Worried about capital gains tax and ASX shares? Here’s why you shouldn’t be

Much has been made of the recent federal budget, which was, hands down, one of the most controversial in years. Early last month, Prime Minister Anthony Albanese and Treasurer Jim Chalmers made the annual reveal of exactly how much money the government expects to raise over the coming financial year, and how it plans to spend it. As is usual these days, there was more spending than raising. But one of the most controversial changes the government has made is a revamp of the capital gains tax (CGT).

Anyone who has bought, and sold, ASX shares or exchange-traded funds (ETFs) before should already be familiar with CGT. It is the tax we are required to pay on profits earned from the sale of an investable asset. As ASX shares are investable assets, they are covered by capital gains tax. As is investment property, business gold bullion, Bitcoin, fine art, and any other investment-grade asset.

CGT changes cause a stir

As we covered last month, CGT has worked in the same way for almost two decades. If an asset has made its owner a capital gain upon its sale, that investor must add the value of that gain to their taxable income in the financial year that the sale was made. If that asset was held for longer than one year, the investor is entitled to a 50% deduction on the profit for tax purposes.

However, last month, the government announced that we would be returning to a pre-1999 model for capital gains tax from July 2027. From that date, investors will lose access to the 50% discount, which will be replaced by a mechanism that allows investors to only deduct the rate of inflation from their long-term gains.

It’s fair to say that this has resulted in a bit of an outcry from investors all around the country. Some are even saying that the new CGT will remove the incentive to invest in ASX shares at all.

However, I think that this attitude is misplaced, and is dangerous for anyone who gives it the time of day.

Yes, the changes may result in many investors getting a larger tax bill upon sale of their ASX shares.

There are a few things investors need to keep in mind though.

Why ASX shares are still a buy after the capital gains tax changes

Firstly, tax is still only payable on profits one makes. If you buy $10,000 worth of ASX shares and sell them five years later for $20,000, only $10,000 is taxable as income. Thus, the idea that the capital gains tax changes make stock market investing undesirable is laughable.

Secondly, the profits we make from investing in ASX shares will still be taxed at a lower rate than the salary or wage income we make from our jobs. I’ve never heard of someone quitting their job because they have to pay tax on the income they earn. So why would anyone not invest in shares because any profits they make will earn them income that is taxed at a rate below their day jobs?

Thirdly, you may have heard much talk about a 47% tax rate. However, that is the top marginal tax rate in Australia, if we include the 2% Medicare levy. It only applies to income above $190,000 a year. As such, the vast majority of ASX stock market investors will not be paying anything close to 47% on their capital gains from ASX shares. It’s far more likely that the maximum tax rate you will pay will be 30%. And that’s before discounting inflation.

Of course, everyone’s personal circumstances are different, and you should talk to a tax professional about how the capital gains tax changes might affect you. But from where I’m sitting, most ASX investors don’t have much to fear. ASX shares helped Australians to build wealth well before 1999, and they will likely continue to do so after 2027.

The post Worried about capital gains tax and ASX shares? Here’s why you shouldn’t be appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has positions in Bitcoin. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.