable income brackets were, in fact, well off or in a tax-free (or low tax) retirement phase.

"Although their taxable incomes, after deduction of net capital gains, are in the bottom 10 per cent, their actual wealth and living standards are likely much higher up the [income] distribution," he said.

"Many own shares and businesses or have negatively geared investment properties.

"They get dividend imputation cheques and report business losses."

Professor Phillips said the data also indicated older Australians paid only 5.6 per cent of personal income tax, but 29 per cent of capital gains tax.

He said partnered women were also over-represented, paying 19.4 per cent of income tax but 28.7 per cent of capital gains tax.

"This is what you would expect if couples planning to minimise tax put the asset they were planning to buy and sell in the name of the lower- paid partner," he said.



'Not particularly informative'

The deputy director of the Melbourne Institute of Applied Economic and Social Research, Roger Wilkins, said Mr Frydenberg's claim was accurate but "not particularly informative" in terms of the distributional impact of Labor's policy.

"The reduction in disposable income produced by the tax change will be larger, both in dollar terms and percentage terms, among high income earners than among those earning under $80,000," Professor Wilkins said.

"Realised taxable capital gains also tend to be higher among people with high levels of wealth.

"So if we are thinking of the rich in terms of wealth rather than incomes, we will again see that the effects of the tax change will be most acutely felt by the rich."

Associate Professor Jinjing Li, of the National Centre for Social and Economic Modelling at the University of Canberra, said Mr Frydenberg's figures were consistent with the ATO data.

However, referring to 2013-14 figures, she pointed out the ATO data also showed the top 10 per cent of taxpayers accounted for 70 per cent of the entire capital gain.

"The same group claimed just under 30 per cent of the total wages," Dr Li said.

"In 2013-14, for example, there were less than 5 per cent claiming a positive net capital gain, and they, on average, had a much higher average taxable income than those who did not claim.

"Among those who reported net capital gain, most of those gains were claimed by the richer ones in the group."

By only taking into account the number of people declaring a capital gain, not the amount of the gains, Mr Frydenberg's claim was potentially misleading, said Kathrin Bain of UNSW's School of Taxation and Business Law.

"What he has done is just look at the number of taxpayers in those categories that have a capital gain," Ms Bain said.

"What he is saying isn't incorrect, but it isn't taking into account the amount of capital gain.

"Someone could have a taxable income of $30,000 and sold some shares and have quite a small capital gain – reducing the discount certainly may impact them, but it will impact them less than someone who made a capital gain of $500,000."

Professor Phillips told Fact Check that taxable income was a poor measure of household wealth, particularly in the case of retirees with tax-free superannuation.

He said it would be more meaningful to compare capital gains by household, examining the combined income of each household.

However, Professor Phillips said this was difficult to do because Australia's tax system was built around individuals.

Principal researcher: Josh Gordon, Economics and Finance Editor

factcheck@rmit.edu.au



Sources

Topics: tax, government-and-politics, federal-government, australia

First posted