With the federal budget just weeks away, speculation is growing that the government is weighing up changes to one of Australia’s most significant tax concessions. Capital gains tax, particularly the 50 per cent discount applied to profits on assets such as property and shares, has long been a central feature of the tax system, but also a frequent source of debate.
As housing affordability remains under pressure and budget constraints tighten, attention is turning to whether the discount could be scaled back, reshaping the incentives that have helped drive investment in property for more than two decades.
What is Capital Gains Tax?
Capital gains tax (CGT) is the tax you pay on the profit you make when you sell an asset for more than you originally paid for it. While it is most commonly associated with property and shares, it can apply to almost any asset held for investment, including cryptocurrency, managed funds and valuable collectables.
Emeritus Professor Chris Evans, a taxation expert and former head of the Australian School of Taxation at UNSW, told 7NEWS.com.au that capital gains tax applies to profits made when selling assets. “A capital gains tax is a tax on the profits that you make from disposing, selling, gifting, whatever, disposing of an asset for more than you paid for it,” he said.
Importantly, capital gains are not taxed as a separate category. Instead, the profit is added to your income for the year and taxed at your marginal income tax rate, meaning the amount you pay depends on your total earnings.
Some key exclusions and rules determine when CGT applies. The most significant is the family home, which is generally exempt, meaning most Australians will not pay capital gains tax on the property they live in. Other factors can also affect how much tax is paid, including how long the asset is held and whether any deductions or losses are applied, making the system more complex in practice than it first appears.
How the System Worked Before 1999
Before 1999, capital gains tax was calculated differently, with the system focused on taxing the “real” increase in value of an asset rather than the headline profit. Instead of applying a flat discount, the original purchase price, known as the cost base, was adjusted in line with inflation using the Consumer Price Index. When the asset was eventually sold, tax was applied only to the gain above that inflation-adjusted figure.
That meant investors were not taxed on increases in value that simply reflected rising prices over time, which was seen as a fairer way to treat long-term investments. The approach also aligned capital gains more closely with other forms of income, ensuring that profits were taxed without giving a broad, across-the-board concession. However, the system was more complex to calculate and, by the late 1990s, there was a growing political appetite to simplify it and encourage more investment activity.
What Changed in 1999?
That system was replaced in 1999, when the Howard government introduced the 50 per cent capital gains tax discount, allowing investors to pay tax on only half of the capital gain made on assets held for more than 12 months. At the time, the change was framed as a way to simplify the system and encourage investment, particularly in shares.
“They said, first of all, we want to inflation-proof because it’s a bit unfair. If you bought investment property 20 years ago and you’re selling it now, a lot of that capital gain is just down to inflation, just down to ordinary prices increasing over time,” Evans said. “They wanted to boost investment in shares — they were particularly keen to get more people into the share market. And the third reason for introducing the 50 per cent discount was to make Australia more internationally competitive.”
But Evans argues the policy had very different effects in practice. “All three of those reasons for introducing the discount are a little bit phoney,” he said. Rather than directing money into shares, he said the change coincided with a sharp increase in investment in residential property, which was seen as a safer and more reliable long-term asset.
That shift, combined with negative gearing, has been widely cited as playing a key role in shaping the housing market. “With negative gearing, you get 100 per cent write off, but you only pay tax on 50 per cent of the gain, so it’s a win-win for the property speculative investor,” Evans said. Over time, that combination has increased investor demand and, according to Evans, contributed to affordability pressures. “You got massive overinvestment in property and that, of course, had the impact of freezing out lots of first home buyers. House price increases are about three times the level of increase of other asset classes.”
What Could Change Next?
With pressure mounting on housing affordability, there is speculation the government may scale back the capital gains tax discount as part of a broader response in the federal budget. No formal policy has been announced but several options have been suggested, ranging from modest changes to broader reform.
