Tax mix switch the ‘holy grail’ of reform, CGT inquiry hears

On Tuesday (24 February), the Select Committee on the Operation of the Capital Gains Tax (CGT) Discount held its second public hearing in Canberra to support its investigation of the discount’s effects on inequality and Australia’s housing market.

Fronting the committee, tax specialist and author David Montani proposed that the CGT discount should be reduced in the context of broader holistic reform in Australia’s tax system, which would include a shift away from income tax and an increase in the GST.

“The holy grail of tax reform is tax mix reform, shifting from our over-reliance on income tax to consumption taxes with appropriate shielding measures. That is what enables you to do so much more. Without that, then you are more limited,” Montani told the committee.

Previously, economists told the Senate committee that the current CGT discount overcompensated for inflation, and paring it back could have economic benefits.

Montani noted that if the CGT discount were reduced as part of a broader tax reform package, this could eliminate the need for administrative complexities such as grandfathering. This is because prospective economic losers from a reduction in the CGT discount would be compensated through other changes, such as a reduction in their income tax rate.

“My proposal is achievable without grandfathering and without asset class differentiation, because it's just one component of a coherent, holistic package,” he said.

“I say, look, reduce the CGT discount, but not in isolation. That is paired with, for example, a reduction in income tax rates. So okay, look, I'm taking away your discount, but I'm also reducing your income tax rates.”

He added that an isolated change, such as altering the CGT discount, was closer to tinkering than ambitious reform.

“I mean, you can change one item, and you are addressing whatever the subject is you are addressing. But if we're looking at this subject in isolation, it's tinkering. I go back to the original comment. So that word ambition, I mean, what we want to see is a bit more ambition here,” he said.

“And we've seen in recent years, when you put up an isolated change that's really trying to address a fundamental issue, the history is not good. They’ve mostly all politically gone down in flames.”

Other expert witnesses, including UNSW economist Dr Mark Humphery-Jenner, argued that the CGT status quo should remain as a smaller discount would reduce Australia’s international competitiveness and hamper housing supply.

“Australia's top marginal tax rate is 47 per cent and that applies to short-term capital gains. By contrast, capital gains tax rates in New Zealand, UAE, Singapore, Hong Kong, they're all 0 per cent. Vietnam in 2025 cuts capital gains tax rate to 0 per cent [and] China, run by the Communist Party, has a capital gains tax rate of 20 per cent,” Humphery-Jenner said.

“Hiking capital gains tax rates for all assets is a particular problem, because it would render Australia uncompetitive relative to the myriad other economies where one can invest.”

He added that increasing the CGT rate would reduce incentives to invest in new construction projects, and could prompt homeowners to hold off on selling their properties to avoid the discount and instead borrow money mortgaged against their property.

“There's simply no universe in which hiking capital gains tax rates would increase supply through new construction,” he told the committee.

“Holders of property, they're not necessarily going to exit the market. What they're going to do is they're going to hold on to the property for longer, and then they'll get their gains out by borrowing against that property.

“Both of these factors would reduce the amount of supply available to potential owner occupiers.”