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Capital gains or capital pains? Labor hints at CGT changes
While whispers about capital gains tax (CGT) have been ongoing since the beginning of the year, the federal government has made it clearer that changes will likely be made in the 12 May budget.
Treasurer Jim Chalmers hinted the budget could alter the CGT discount, telling ABC Radio that all tax options are still under consideration.
“We have indicated publicly for some time now, really since the reform roundtable in (August) last year, that we have an open mind to tax reform if we can afford it… I’ve tried to be up front in saying that we are working up some options,” he added.
“I’m not going to come out with what those options look like, but there’s certainly some and there’s certainly appetite for more tax reform if we can land it.”
Chalmers’ commentary followed a Senate inquiry into CGT, released yesterday, 17 March, and endorsed by two Labor senators.
Led by the Greens, the inquiry concluded the tax discount distorts investment, fuels housing unaffordability, and deepens inequality, revealing structural flaws in the system.
Established in the 1990s, the CGT discount reduces the taxable portion of a capital gain by 50 per cent for assets held for longer than a year, making it a major asset for investors across the country.
The inquiry found the discount favoured capital over labour, encouraging tax planning, shaping investor decisions, and channelling much of the benefit into existing housing instead of productive investment.
Additionally, when combined with negative gearing, the report found that the tax settings have shifted ownership away from owner-occupiers towards investors, exacerbating affordability pressures.
The inquiry concluded that the CGT discount disproportionately benefits some, furthering income, wealth, and generational inequality.
What’s next?
The committee proposed several measures to tackle the identified issues, including cutting the CGT discount from 50 to 25 per cent to curb speculative investing and boost government revenue.
Another option put forward by the report was to abolish the discount, with capital gains taxed like ordinary income, or to return to the Keating model, with gains adjusted for inflation.
The inquiry also recommended taxing housing investments less favourably than other assets to discourage investment in existing property, alongside reforming negative gearing to restrict or alter deductions for property losses against other income.
Similarly, the committee suggested limiting the discount’s use via trusts, restricting how trusts can distribute capital gains to reduce overall tax minimisation.
Finally, it recommended introducing a dual income tax system, in which labour income remains progressively taxed, while capital income is taxed separately at a lower, flat rate.
If the CGT discount changes were applied, not all investors would be affected.
The report raised a “grandfathering” option that would allow existing assets to retain their current tax treatment.
Opposite views
Coalition senators broke ranks with the findings, issuing a minority report warning against sweeping changes to the CGT discount, which they argue has been vital for driving investment and supporting capital formation in Australia.
They dismissed claims that tax settings are the main cause of housing affordability pressures, instead pointing to supply shortages, planning constraints and population growth.
The senators also warned that cutting the discount could trigger unintended consequences, including reduced investment, constrained housing supply and higher rents, ultimately risking investor confidence and broader economic growth.
What about property experts?
According to Domain, Australia’s housing affordability challenges cannot be solved by tax changes alone.
Data showed that since its introduction, the CGT discount has had little impact on house prices, with any potential changes expected to affect prices by just 1–4 per cent.
Domain’s chief of research and economics, Dr Nicola Powell, said that housing costs have been largely driven by interest rates, population growth, and limited supply, not CGT.
“There’s a real tendency to treat negative gearing and CGT as a quick fix, but housing affordability just isn’t that simple,” she said.
“These tax settings haven’t been the main drivers of price growth. It’s been low interest rates, strong population growth and not enough homes being built.”
Similarly, she said that scaling back negative gearing will also likely have only modest effects, primarily at the entry level.
“What could shift more meaningfully is who’s buying. If investor activity eases, first-home buyers could have a better chance of getting in.”
“If we’re serious about affordability, we need to think much broader. That means tackling supply, rethinking stamp duty, and making better use of the housing we already have.”
According to the data, stamp duty has remained a significant barrier, rising up to 3.4 times faster than incomes since 2000.
“There’s no silver bullet, but broader reforms like moving from stamp duty to land tax, reviewing policies that discourage efficient use of housing, and investing in infrastructure to unlock supply could make a real difference,” she concluded.
