The stay-at-home mum caught in Labor's CGT crossfire

One day, a lovely mother and family friend I know made a difficult decision.

After leaving her full-time job at the Commonwealth Bank to care for her family, she felt guilty that she was no longer contributing financially to the household. Anyone who has raised children knows that was nonsense, but she felt it all the same.

So she found another way to help.

Between caring responsibilities and casual work, she learned technical analysis and started trading shares. Every so often she would proudly announce: "Look, I just made $400!"

The profits weren't life-changing, but every cent helped. They helped pay down the car loan, covered new school uniforms and allowed the family to enjoy the occasional meal out, easing some of the pressure on a husband carrying the weight of being the family's breadwinner.

And because she had little taxable income, much of what she earned from investing attracted little or no tax.

That's why a new analysis from Morgans caught our attention. It highlights a group of investors almost entirely absent from the debate around Labor's proposed CGT changes: stay-at-home parents, carers, part-time workers and other Australians who use investing to supplement household income.

The investors nobody talks about

Much of the discussion around the proposed reforms has focused on wealthy investors and property owners.

But Morgans argues the changes could also affect ordinary and low-income Australians who use shares and exchange-traded funds (ETFs) to build wealth outside superannuation.

Under the current system, investors who hold assets for more than 12 months generally receive a 50% discount on their taxable capital gains.

Under Labor's proposed changes, that treatment would be replaced with a system involving indexation or a flat 30% tax rate on capital gains, depending on the structure involved. Morgans argues this would increase the tax burden for many long-term share investors.

"Proposed changes to Capital Gains Tax by the Federal Government will leave Australia’s 10.2 million shareholders paying more tax than they do under the current system," Morgans says.

"The changes will see low-income and part-time workers pay more tax on shares, making it harder for young Australians and women to build long-term wealth outside superannuation."

Case studies to show the impact

To illustrate the effect, Morgans modelled two hypothetical investors.

The first, "Tim", is a tradesperson earning $65,000 a year who invested $20,000 into a basket of blue-chip shares in 2020. By 2026, that investment had grown to $39,185.

Under today's rules, Tim's tax bill would be substantially lower than under the proposed framework.

Morgans calculates he would pay an additional $4,420 in tax under the new approach.

The second example is arguably more revealing.

"Sarah" is a stay-at-home mother with no current income. She makes the same investment and achieves the same gain.

Under the current system, because her taxable income remains below the tax-free threshold, she would pay no tax.

Under the proposed framework, Morgans estimates she would face a tax bill of $5,755.

Whether or not one agrees with the broader policy objective, the modelling highlights an important reality: the impact is not evenly distributed.

For high-income earners, the changes represent a larger tax bill.

For someone with little or no income, they may represent the introduction of a tax bill that previously didn't exist.

A shift in investor behaviour?

Morgans warns the changes could alter how Australians invest.

Marcia Senn, the firm's Director of Wealth Management, says the reforms could have a disproportionate effect on women and other low-income investors seeking to build wealth through shares, as many start from a lower earnings and savings base and rely on long-term investment returns to build financial security outside super.

More broadly, she argues the changes reduce the incentive for long-term capital growth investing and may encourage investors to favour income-producing assets instead, and potentially take bigger risks.

"These changes send a clear signal that the reward for backing shares over the long term is being reduced and may even cause investors into shorter-term, riskier type strategies in order to make up the shortfall from paying the higher amount of tax," Senn says.

That possibility echoes concerns raised by several other commentators since the policy was announced, including Stockspot's Chris Brycki and Viola Private Wealth's Daniel Kelly, who have argued the changes may reshape portfolio construction and investor behaviour (see link below).

Morgans has urged the government to maintain incentives for long-term investing and exclude shares from any CGT indexation changes as part of its submission to the Senate inquiry. 

Education

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