Policy think tanks call on government to reduce CGT discount

“The CGT discount is the most unfair and unequal tax break in the entire Commonwealth tax code which is supercharging house prices and locking first homebuyers out,” Greens senator Nick McKim said in a November statement.

“This inquiry will shine a light on how the CGT discount has supercharged inequality, funnelled money away from productive investment, and turned homes into financial assets instead of places of shelter and community.”

The 50 per cent CGT discount is applied to assets held for over a year. It was introduced in the late 1990s to replace the more complex CGT cost base indexing, which ensured that asset holders were not taxed for gains caused purely by inflation.

In a December submission to the Senate inquiry, the Grattan Institute argued the discount had overcompensated property investors for inflation over the past 25 years. It noted that average annual house price growth, at 6.4 per cent, had outpaced inflation (2.9 per cent) since the introduction of CGT in 1999.

“In conjunction with generous rules for deductibility of interest costs (i.e. negative gearing), the tax system creates strong incentives for debt-financed and speculative investments,” the submission read.

“The interaction of a 50 per cent CGT discount with negative gearing reduces home-ownership. And the discount undermines income tax integrity by creating opportunities for artificial transactions to reduce income tax.”

It called on the government to reduce the 50 per cent CGT discount for individuals and trusts to 25 per cent, with a gradual phase-in rather than grandfathering. 

It said this would raise around $6.5 billion annually for the federal budget, which could be used to “shore up the budget, reduce more economically harmful taxes and lower the tax burden on younger Australians, or pay for more support for low-income renters by boosting Rent Assistance.”

ANU’s Tax and Transfer Policy Institute (TTPI) called for the CGT discount to be reduced from 50 per cent to 40 per cent, arguing that “a modest reduction in the CGT discount would better align with the notional goal of taxing the real investment return.”

The TTPI suggested this change should apply immediately, with no grandfathering, to mitigate lock-in effects.

It said that reducing the CGT discount would be a “small step” towards restoring intergenerational equity in Australia’s tax and transfer system, which it has argued currently overwhelmingly favours older, wealthier Australians.

The CGT inquiry, which was established on 4 November, is set to present its final report by 17 March.