The proposals to rein in investor tax breaks will be bundled up alongside a $250 a year tax rebate for workers and a $1000 standard tax deduction in a single bill that Treasurer Jim Chalmers will submit to the House of Representatives on Thursday.
The treasurer has said the changes will help level the playing field for many young Australians who have been locked out of the housing market by a system that taxes income earned from labour at a higher rate than income derived from investments.
While the majority of economists and business groups have acknowledged the need for tax reform, and the changes are likely to be passed with the support of the Greens, the government has taken flak in particular for the proposed changes to the capital gains discount.
Rather than confining the change to property and leaving the existing 50 per cent discount for gains made on the sale of shares and businesses, Labor has applied its new indexation regime across the board.
The government has acknowledged that creates an issue for startups, which have a low initial capital base, and is consulting on potential amendments with industry groups, including the Australian Chamber of Commerce and Industry.
The chamber's chief executive Andrew McKellar called on the government to scrap the changes for businesses and keep them confined to housing.
He warned the tax changes will result in less business investment.
"That will be bad for productivity. That will be bad for competitiveness. It will be bad for the future growth of the Australian economy," he said.
Capital gains exemptions already exist for small businesses with turnover below $2 billion.
But that in effect punishes successful businesses who go from paying basically no capital gains tax to a relatively high tax rate because of rapid growth, said UNSW professor of economics Richard Holden.
"That basically says our tax system is going to identify the most dynamic, highest-productivity growth, highest-employing, most successful small businesses that are becoming big businesses, and tax the hell out of them," he told AAP.
Shadow Treasurer Tim Wilson accused the government of "knee-capping" small businesses.
"There are existing carve-outs, no one's disputing that, but unless the treasurer's ambition is to keep small business small ... these exemptions simply don't meet the needs of all small businesses in this country," he said.
Dr Chalmers said the reason the changes were not ring-fenced to housing was because the government wanted to iron out the distortions out of the tax system.
Asked why the government could not distort the system the other way to encourage investors into shares at the expense of existing housing, he said "a fairer and more neutral treatment of capital gains will fix this issue".
"Established housing has been overcompensated, and other investments like shares have been undercompensated," he told reporters on Wednesday.
"Some people will be better off under the new arrangements depending on their circumstances."
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