Operation of the Capital Gains Tax Discount

Australian Council of Trade Unions submission to the Senate Select Committee into the Operation of the Capital Gains Tax Discount

Summary

At its worst, the Capital Gains Tax discount is a tax avoidance scheme for the richest Australians that is helping to drive record inequality and is pricing mostly younger people out of home ownership. Rubbing salt into those wounds, the discount is effectively paid for by working people. At its best, the CGT discount is a failed tax policy long in need of an overhaul.

Since the introduction of the CGT discount in 1999, half of the capital gain on an asset held for 12 months is tax free. The rest is taxed at the marginal rate of the taxpayer. The Howard Government introduced this discount to replace the prior system that taxed all real capital gains since 1985, which were determined by adjusting any sales proceeds by inflation.

According to Treasury, the policy basis of this change was “to promote more efficient asset management and improve capital mobility, by reducing the tax bias towards asset retention, and to make Australia’s capital gains tax internationally competitive.” 26 years later, little of this intent has been met. As this submission outlines, the CGT discount has been a key mechanism allowing the very rich to pay lower effective rates of tax.

The latest Treasury data from December 2025 shows that most of the benefits of the discount are captured by the richest 1 per cent of Australians. While Australia generally has a progressive system of income tax, that breaks down completely for the top 5 per cent of income earners who pay a wide range of effective tax rates. At this level, “income bares almost no relationship with the tax rate faced by any one person’, according to the e61 institute. It is no wonder that income inequality in Australia is close to record highs.

The introduction of the CGT discount in 1999, with its tax-favourable interaction with the existing negative gearing arrangements, marked the point where incomes and house prices started to diverge dramatically. Back then it took 6 times the average income to purchase a house outright. Today it has nearly doubled to 11 times. This is because the CGT discount has given professional investors a huge advantage in bidding up house prices. New analysis conducted by the ACTU for this submission demonstrates a strong correlation between growth in investor loans and growth in house prices. In contrast, there is practically no correlation between growth in first home buyer loans and house prices.

As a result, today too many workers can no longer afford to live near where they work. And a growing number of workers will never be able to save enough for a deposit – accelerating rents and house prices is outpacing the money they can save each week.

Reforms to the capital gains tax discount is not a complete answer to our housing crisis, but, along with negative gearing reform, is an important part of it. It will help more renters become home buyers, by reducing the advantage for professional investors. Early research suggests that the impact of similar reforms, as recommended in this submission, could boost home ownership by as much as 4 per cent.

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