Labor considering scrapping CGT discount in favour of cost base indexing

The government is reportedly considering replacing the 50 per cent capital gains discount with inflation indexing, in a return to pre-1999 policy settings.

On Friday (24 April), The Australian reported that Labor’s Expenditure Review Committee was considering axing the 50 per cent CGT discount in favour of an inflation-indexation model in this year’s budget, due to be handed down on 12 May.

It was also reportedly considering removing negative gearing on existing properties, including grandfathering.

Jenny Wong, tax lead at CPA Australia, said that changes to the CGT discount and negative gearing risked sparking unintended consequences as the tax settings interacted with inflation, superannuation, investment behaviour and rental supply.

“Any reform to capital gains tax and negative gearing should consider the real‑world impact on renters, particularly households already facing sustained cost‑of‑living pressures. Certainty in the tax system matters. Abrupt or narrowly framed changes can undermine confidence and increase complexity for investors and their advisers,” she said.

“It’s important that any change recognises the effects of inflation and, at the very least, indexation needs to be considered as the alternative. Meaningful tax reform would look at this issue, not just for the tax treatment of investments by individual taxpayers but across the whole system.”

Economists at the e61 Institute have called the current CGT discount “inequitable and inefficient,” and warned that it has caused substantial horizontal inequity among Australia’s highest-income earners.

Their analysis found that 99th income percentile earners saw effective tax rates ranging from 19 per cent to almost 40 per cent in a given year, with almost 80 per cent of this discrepancy attributable to the CGT discount.

Julie Abdalla, head of tax and legal at The Tax Institute, said that the CGT discount in some cases over-compensated for inflation.

"Although it depends on various factors like how long an asset has been held and the inflation over that period, the 50% discount may over-compensate for inflation, and this benefit is in the government’s crosshairs as it is seen as overly generous or distortionary. Others of course argue it encourages investment," she said.

That said, Wong said that adjusting CGT and negative gearing settings in isolation risked boosting complexity in the tax system. She said that changes should be considered as part of a broader review of the tax system.

“From an administration and compliance perspective, simplicity is critical. Adding complex carve‑outs or hybrid models risks higher compliance costs without clear benefits. Good tax reform should make the system simpler and more predictable, not harder to navigate,” she said.

“If these settings are to be revisited, they should form part of a broader, evidence‑based review of the tax system rather than being used as a narrow housing policy tool. A careful, holistic approach is more likely to support sustainable outcomes for housing, investment, and the broader economy.”

Susan Franks, Australian tax, superannuation and financial services leader at CA ANZ, said the CGT review was welcome but raised similar concerns regarding complexity.

“CA ANZ supports a review of the 50 per cent CGT discount and acknowledges the importance of getting a reform of this scale right,” she said.

“Replacing the 50 per cent CGT discount with indexation or a lower discount rate raises questions about how the transition would work in practice. The biggest issue is whether existing assets would continue to benefit from the current discount or whether the Government would make a clean break.”

If the CGT discount were to be altered, Franks said the transition would need to be carefully managed and communicated to those affected.

“Other jurisdictions have stepped down their discount rates over time, and that approach highlights just how many design choices need to be carefully considered,” she said.

“Any change of this scale must be transparent, well‑modelled and clearly communicated to avoid confusion for taxpayers and advisers.”

While indexation was first scrapped due to concerns about complexity, Abdalla said that a return to the pre-1999 settings could be made easier by new technologies.

"If we return to the old indexation rules it may feel like a backward step, going back to rules that were in place over 25 years ago. That said, the argument against indexation was that it was complex. However, today with the ubiquitous use of tax return and accounting software, calculating indexation may not pose as much of a problem as it did before," she said.

"Ironically, since indexation was removed in 1999, far more complex and burdensome aspects of our tax system have been introduced, making somewhat of a mockery of the modest attempt at simplification attempted by swapping indexation with a CGT discount."

Article updated to include additional commentary.