Australia’s ‘quarter-trillion-dollar joke’: PBO delivers further analysis to slash CGT

With opinions towards slashing the capital gains tax (CGT) discount continuing to divide the accounting industry, the Parliamentary Budget Office (PBO) has provided further research into the controversial tax.

In an analysis commissioned by the Greens and released on 5 February, the PBO unveiled that CGT would cost the budget $247 billion over the next decade – more than the $205 billion it had cost over the 25 years since it was introduced.

The PBO also proposed modifying CGT in a report last year, by removing the 50 per cent discount for investment properties, excluding the first investment property held by an entity acquired before the start date of 1 July 2025.

It was noted that for all other assets that were not investment properties, the 50 per cent CGT discount would be replaced by indexation of the cost base.

The Greens, historically opposed to CGT, said the most recent analysis once again highlighted that massive tax breaks for wealthy property investors were “cooking our housing system”.

Senator Nick McKim, Greens economic justice spokesperson, said the analysis showed the richest one per cent of income earners would receive 59 per cent of the benefit from the CGT discount this financial year – up from 54 per cent.

“The CGT discount has blown into a quarter-trillion-dollar joke that overwhelmingly favours the super-wealthy, who have had it far too good for too long,” he said.

“The evidence keeps piling up against the most unfair tax rort in the country. Every time you crunch the numbers, it just gets worse.”

“This tax break cuts straight across any claim of fairness. Nearly 60 per cent of the benefit goes to the richest one per cent, while just four per cent of the benefit goes to people under 35.”

Last year’s PBO proposal was designed to capture individuals, partnerships and trusts, as well as the cost of all other assets not investment properties held for 12 months or more, indexed by changes in CPI to calculate the capital gain when sold.

Similarly, the PBO also proposed removing negative gearing from all assets excluding the first investment property held by an entity that was acquired before 1 July 2025, and would apply to individuals, partnerships, trusts and companies.

The PBO said it originally expected this structure to increase the fiscal and underlying cash balances by around $5.8 billion over the 2025–26 budget, reflecting an increase in tax revenue and an increase in departmental expenses.

However, it was noted that “these estimates are highly uncertain and heavily influenced by behavioural responses to the proposal” and that it was expected to have an impact beyond the 2025–26 budget forward estimates period.

During the establishment of the 2025 proposals, ‘key assumptions’ were identified, with those for CGT being:

· Around 70 per cent of rental properties acquired prior to the start date were the first residential real estate asset held by an individual.

· Some property investors may adjust their portfolios away from housing and towards other classes.

· Others may hold onto their existing single property for longer or restructure their tax affairs to retain the 50 per cent discount on capital gains.

· The value of CGT assets, other than residential real estate, would increase in line with nominal GDP, and these assets would be sold evenly over a 10-year period.

· Ninety-five per cent of tax liabilities would be recognised in the year following the relevant CGT event, with 5 per cent recognised two years after the event, based on the timing of tax returns.

In contrast to these CGT proposal assumptions, the PBO’s analysis also included its uncertainties, based on the financial implications being subject to uncertainties and sensitivities surrounding factors such as residential property prices, turnover and other asset prices.

Behavioural responses were also noted to likely impact the budget through changes in asset prices, which would have the flow-on effect to CGT revenue from assets that would still be eligible for the discount.

“With no changes to asset prices or rents, removing the capital gains tax discount for residential investment properties is estimated to reduce the overall rate of return by between 15% and 30%, depending on factors including lending interest rates, rental yields and property price growth,” the analysis said.

In terms of behavioural responses, when CGT slashing perspectives have been previously reported by Accounting Times, readers expressed both strong agreement and disagreement with the proposal.

Last week (6 February), when news surfaced that Labor could be considering changes to the CGT discount, one reader said: “This is just a cash grab by the worst economic managers since the Whitlam government. This will not help the housing problem. It will not help young people. It will not help anyone except a government who cannot stop spending to excess.”

In response to this, another reader said: “If a business removed a discount when it was a detriment to operations it would be considered wise and good business sense – how is modifying a taxation discount any different?”