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Tuesday, 25 November 1986
Page: 2660

Senator WATSON —Does the Minister representing the Treasurer agree that, in situations where there are no cost bases and therefore no benefit of inflation adjustments, the capital gains tax rates can be the highest of any developed country in the Western world?

Senator WALSH —I am not sure that I understood the question properly; I am not sure that anybody could, for that matter. These are people who, for example, believe that they would like to have the Reagan tax policy in preference to the Australian tax policy. If I remember correctly, that policy taxes the nominal gain at a rate of 34 per cent. In other words, it is a 34 per cent tax on inflation. The rate of capital gains tax in Australia can be higher than 34 per cent as from 1 July 1987, and could be as high, but not necessarily as high, as 49 per cent, but only on the real gain. It is certainly not difficult to find capital gains taxes in other countries at which the rate is lower, but the tax is levied on nominal gains not on real gains. Of course, the effective rate of tax is, in most cases, higher than the Australian rate. Even worse, it is a very unfair type of tax in that very substantial taxes can be levied after disposal of assets upon which there has been no real gain at all. In other words, there is always that uncertainty about the effective rate of capital gains taxation in just about every other country, an uncertainty, of course, which, until this Government's tax reform package, also existed with respect to the taxing of capital gains in Australia; nobody could be absolutely certain that on the disposal of an asset he would not have had tax levied under section 26 (a) of the Income Tax Assessment Act, again, on the nominal gain. That section will no longer be applicable. What Australia now has, in the taxation of capital gains as in the taxation system generally, is a system which is fair and the outcome of which is known.

Senator WATSON —I ask a supplementary question. Given the Minister's answer and given the circumstances of my question, does the Minister therefore concede that there is a full gain at marginal rates on a nominal basis?

Senator WALSH —As I said, I am not sure that I understood the question and I doubt whether that is my fault. Section 26 (a), over which Mr Howard, for example, presided as Treasurer for five years could, under circumstances which could not be foretold with any certainty, have taxed the nominal gain at the full marginal rate. The capital gains tax which this Government introduced to replace that uncertain and unfair provision of the old Act will tax only the real gain.