Why Keep the 50% Capital Gains Tax Discount?
The CGT discount is not lost revenue, don’t listen to duplicitous politicians
There’s been plentiful talk lately about reducing Australia’s 50% capital gains tax (CGT) discount, with some arguing it mostly assists the wealthy. However, it’s important to consider the other side: hundreds of thousands of everyday Australians benefit from this discount – not just billionaires. Historically, Australia didn’t tax capital gains at all until 1985. So before jumping to cut the CGT discount, let’s look at why it exists and who it helps.
Broad Benefits, Not Just for the “1%”
It’s true that in pure dollar terms high-income investors pocket a large share of CGT discounts. For example, a multi-millionaire property developer with huge gains will save more tax dollars than a teacher who sells a modest investment flat. Reports often highlight statistics such as “the top 1% of taxpayers get a majority of the CGT discount”, but that is only part of the story. The participation in the CGT discount is much broader: recently, roughly 830,000 Australians used the 50% CGT discount when lodging their tax returns. That’s about 5–6% of all individual taxpayers. In other words, nearly one in every 15–20 taxpayers had some investment profit eligible for the discount – a figure far beyond just the ultra-rich. These people include mum-and-dad property investors, retirees selling shares to fund retirement, and small business owners who qualify for discount on selling their business. They may not be obtaining massive windfalls, but the CGT discount still provides a valuable tax relief for them.
In contrast, the skewed dollar figures come from the fact that wealthy investors make bigger gains per person. Yes, it is true that wealthier Australians do get a larger slice of the total “pie” – one study found the top 10% of households by income received roughly 70–75% of the total CGT discount dollars in a year. But tens of thousands of ordinary Australians make up the rest of that pie, sharing around 25–30% of the benefit by value. The key is that the discount isn’t an exclusive club – it’s available to anyone who invests and holds an asset for over a year. Big investors might eat more of the cake, but a lot of Australians still get a piece. Cutting the discount in half (from 50% to 25%, as some propose) wouldn’t just trim the cake for billionaires – it would also take a tax-saving slice away from that broad base of everyday investors. For someone who is not super-wealthy but has, say, a $50,000 capital gain on shares they held for a few years, the current discount saves them about $3,750 in tax (if they’re on a 30% marginal rate). Halving the discount would mean they save only about $1,875 – losing nearly $2,000 extra to the tax man. That’s a meaningful difference to a normal individual investor.
Remember: No CGT Before 1985
A little blast from the past: Australia had no capital gains tax at all until late 1985. For decades, if you sold assets, any profit was entirely tax-free. The system changed in 1985 because the government saw that very wealthy people were converting income into capital (to avoid tax), and they decided to tax those gains for fairness. But here’s the thing – when capital gains were untaxed, it wasn’t viewed as “lost revenue”, it was simply the way the law functioned. In 1999, the 50% CGT discount was introduced to simplify matters (replacing a complicated inflation adjustment formula) and to ensure people weren’t taxed on the inflationary component of a gain. So you might say the current rule strikes a balance: it taxes half of your gain at full rates and ignores the other half (roughly accounting for inflation and encouraging long-term investment).
Critics occasionally discuss this particular discount as if the government is “spending” money or “losing” revenue by allowing you to retain that untaxed half. You’ll hear figures such as: “the CGT discount costs the budget $20 billion a year.” But referring to it as a “cost” or “taxpayer subsidy” can be misleading. It’s not as though the government ever had $20 billion and carelessly decided upon dispatching it – they simply chose not to tax 50% of certain profits. It’s similar to saying the government is losing revenue because it doesn’t tax birthday presents or lottery winnings. Not taxing something isn’t the same as spending money. We don’t consider the absence of a tax on your family home (which is exempt from CGT) as a “cost to the budget” – it’s a policy decision. Similarly, the 50% discount is a policy choice relative to what portion of your capital gain is subject to tax. Framing it as government “waste” or a gift to investors isn’t quite fair, nor entirely truthful; it’s been part of the tax system’s design for over two decades.
The Case for Stability and Fairness
From an investor’s viewpoint, the CGT discount has been a predictable rule that encourages investment in assets like property, shares, and small businesses. People plan their finances knowing that if they invest for the long term, they won’t be taxed on the full gain when they eventually sell. This isn’t about evading tax – it’s about acknowledging that long-term investments carry risks and that inflation inflates gains on paper. The discount rewards patient capital and helps Australians in building long-term wealth over time, whether that’s a nest of shares or an investment property to help fund retirement.
If the discount were drastically reduced, it would not only be a handful of billionaire developers who would feel the pinch. Ordinary Australians could end up paying extra CGT when they sell an asset – which might make them think twice about investing in the first place. For example, a young family that invested in an apartment as a long-term rental, or channelled money into shares for a decade, would face a higher tax bill on any profit. Some argue this could dampen the incentive to invest and save, or that it’s an abrupt change of the rules that people have built into their financial plans. While the very rich would certainly pay more tax under a reduced discount, so would the middle-income nurse who sold an investment flat she owned for 15 years, or the retired couple selling shares to finance their move into a smaller home.
Not Every “Tax Break” Is a Loophole
It’s easy to paint any tax concession as a loophole, but many are in place for virtuous reason. The CGT discount was designed to be simple and fair, aiming to tax real gains, not just inflation. There’s a genuine debate to be had about what the right level of discount is (50% vs 40% vs 25%, etc.), but completely vilifying the current discount ignores the fact that millions of Australians have skin in the game. Moreover, not taxing the full value of something isn’t inherently a counterproductive policy – it largely depends on the context. We don’t tax inheritances in Australia; we don’t tax the increase in value of your primary home; we don’t tax personal gifts. These aren’t seen as “government losses” but as decisions to respect certain zones of private gain for social or economic reasons. Similarly, giving a 50% discount on investment gains is a policy approach to encourage investment and account for inflation.
A Broad-Based Incentive
The narrative that only the uber-wealthy profit from the CGT discount can be misleading. Yes, a mining mogul or a tech billionaire will save a lot of tax on a giant capital gain, but so does the average person who’s diligently invested over the years. The CGT discount has arguably helped foster a culture of investment in Australia – be it property investment or share ownership – by assuring people that long-term investments won’t be punished by the tax system. In fact, Australia has a relatively high rate of individual share ownership and property investment compared to some other countries, partly because the tax settings (like the CGT discount and franked dividends) make it increasingly more attractive to invest. You could say the discount has empowered many Australians to share in wealth generation, not only the elite.
Conclusion
Debates about tax policy often swing between fairness and incentive. Those calling to reduce the CGT discount focus on vertical equity – making the rich pay more. Those against the reduction (like this perspective) emphasize that the discount’s benefits are more widely spread than critics care to admit and serves a purpose in encouraging investment and recognising inflation. It’s worth noting that CGT itself is only a few decades old in Australia, and the 50% discount has been the status quo for almost 25 years. Altering it would affect a considerable number of ordinary taxpayers, not only the wealthiest cohort. Fundamentally, electing not to tax every last dollar of gain isn’t a “handout” – sometimes it’s smart policy. Just as we don’t tax every gift or every increase in home value, allowing investors to keep half their capital gain tax-free has been an effective way to strike balance between revenue and reward for investment. Any reform to this discount should weigh not only how much revenue the government could possibly gain, but also what every day Australians stand to lose.
