Australia is weighing significant changes to its capital gains tax (CGT) system ahead of the upcoming federal budget, with potential reforms that could reshape investment behaviour and the housing market.
The federal government is reportedly considering two main options: reducing the current 50 per cent CGT discount to 33 per cent, or reverting to a pre-1999 system where capital gains are adjusted for inflation, meaning only “real” gains are taxed.
Tax experts warn that either approach could have unintended consequences, including the emergence of a so-called “never sell” investor who holds onto assets longer to avoid higher tax liabilities. This behavioural shift could further tighten Australia’s already constrained housing supply and limit the expected revenue gains from reform.
Under the current system, assets held for more than 12 months receive a 50 per cent discount on capital gains before being taxed at an individual’s marginal rate. Treasury modelling suggests this discount costs the federal budget approximately $247 billion over the next decade.
A reduction to a 33 per cent discount would represent a straightforward tax increase for property investors. However, economists note that it could also discourage property sales, reducing transaction volumes and partially offsetting projected revenue gains.
The alternative indexation model is more complex but potentially more responsive to economic conditions. It adjusts the purchase price of an asset in line with inflation, taxing only the real increase in value. Depending on inflation and growth cycles, this system can produce significantly different tax outcomes for investors.
For example, a property purchased in 2016 for $650,000 and now worth around $1.1 million would incur roughly $107,000 in CGT under current rules. Under a 33 per cent discount, the tax bill could rise to over $143,000, while under indexation it may remain similar to current levels.
Experts also warn that complexity increases under indexation, particularly for properties that are improved over time, as each cost component must be adjusted separately for inflation.
While some economists argue reform could improve fairness and housing affordability, others caution that isolated CGT changes risk failing to address broader structural issues, including planning restrictions and construction supply constraints.
Any reforms are expected to include grandfathering provisions to protect existing investors, though critics argue this may widen intergenerational inequity in the housing market.
