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The superficial attraction of Ralph CGT measures belie the weaknesses

Publication date: 21 Sep 99 | Source: THE TAX INSTITUTE

The Taxation Institute of Australia today welcomed the Government's capital gains tax proposals, however, it warned that the measures in some cases are too restrictive and in others will lead to inefficient investment decisions and have the potential to encourage tax avoidance. "The reduction in the effective CGT tax rate, although welcomed, could lead to persons favouring investments which have a capital yield over those which have an income yield," warned Taxation Institute of Australia President, Mr Gordon Cooper. "Companies could be encouraged to retain earnings to give shareholders increased capital gains on shares rather than distribute dividends ," he said. "Further, arrangements such as restrictive covenants for employees may return to favour with employees substituting salary increases for the more concessionary taxed capital gain arising from such a restrictive covenant," Mr Cooper warned. "Certainly individuals generally will be looking to turn income into capital. It was to combat such arrangements that CGT was initially introduced! The indexation trade-off for a lower effective CGT rate may seem attractive for individuals in times of low inflation, but will lose its lustre if the Australian economy experiences again high rates of inflation. Even the 15 year concession for potential business retirees, which is superficially attractive, has it problems", he said. "It could lead to individuals holding onto business assets in order to gain the concession rather than redeploy the capital in new ventures. Finally, restricting the CGT concession for certain overseas investors (exempt pension funds in comparable tax regimes) to investments in PDF's is a "Clayton's" concession as it unduly limits the ability of funds to invest with adverse CGT consequences," said Mr Cooper. "For example, a US pension fund that invests in an Australian managed investment fund will not get any CGT concession."