Australia leads the world in many ways. Taxing investments is one of them.
Our tall-poppy syndrome inspired tax system stands out globally for lumping investment gains in with regular income. Before applying progressive tax rates to the lot.
In practice, this means your investments are taxed at your marginal rate. If you’re in the 47% tax bracket, that’s more than double Japan and US tax on investment returns. And almost double Germany’s.
Of course franking credits and the 50% CGT discount apply…for now.
But franking credits don’t apply to foreign dividends. This means a foreign dividend portfolio is taxed at 47% for high-income earners in Australia. And about half that for an investor in Japan, the US and Germany.
Throw in corporate taxes already paid on those profits, and you’re looking at a cumulative tax nightmare. It’s almost three times North Korea’s tax on foreign businesses operating in the country.
As for the CGT discount, even the media is doing a good job of trashing Labor’s proposed alternative.
So we really are looking at a tax system that is about twice as onerous for wealthy people in Australia as overseas.
Here’s what makes this so very interesting. Other countries long since figured out that Australia’s model for taxing investment is a disastrous way of doing things. And abandoned it decades ago.
What Albo will learn the hard way
Wages and the people who earn them don’t easily move around. Capital does. And it tends to go where it is taxed the least.
As globalisation opened capital flows in the 80s and 90s, high-tax countries experienced capital flight. German money fled to Switzerland. English money to the Caribbean. And Scandinavian wealth went anywhere it could.
Governments responded by separating out investment income from work income in the tax system. And applied different tax rates to investment income. Those rates were well below the high marginal tax brackets for work income.
Part of the reason was to encourage people to save and invest. But it was really a panicked response to the loss of wealth across borders.
With the 50% CGT discount on the chopping block, Australia could soon experience the same reckoning.
Will it force our government to split the way it taxes investment and work income too? We’d only be aligning with the global norm…
Vote with your feet
The media and social media are full of anecdotal stories about fleeing taxpayers and entrepreneurs. They’re heading to Singapore and the US. Even the 0% tax on capital gains isn’t enough to convince them to move to New Zealand.
I can’t wait to see the fleeing productive class discover Australia’s deemed disposal rules. These require departing Australians to pay capital gains tax on unrealised gains before they can move their wealth overseas.
Leaving the lucky country is almost as costly as a stay in Hotel California.
But the bigger issue is this. The valuation of an asset takes into account its tax treatment. If taxes on certain assets are increased, their value will fall.
It is not immediately clear whether the higher taxes on investments will actually raise more revenue. Because the tax-induced value destruction could outweigh the higher tax rate.
Yes, the Laffer Curve applies to capital gains tax, too. And it can be proven in the same way.
What’s the value of an asset that gets taxed at 100%? Zero.
So higher tax rates must reduce value.
This is most stark in the Japanese property market. Inheritance and other taxes are so high that long-term assets are downright dangerous to own.
And so the value of Japanese property is extremely cheap relative to rental returns. But it’s a trap. The houses are only built to last a lifetime.
Australia’s future tax policy
just copies other countries’
John Howard’s 50% capital gains tax discount looks like a generous tax break for the rich. But it was really about aligning Australian taxes on investments with reforms elsewhere.
We couldn’t keep a tax system that hits investors with their top marginal tax rate. Nobody would come here with their money. And many would leave.
Howard knew that taxing investors separately at a low tax rate would go down like a lead balloon with the egalitarian Australian voter. So he couldn’t copy European reforms. Instead of shifting Australia to a system like the rest of the OECD, he applied the 50% CGT discount.
The current government thinks it is merely taking Australia back to a more reasonable form of tax system. But the rest of the world abandoned that system decades ago. We would become the tax outlier led by outed tax liars.
So my point is that Albos’ latest nightmarish tax reforms may end up triggering the opposite response. The exodus of capital and destruction of value could force a reversal. We could end up with a tax system that copies what many European nations created in the 80s and 90s.
That’d leave us with an entirely different tax treatment for investment returns, rather than lumping all income together. Perhaps a flat rate of around 25%.
This would solve several other distortions and complexities. For example, it would allow us to get rid of franking credits and thereby tax foreign dividends the same way we tax Australian dividends. The dangerous home bias in Australian portfolios could end.
The new system would treat all Australians equally with a flat tax.
It could also allow people who no longer work to avoid filing taxes each year. In Germany, banks and brokerages just withhold the 26% tax on investments, end of story. My mum hadn’t filed a tax return since 2020 under this system.
So far, the biggest beneficiary of Labor’s tax proposals has been Pauline Hanson. And her comments about income splitting are a sign that major tax reforms of this sort are coming under One Nation.
Hanson wants to allow couples to combine their tax thresholds. This leaves more of your family’s income in lower tax brackets.
I am considering converting to Islam and taking on more wives in response.
But this may be an overreaction to the coming tax changes. Perhaps I should be focusing on the investment side of things?
That’s why I’ll be joining Murray Dawes’ live Trading Masterclass event on Thursday, June 25, 2026, 1pm AEST.
I’ve watched Murray keep audiences on the edge of their seats since 2010. But this is the first time he’s agreed to do it for free.
You can sign up here.
Regards,
Nick Hubble,
Strategic Intelligence Australia
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