In Wilson Asset Management’s new report, Taxing innovation into oblivion: how the unrealised gains tax and the failure to index will decimate Australia’s innovation, the firm says a lack of indexation will stifle investment and fail to deliver the productivity reform that is desperately needed.
Geoff Wilson, founder and director of Wilson Asset Management, said it is also a policy that may discourage the emerging investment preferences taking place with younger generations who are increasingly allocating to cryptocurrency, an asset class with high volatility.
According to the report, 67 per cent of investors will reduce holdings in start-ups, smaller capitalisation, or high-growth companies, and 63 per cent will no longer be willing to hold investments longer than five years.
Furthermore, the report said that 611,823 Australian companies, which are either start-ups or small-growth companies, are projected to forgo $19.73 billion in taxation contributions to the government during the maturity phase of the S-Curve life cycle.
“Each year, 55,096 corporate start-ups are expected to be captured by the taxation of unrealised gains. As a result, we estimate an annual loss of $444.3 million in taxation revenue once these companies reach the mature stage of the S-Curve,” it said.
“Self-managed superannuation funds will be forced to abandon growth-oriented investments. The need to manage annual tax liabilities will drive a shift towards lower-risk, yield-focused assets such as debt and fixed interest instruments, or top ASX 100 listed companies.
“This reallocation will deprive innovative companies of critical funding, and contribute to dangerous levels of market concentration and potential overvaluation in large-cap stocks, introducing idiosyncratic risks to the broader market.”
Additionally, the report said the current policy will shift investment preferences towards highly volatile cryptocurrency.
“Australia has emerged as a leading global hub for digital asset adoption, with invested capital now totalling $75 billion. According to the Independent Reserve, 31 per cent of Australian adults, or 6.2 million people, own or have owned bitcoin or another form of cryptocurrency. This growing adoption is extending into retirement savings,” the report read
The report continued that in 2024, Australian SMSFs held $1.044 billion in cryptocurrency, based on ATO data. Just five years earlier, this figure was under $200 million, representing a growth of more than 500 per cent.
“No other major asset class within the superannuation system has expanded at this rate, and all indicators suggest this momentum is accelerating,” it added.
“This signals the emergence of a new retirement philosophy, led by digital-native generations who view cryptocurrency as a core component of their long-term financial planning, challenging notions of what constitutes a legitimate retirement asset.”
It also said this presents serious implementation challenges as bitcoin and other cryptocurrencies are highly volatile, with extreme and frequent price swings. Investors could be forced to pay tax on a hypothetical gain one year, only to then suffer a substantial capital loss in the next.
“In practical terms, this could impose tax liabilities that are impossible to fund, making cryptocurrency the most challenged asset class to be subject to the proposed tax.”
“The extreme volatility of cryptocurrency calls into question the reliability of Treasury’s tax revenue forecasts that include unrealised capital gains. As with the lack of indexation, younger Australians who are most likely to allocate to cryptocurrency within superannuation will be disproportionately impacted over time, particularly as their balances grow.”
