Australian property investors are bracing for a potential overhaul of the capital gains tax (CGT) discount, after Treasurer Jim Chalmers again signalled the government is considering “next steps” on tax reform — a move that could leave some landlords facing six-figure tax bills when they sell.
While the family home would remain untouched due to its existing CGT exemption, any changes would apply to investment properties, potentially hitting not just wealthy landlords but also middle-income Australians such as nurses, teachers and police officers who have invested in property to supplement their income or retirement savings.
Under Australia’s current system, investors who hold an asset for more than 12 months can reduce their capital gain by 50 per cent before it is added to their taxable income. However, reducing or scrapping that discount would dramatically increase the amount of tax payable in the year a property is sold.
How big could the hit be?
In a simplified example, an investor earning $105,000 a year who buys a house for $1 million and sells it a decade later for $2 million would currently face a CGT bill of about $250,000 under the existing 50 per cent discount.
If the discount were cut to 25 per cent, that tax bill would rise to around $368,000 — an increase of roughly $117,000. If the discount were abolished and replaced with inflation indexation, the tax payable would still climb to about $354,000, or $103,000 more than under current rules.
A similar impact is seen at lower price points. An investor who buys a $600,000 apartment and sells it for $1.2 million after 10 years would currently pay about $156,000 in CGT. A reduced discount would lift the bill to about $227,000, while indexation would push it to around $219,000.
In all scenarios, the seller is temporarily pushed into the top marginal tax bracket because the entire capital gain is counted as income in the year of sale.
Why CGT changes affect income tax
Capital gains are not taxed separately in Australia. Instead, they are added to a taxpayer’s ordinary income in the year the asset is sold. The CGT discount does not change tax rates — it simply reduces how much of the gain is treated as taxable income.
Because gains often accumulate over a decade or more, selling an investment property can cause a sharp spike in income in a single financial year. Reducing the CGT discount magnifies that spike, increasing the likelihood that even middle-income earners will be taxed at the highest marginal rates when they sell.
Intergenerational equity in focus
The Prime Minister and Treasurer have increasingly framed tax and housing reform around “intergenerational equity”, arguing younger Australians are being locked out of home ownership by high prices and strong investor demand.
Speaking on ABC’s Insiders, Dr Chalmers said housing and tax inequities between generations were “front and centre” of the government’s thinking, while stressing that any changes would be decided collectively by Cabinet.
Speculation is mounting that the government could revisit long-standing Labor proposals, including a reduction of the CGT discount — a policy previously taken to elections by Bill Shorten in 2016 and 2019, but later abandoned after Labor’s defeat.
Would changes be grandfathered?
One of the key unresolved questions is whether any changes would be “grandfathered” to protect existing investments. Grandfathering would mean new rules apply only to future purchases, avoiding retrospective tax increases but creating uneven outcomes between older and newer investors.
Dr Chalmers has declined to be drawn on the issue, saying the government has not yet changed its policy and would not speculate on hypothetical arrangements.
Pressure from unions
The Australian Council of Trade Unions is pushing for the CGT discount to be halved to 25 per cent, arguing the concession overwhelmingly benefits the wealthiest Australians and fuels housing price growth.
ACTU president Michele O’Neil has described the discount as a driver of inequality, warning many workers can no longer afford to live near their jobs and may never save enough for a home deposit.
With housing affordability already a dominant political issue, property investors remain on high alert as the government weighs whether reforming the CGT discount is the next lever it is prepared to pull.
