Why reducing the 50 per cent discount would improve the tax system
By Lucas Lewit-Mendes
Capital gains tax (CGT) was introduced in 1985 as part of reforms to broaden the income tax base and reduce the rate. CGT is leviable on the increase in the value of an asset, such as property or shares, and is levied when capital gains are realised (i.e. the asset is sold).
In 1999, the previous inflation adjustment was replaced with a flat 50 per cent discount, with the goal of stimulating investment in the share market.
The 50 per cent discount goes beyond the purpose the discount and undermines the progressive nature of Australia’s personal income tax system. The discount should be reduced to 25 per cent to improve equity and fund more effective ways to encourage productive investment.
The 50 per cent discount is too high
The CGT discount overcompensates for inflation
The CGT discount is designed to account for the inflationary causes of the increase in asset value. However, on average, the 50 per cent discount overcompensates asset holders for inflation. The Henry Tax Review determined that a 40 per cent discount would be an appropriate adjustment.
Taxpayers delay capital gains to minimise tax
Taxpayers can reduce their CGT rate by delaying the sale of assets until retirement, when they typically face a much lower marginal tax rate. This makes CGT less progressive than intended, because the investor is taxed at the lower rate, despite holding the asset over a period in which their marginal tax rate was higher.
Other forms of savings do not receive a discount
While superannuation savings also receive significant tax concessions, earnings from bank deposits do not receive any discount at all. This distorts investment towards more risky assets and worsens inequality, as lower income earners are relatively more likely to hold their savings as bank deposits compared to investment properties and shares.
Reducing the CGT discount would improve wealth redistribution
Almost 90 per cent of CGT discount concessions benefit people in the highest income quintile.
Even if economic fundamentals suggested that the current 50 per cent discount was justified (which we have shown do not), reducing the CGT discount would be a straightforward way to improve Australia’s wealth distribution.
The housing market would become more stable
The tax advantage given to capital gains encourages speculation in the housing market, especially when combined with negative gearing deductions. As noted in the Henry Tax Review, this leads to greater volatility in the housing market, which damages economic stability.
Housing construction and rents would be largely unaffected. Capital gains from property reflect growth in land values, as buildings depreciate over time and capital investments are CGT deductible. This means CGT has no impact on a landowner’s decision to develop.
There are more targeted ways to encourage productive investment
The original intent of the higher CGT discount was to encourage investment in the share market. However, the CGT discount targets not only business investment but also land and other speculative assets.
Instead, reducing the CGT discount to 25 per cent would provide additional revenue (approximately $6.5 billion per year), which could fund more targeted tax measures such as lower income tax rates for secondary earner parents or replacing company tax with a cash flow tax.
This would be supported by the community
Per Capita’s annual tax survey in 2024 showed that the majority (60 per cent) of Australians would pay more tax to support better health and aged care services. Additionally, removing the CGT discount was one of the most popular ways to raise more tax to pay for improved services.
Read Per Capita’s Submission to Select Committee on the Operation of the Capital Gains Tax Discount, here.