Reform, retain or scrap? The $45 billion CGT debate splitting Australia

Earlier this month, I opined why I opposed a potential reduction to the 50% capital gains tax discount on investment properties.

In short, I questioned what incentive remains to be a landlord without the discount - given the work, stress and financial risk involved - and whether cutting it would truly improve affordability, or merely serve as a convenient revenue lever for an indebted government.

The piece received dozens of passionate comments from you, our readers. To be sure, I’m not opposed to higher taxes in principle, but only if they’re clearly linked to policies that expand homeownership, not simply absorbed into general revenue.

But I digress; being a journalist, I recognise the need to present a balanced view. In this regard, Parliament had established a Committee on the Operation of the CGT Discount to examine key issues, including:

• Whether the CGT discount contributes to inequality, particularly in housing
• Whether it is fulfilling its original policy intent
• Whether it should remain part of Australia’s future tax mix

I reviewed many of the 80 submissions to the Committee, along with remarks from business leaders during the hearings or subsequent interviews, and summarised five of the most compelling arguments - on both sides - below for added perspective.

How much does the CGT discount cost?

Before diving into the arguments, it’s worth understanding the cost of the CGT discount.

According to the Australian Taxation Office’s submission, in the 2022–23 income year $45.2 billion in CGT discounts were applied across approximately 577,000 entities. The ATO does not distinguish whether the $45.2 billion relates to all capital assets, including shares, or specifically to investment properties.

Individuals and trusts can reduce eligible capital gains by 50% if assets are held for at least 12 months, while complying superannuation funds receive a 33.33% discount. Companies generally do not qualify.

That makes the CGT discount one of the most significant structural features of Australia’s tax system.

In favour of scrapping or amending the discount

#1 - Matt Comyn, Chief Executive Officer, Commonwealth Bank of Australia (CBA)

Position: Open to reducing the discount as part of broader reform

Comyn has signalled he is open to cutting the 50% CGT discount - but only within the context of broader structural tax reform, and only if it applied "not retrospectively, but going forward".

The head of Australia’s largest bank has framed the issue around intergenerational equity and fairness, arguing the current tax mix places too much burden on labour income relative to capital.

In his view, reform should not be piecemeal, but part of a coordinated effort to boost productivity, simplify the system and rebalance incentives across the economy.

Comyn has not advocated a specific rate reduction, but has made clear that capital taxation should be “under consideration” as policymakers look to address structural imbalances between workers and asset owners.

He has linked the discussion directly to long-term economic outcomes - productivity, investment and fairness - rather than housing policy alone.

“A big part of intergenerational equity is there is too much of a burden on labour… we’ve got to make sure that the tax system is fair," Comyn told the ABC.

#2 - Emeritus Professor Chris Evans, School of Accounting, Auditing and Taxation, UNSW Business School

Position: Scrap the discount

Professor Evans argues the 50% CGT discount is “over-generous” and has failed on efficiency, equity and fiscal grounds.

He contends the concession disproportionately benefits higher-income earners, distorts capital allocation decisions and undermines neutrality between labour and capital income. In his view, there is little empirical evidence that the discount materially promotes entrepreneurship, innovation or employment growth.

On housing, he argues the interaction between the CGT discount and negative gearing has entrenched speculative investment behaviour, producing “structural inflationary pressure” on property prices rather than improving supply outcomes.

Evans ultimately calls for abolition of the 50% discount, potentially replaced with a modest annual exempt amount to protect smaller investors while restoring equity and improving budget sustainability.

“The weight of empirical evidence and academic analysis… demonstrates that the 50% CGT discount is inefficient, inequitable, costly, and structurally distorting," Professor Evans said in his submission.

#3 - Grattan Institute

Position: Reduce to 25%

In its submission, led by Housing and Economic Security Program Director Brendan Coates, the Grattan Institute accepts that some discount may be justified - to account for inflation and reduce the “lock-in effect” - but argues that 50% is too generous, especially combined with negative gearing.

It contends the current rate has “overcompensated” investors relative to inflation for more than two decades and disproportionately benefits higher-income Australians, with nearly 90% of the benefit flowing to the top income quintile.

The think tank proposes reducing the discount to 25%, phased in over five years, estimating the reform would raise around $6.5 billion annually. It expects house prices would fall by less than 1%, with minimal impact on rents. The additional revenue, it argues, could be redirected toward more targeted housing support or broader tax reform.

"The interaction of a 50% 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," they said.

In favour of retaining the discount

#4 - Financial Advice Association Australia (FAAA)

Position: Retain - housing reform must be broader

The FAAA argues the CGT discount plays an important role in encouraging investment in productive assets and supporting retirement savings through superannuation and trusts.

While acknowledging divergent views among members regarding housing-specific changes, the association broadly agrees that altering the CGT discount alone is unlikely to materially improve housing affordability, according to Phil Anderson, General Manager of Policy, Advocacy and Standards at the FAAA.

The FAAA warns that introducing asset-specific rates - such as a lower discount for housing - would add complexity and create restructuring behaviour designed to minimise tax exposure.

Any changes, it argues, should form part of a broader review of housing policy settings, including negative gearing, supply constraints and social security interactions.

“Making changes to the CGT discount alone is unlikely to have a material effect on housing, housing assets and housing inequality," Anderson said.

#5 - Real Estate Institute of Australia (REIA)

Position: Maintain current settings

REIA takes the strongest pro-investor stance.

It argues housing is already heavily taxed and that reducing the CGT discount would exacerbate supply shortages in an already constrained market. With forecasts of a 262,000-home shortfall relative to national targets, REIA warns that weakening investor incentives would reduce dwelling starts and push rents higher.

Modelling cited in its submission suggests CGT reform could result in more than 33,000 fewer dwelling starts over five years, representing a contraction of new supply of dwellings of up to 3.2%. 

This would have severe impacts on housing affordability. With renters already spending 24.3% of their income on rent payments, a supply shortfall would further exacerbate rental inflation and push first home buyers out of the market.

"If CGT incentives were removed, there is a high probability that property owners would seek to recover the lost capital gain incentives through increased rents, which would then be passed on to tenants in an already constrained rental market," they said.

Where are we now?

In a Livewire poll on the issue, 53% of roughly 850 readers opposed changing the CGT discount. Around 22% supported applying a reduced rate to future property purchases, while 21% were happy to see it apply to all properties.

Media reports suggest the option Labor is most seriously considering is reducing the CGT discount to 33%. Additionally, it is also looking to cap negative gearing to two properties per investor.

However, the government will need clearer evidence that such a move would generate meaningful revenue, while managing concerns about unintended consequences - particularly the risk that investors attempt to offset higher tax liabilities through rent increases.

At the same time, Labor may ultimately abandon or defer the proposal if the amount of friction outweighs 

The debate, for now, remains open... and highly sensitive.

Have your say 

We’re interested in your view. Is labour taxed unfairly compared to capital? That’s ultimately what this debate comes down to. Do asset owners deserve preferential treatment for putting money at risk? Vote and share your thoughts in the comments below.