Any changes to current regime should be part of a wider discussion around generational inequality
Is Labor once again flirting with one of the most politically combustible ideas in Australian tax policy: winding back the capital gains tax (CGT) discount?
Industry bodies and lobby groups seem to think so, with opposition to any changes to the lucrative concession coming thick and fast in recent weeks.
The Housing Industry Association (HIA) has warned that scrapping or even just reducing the discount would harm Australian housing supply, at a time when the government’s 1.2-million-new-homes-by-2029 initiative is coming up woefully short.
The Property Investment Professionals of Australia (PIPA) has warned of a fresh round of investor sell-offs that could further squeeze rental supply, while the Real Estate Institute of Australia (REIA) said that any changes to the current system “would add to the supply constraints, increasing pressure on the availability and affordability of private rental accommodation”.
Mounting opposition to the current CGT regime comes amid rife speculation ahead of Labor’s May Budget.
While nothing has been confirmed, it wouldn’t be the first time modern Labor tried to change the current CGT system.
Under current rules, a 50% tax discount is applied on profits from the sale of certain assets (including real estate) held for more than 12 months. Individuals and trusts can take advantage of the discount, while complying superannuation funds receive a one‑third discount.
In the 2019 federal election, former Labor leader Bill Shorten proposed reducing the discount from 50% to 25% for individuals and trusts, but only on future investments. Assets acquired before that date would keep the existing 50% discount for as long as they were held.
Shorten argued the 50% discount, introduced by John Howard in 1999, overly favoured wealthy investors, distorted investment toward housing, and reduced government revenue. Essentially, the same talking points that are being discussed today.
His proposal to reduce the discount was part of a broader set of tax reforms, including tightening negative gearing and introducing franking credit changes that cumulatively spooked retirees, middle-class investors and aspirational voters who felt these reforms were unfairly punitive.
Labor thoroughly lost that election, yet there is a sense of history repeating as the May Budget approaches.
While no promises have been made, the rumour mill is well and truly churning, with the prospect of changes to the current CGT regime becoming ever more likely.
Prime Minister Anthony Albanese has refused to wade into the conversation, although Labor treasurer Jim Chalmers has not ruled out the prospect of changes being made.
This would certainly be applauded by numerous respected economists.
Speaking to a Senate committee this Tuesday, Treasury assistant secretary Shane Johnson shot back at the idea that reducing the discount would harm supply. Rather, it would provide “an opportunity, essentially, for first-home buyers to have a house”.
Former RBA governor Bernie Fraser went even further, telling the committee the CGT discount should be completely scrapped.
"Despite that sort of toxic approach to tax changes, I think that a case can be made for doing away with the discount on the gains, capital gains tax, abolishing it altogether," said Fraser. “I believe that that would be a useful step, one of many steps that are required to moving back to an affordable housing market for all Australians."
Fraser lashed out at the “cartel” of existing home owners, property developers and politicians “who like to see house prices rise and go on rising, because there are votes in it”.
"It's not just those people in the housing markets now… feeling the disappointment," he added. "There are all those other generations of people – young home buyers – that are watching what's going on in the marketplace, but they must be watching with awful dismay."
Shane OIiver, chief economist at AMP, has a more measured approach to the matter.
He agrees that “there is an issue with intergenerational equity in Australia”.
But does he think the CGT discount is exacerbating this inequality? “It’s certainly perceived to be,” Oliver tells MPA. “Most first-time buyers sort of think that older Australians, with their tax concessions, get a better deal than younger Australians in trying to get into the property market. And one of the tax concessions is the (CGT) discount."
In its current state, the CGT discount is “quite generous”, reckons Oliver. “You can sort of see politically and economically why the government might want to do this.”
Yet simply reducing the discount would be something of a blunt instrument.
Oliver argues that reforming the CGT discount should not be treated as a standalone measure, but as part of a broader, coherent tax reform package.
In his view, simply cutting the 50% CGT discount is effectively a tax hike, rather than genuine reform, because it leaves untouched the underlying problem: a highly punitive income tax system where the top marginal rate kicks in at relatively low income levels.
Oliver suggests that concessions like the CGT discount and negative gearing have largely evolved as a response to these high income tax rates, with investors using them to reduce an otherwise heavy tax burden.
He therefore suggests a trade‑off: modestly winding back the discount and potentially capping negative gearing, while simultaneously lowering income tax rates and lifting thresholds.
Framed this way, changes to the CGT discount could be justified on grounds of efficiency, equity and intergenerational fairness, rather than being seen purely as a revenue grab.
One option could be to revert to the pre-Howard system of indexing the capital gains cost base to inflation. Under this system, the inflation component of the capital gain on assets held for over 12 months was untaxed. This was a less generous, but nonetheless net-positive system for investors.
But is that a vote winner?
Addressing generational equity has burned Labor in the past. It will take a lot of guts to try again.
