The renewed debate over Australia’s capital gains tax discount is being framed by the government as a question of “inter-generational equity”.
But behind the rhetoric lies a far more complicated and politically risky reality: any blunt reduction of the CGT discount risks hitting not just wealthy investors, but thousands of ordinary Australians who entered the property market as a form of long-term financial security.
Treasurer Jim Chalmers has carefully avoided spelling out specific changes, yet his repeated references to “next steps” have sent a clear signal. Property investors are firmly in the government’s sights. While owner-occupiers remain exempt from capital gains tax on their family homes, investors — including nurses, teachers and police officers — could face a severe one-off tax shock when they sell.
This is not a hypothetical concern. Under the current system, capital gains are added to a person’s income in the year an asset is sold. Even with the 50% CGT discount, this can temporarily push middle-income earners into the top marginal tax bracket. Reducing or abolishing the discount would magnify that effect dramatically, creating six-figure tax bills for investors who are far from wealthy by Australian standards.
The government argues that most of the CGT discount flows to the top 1% of taxpayers. That statistic may be technically accurate, but it obscures a crucial reality: the pain of reform will not be evenly distributed. A teacher who bought a modest investment property a decade ago is taxed under the same rules as a high-net-worth investor with multiple assets. The system does not differentiate between speculative wealth and long-term, risk-laden investment by ordinary workers.
The structural flaw is not simply the size of the discount, but the way capital gains are taxed in a single year. A gain accumulated over ten or fifteen years is treated as if it were earned all at once. Any serious reform aimed at fairness should confront this distortion, rather than relying on politically attractive slogans about generational justice.
Housing affordability is a genuine crisis, particularly for younger Australians. But it is far from clear that reducing the CGT discount will deliver cheaper homes. There is a real risk it will instead reduce rental supply, push some landlords to exit the market abruptly, and increase pressure on renters — the very group the government claims it wants to protect.
Labor has been here before. Bill Shorten’s attempt to halve the CGT discount became a political liability in the 2016 and 2019 elections, contributing to devastating losses. The current leadership may believe the politics have changed, but voters have long memories when it comes to policies that threaten their financial stability.
If the government proceeds, it must tread carefully. Transitional arrangements, grandfathering existing investments, or reforming the timing of capital gains taxation would be far more defensible than a simple cut. Otherwise, a policy sold as fair and progressive risks being experienced as punitive and arbitrary.
In the end, tax reform succeeds only when it is perceived as balanced, predictable and just. On capital gains tax, the danger for the government is not that it acts — but that it acts crudely, and ends up punishing precisely the Australians it claims to stand for.
