Gen Zs who approach share market like 'lottery ticket' could pay more tax

Young investors who take bigger risks will pay more tax under the government's proposed changes to CGT. (ABC News: John Gunn) The federal government's proposed changes to the capital gains tax would disadvantage high risk investors. Slow growing investments popular with new investors like ETFs might be better off, particularly in years where there is high inflation. Experts say some people have used high risk investing in assets like crypto to get ahead and save for a house deposit. Link copiedShareShare articleYounger investors chasing quick 'YOLO gains' will pay more tax than their peers who invest in slower, longer-term investments under a proposed tax overhaul the government says will fix a system which has undercompensated the share market for decades. Capital gains tax reform in last week's budget will replace the current 50 per cent discount in favour of taxing profits except the portion caused by inflation. While critics have labelled the proposal a tax hike, others argue it may favour options popular with first time investors, such as Exchange-Traded Funds (ETFs). The prime minister says this budget is about fixing intergenerational inequality, but online, gen Z and the millennials are hearing a different narrative. But the change would disadvantage investors who take bigger risks on assets like cryptocurrency, which are seen by some people as a shot at quick wealth accumulation. It's what financial analyst Andrew Lilley from private capital firm Barrenjoey described as a tax on "YOLO gains". "I sympathise with people who feel they have no shot of owning a house on their current wage who think it is better to just YOLO into bitcoin or gold, even if it is unlikely to make them a lot of money," he said. "They might feel like the government has taken away their lottery ticket." An ASX study from 2023 found 9 per cent of 18 to 24-year-olds are investors, and of those, a third had invested in ETFs. Treasurer Jim Chalmers said the latest Treasury data shows one in 10 people under 35 have shares. ETFs are a basket of stocks that you can trade as a single transaction, instead of buying individual shares. Under the current rules, people who make money selling investments like shares or cryptocurrencies only pay tax on half of their profit. Having a set rate means the profits of slow growing assets like ETFs are taxed even if they fail to keep up with inflation. In the proposed changes the government would only tax the profit above the rate of inflation. "Any time the capital gain is less than double inflation, which is generally true for ETFs in Australia, you will pay a lower capital gains tax," Mr Lilley said. This week, Treasurer Jim Chalmers defended the tax overhaul and said shares had been disadvantaged in the existing CGT system since the discount was put in place in 1999. That is because in bad years the capital gain made on shares did not keep pace with double inflation. Labor and the Liberals are offering imperfect but undeniably bold alternative visions for the tax system. It's nice to have something to talk about. Because there are so many types of shares with different returns, it is hard to say what the annual rate of return would be for the average investor, but we can get a ballpark figure from looking at the ASX. According to S&P Global historical data, the ASX has delivered an average annual return of 5.07 per cent of the past decade, excluding dividends. In this scenario, someone who purchased shares for $1,000 would be able to sell them for $1050.70 a year later. On paper, it looks like they made a profit of $50.70. But if inflation contributed to 3 per cent of that, their real gain would only be $20.70 In the existing system, they would pay tax on half of the gain, $25.35. Under the changes, they would only be taxed on $20.70, paid at their marginal tax rate with a new minimum rate of 30 per cent. The Reserve Bank has a goal of getting inflation to 2.5 per cent, and if that happens, people earning about 5 per cent on their ETFs come out close to even with the proposed changes to CGT. Jim Chalmers says only a small proportion of young people investing in shares are impacted by the change. (ABC News: Lucas Hill) Mr Chalmers said the change would rid the market, including housing, of "one of the big distortions" and deliver a "more neutral treatment of investment". Last week's budget papers showed investors who held their shares for 10 years or more had been disadvantaged under the existing system. Mr Lilley said the change would mean the government shoulders some of the risk of holding shares long term, and are paid for that risk in years when the market is performing well. "That should be a happy trade for most investors," Mr Lilley said. "It makes it more attractive as a saver to be guaranteed a real rate of return than it was previously." Jason Tian, a finance lecturer at Swinburne University, said gen Z investors are increasingly turning to high-risk

Gen Zs who approach share market like 'lottery ticket' could pay more tax

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