These include reducing the discount from 50 per cent to a lower level, such as 33 per cent, phasing it down over a number of years to soften the impact, or returning to an indexation system that taxes only the real gain after inflation rather than applying a flat concession. There is also discussion around targeting the changes more narrowly, particularly within the housing market, by limiting concessions on existing properties while maintaining or even strengthening incentives for new builds in an effort to support supply.
How any change is introduced is likely to be just as important as the policy itself. A sudden shift could disrupt investor behaviour, while a phased approach would allow the market to adjust gradually. Evans said any reform is likely to be cautious, with the government more likely to trim the discount, potentially to about 33 per cent, rather than scrap it altogether, while also protecting existing investors through grandfathering. Under that approach, current investors would retain the existing tax settings, with any changes applying only to future purchases — a move that can ease political pressure but also preserve the advantages already built into the system.
What This Looks Like in Practice
So, what does this actually look like? If a single investor buys a property for $600,000 and sells it three years later for $800,000, they have made a $200,000 profit. If they earn $100,000 a year, that capital gain is added to their income in the year they sell.
Under the current system, the 50 per cent discount means only half of that gain, $100,000, is counted for tax, lifting their taxable income to $200,000. That would result in a total tax bill of about $60,000, meaning roughly $35,000 of the profit is lost to tax. Without the discount, the tax bill would rise to about $105,000, with closer to $80,000 of the profit going to tax.
Who Really Benefits from the CGT Discount?
A key criticism of the current CGT discount is that its benefits are not evenly shared, with the concession largely flowing to those who already own significant assets. Evans said capital gains tend to be concentrated among a relatively small group of Australians, raising broader concerns about fairness, particularly across generations. “The people who tend to make capital gains tend to be the wealthier, and tend to be the older,” he said.
Because capital gains are tied to asset ownership, younger Australians, who are less likely to own property or large investment portfolios, are far less likely to benefit from the discount, even as they contribute to the broader tax system that supports it. That dynamic has fuelled concerns about intergenerational inequality, with critics arguing the system advantages those already in the market while making it harder for new entrants to build wealth.
Evans said the issue can be broken down into three key problems: efficiency, fairness and cost. “The discount is inefficient because it distorts our investments, and it’s unfair because the people who tend to make capital gains tend to be the wealthier and the older, which disadvantages those on lower incomes and younger Australians. And then the third reason is that it’s costly,” he said.
He said the discount also comes at a significant cost to the federal budget, reducing tax revenue that could otherwise be used on public services. Evans said the CGT discount costs the federal budget about $20 billion a year in foregone tax revenue. “It’s about 10 per cent of the population, mainly at the upper end — the wealthier and higher-income earners. So, we’re effectively giving them a massive privilege that isn’t extended to everybody else.”
Who Stands to Gain, and Who Misses Out?
Any change to capital gains tax would reshape incentives across the housing and investment markets, particularly by reducing the tax advantage currently attached to holding and selling assets such as property. First-home buyers could benefit if investor demand softens, especially in the market for existing homes, where they are often competing directly with investors. “You would hope they would have a better chance rather than being outbid by property investors,” Evans said.
For investors, however, the change would likely reduce after-tax returns, particularly for those who have built long-term strategies around the current discount. That could make property a less attractive investment relative to other assets, or encourage a more cautious approach to buying and selling. Over time, it may also alter behaviour, with some investors choosing to hold onto assets longer or reassessing where they allocate their money altogether.
Despite that, Evans argues the change would not be stripping away an entitlement, but rather correcting a policy imbalance that has developed over time. “This was a giveaway that shouldn’t have gone to them in the first place … what you’re doing is just restoring the level playing field.”
Will It Fix the Housing Crisis?
While the debate is closely tied to housing affordability, Evans said changes to capital gains tax alone are unlikely to solve the broader housing crisis. He said the core issue remains supply, with tax settings doing little to directly increase the number of homes being built or brought to market. Instead, any reform is more likely to influence behaviour, shifting the balance between investors and owner-occupiers rather than materially increasing overall housing availability. That means the impact would likely be gradual, easing some pressure at the margins by reducing investor demand, but not delivering a sharp or immediate change in house prices or supply.
