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One of main purposes of Australia introducing a comprehensive capital gains tax (CGT) was to ensure the overall tax system integrity. In the absence of a comprehensive CGT, tax system integrity is compromised, particularly where taxpayers seek to characterise their income receipts as capital gains. Australia’s CGT, as originally enacted to commence in the 1985-86 fiscal year, promoted tax system integrity by taxing capital gains at the same rate as the ordinary income of individuals.

The 50% CGT discount, enacted to commence in 1999-2000, was a significant tax law change and departure from the original policy objectives of a tax on capital gains. As a result of the policy change, most capital gains of individual taxpayers are taxed at half of their marginal tax rates. The 50% CGT discount is, effectively, a tax rate preference that has existed for some two decades, despite calls for reform from tax scholars, policy makers, and other individuals and organisations. The CGT discount compromises tax system integrity and it has adverse effects on horizontal and vertical equity. Modelling by the National Centre for Social and Economic Modelling (NATSEM) on the distribution of net capital gains indicates that the top 10% of households by income receive nearly three-quarters of the benefit of the CGT discount.

In our article, we critically evaluate the policy basis for the introduction of the 50% CGT discount. Our critique draws on a chronologically organised analysis of the commentary on the policy from individuals and organisations from outside of government.

A variety of databases were used to locate the documents referred to in the analysis, which included newspaper articles, journal articles, and submissions to tax policy consultation processes. The documents located were reviewed to confirm their relevance to the research and referred to in our article.

The commentary on the CGT discount that we analysed raises questions about its original policy justification. The volume of publicly available commentary on this topic increased in the years following the final report of the Henry Review in 2010 and our article sets out the available commentary from three separate time periods. The first two of the three time periods were selected on the basis that they both provided for a similar volume of commentary and analysis. By contrast, the relatively shorter final time period reflects the significant increase in commentary on the 50% CGT discount in later years.

Early years: Commentary from 1999 to 2005

An analysis of the Parliamentary debate that took place in late 1999 reveals that the 50% CGT discount was ultimately supported by both major political parties. Nevertheless, there was also some clear opposition to the tax policy change from some parliamentarians, including then ALP backbencher and future Opposition Leader Mark Latham, who expressed concerns about adverse effects of the CGT discount on equity, as well as a lack of evidence about the claimed revenue neutrality.

Professor Chris Evans argued, in a 2003 article, ‘it is difficult to justify the introduction of the CGT discount…on any tax policy grounds’. In a 2004 article in the Sydney Morning Herald, business journalist Alan Kohler described the CGT discount as a ‘huge’ and ‘egregious mistake’, which did not encourage taxpayers to invest in shares, as it was claimed it would.

Before and after the Henry Review: Commentary from 2006 to 2013

A 2006 article in The Australian described the CGT discount as possibly ‘the defining economic blunder of the Howard era’ (the discount was enacted by the Howard Liberal-National Government).

A 2008 opinion piece in the Australian Financial Review set out the case for abolishing the CGT discount arguing that this would improve fairness and economic efficiency. A 2009 editorial in the Australian Financial Review referred to the CGT discount as a form of ‘largesse’ and noted that the revenue cost was ‘rising inexorably’. At that time, the Henry Tax Review recommended reducing the 50% CGT discount to 40%, but policy makers rejected this recommendation.

Debates intensified: Commentary from 2014 to 2017

In a 2015 opinion piece in the Sydney Morning Herald, it was argued that rather than ‘encourage a greater level of investment, particularly in innovative, high-growth companies’, the CGT discount instead ‘delivered windfall gains to those who had already bought real estate and encouraged everyone else to dive in’. It was argued in the same article that the 50% CGT discount should be abolished and that this would allow for a reduction in the overall tax rate.

Notably, during the years 2014 to 2017, the case for reducing the 50% CGT discount was made by business and professional organisations outside of the policy making process, including: Westpac, KPMG, Deloitte, the Financial Planning Association of Australia, and the Business Council of Australia. This is notwithstanding that other organisations have been supportive of maintaining the status quo, as reflected in the EY submission to the Re:think Tax Discussion Paper in 2015.

A 2016 article in the Australian Financial Review quoted economist Saul Eslake’s view on the merit in reducing the CGT discount from 50% to 40% as well as another economist Chris Richardson’s comment that the Federal Government should ‘seize the opportunity to reduce the CGT discount.’ A 2016 PwC report on the implications of changes to housing tax benefits noted that removing the CGT discount would be ‘expected to result in a more productive allocation of savings as distortions would be reduced and household investment choices would better represent individual circumstances and risk-preferences.’

In 2016, professors George Fane and Martin Richardson noted that ‘the simplest way to repair the capital gains tax is to return to the pre-1999 arrangements’.

Concluding comments

According to Minarik (1992), the burden of proof rests with those who advocate CGT rate preferences to demonstrate how these are appropriate. It is implied in some of the commentary that we reviewed that policy makers in Australia have not met this burden of proof standard. Despite the volume of commentary we reviewed, calling for reform of the 50% CGT discount, there has been reluctance from some policy makers to reduce the magnitude of this preference for capital gains.

Given that the current and future Federal Government(s) will need to consider how to reduce the deficit created by the COVID-19 stimulus measures, a reduction to the 50% CGT discount, to increase the proportion of net capital gains that are subject to tax, appears to be a necessary and politically viable reform.


Further reading

Minas, John and Freudenberg, Brett, Australia’s 50% CGT Discount: Policy Oversight? (November 2019). Australian Tax Forum, 35(1): 88 – 107, 2019. Available at SSRN:

This article has 3 comments

  1. Does anybody ask if CGT is equitable at all?

    If the cashflow from an investment is fully taxed (as most besides family houses are already) then the asset price is deflated by the tax rate of that cashflow being the NPV of the after-tax cashflow so any gains from increases in the asset price are therefore already deflated by the tax rate as well i.e. they are already taxed. CGT is a tax on the cashflow from a buyer to a seller not from the investment itself. Also CGT is levied upon realisation an easily avoided tax point by holding long term and enjoying the dividends on the pre CGT asset value. This freezes many assets stuffing liquidity. Forget the discount abolish it.

    • A very good question,

      Debt assets, such as bonds, do not appreciate.

      Land appreciates, but buildings, plant, machinery etc do not.

      Goodwill is the present value of the expected future taxable income stream from a business. To tax an increase in it is therefore double taxation.

      Shares are only claims to interests in the above.

      Given the only truly appreciating underlying asset is land, why not forget about a CGT, avoid double taxation and lock-in effects and bring back the Federal land tax?

      I asked this question as Senior Tax Adviser in Prime Minister and Cabinet. No one answered.

      It was just policy… i.e. follow everyone else, thinking not required.

  2. I know that I am coming to this site quite late, but I am currently researching this topic and found this site.
    The analysts unfortunately overlook one important factor in the introduction of the capital gains tax and the subsequent move to a flat discount figure – at the time 50%.
    The tax on capital gains was only ever designed to tax the gain above inflation. When it was first introduced, every asset holder had to review the cost base of each of their assets every year, by an indexation figure (I think provided by the tax office) and so when that asset was sold, the increased cost base was deducted from the selling price and that became the taxable capital gain.
    The 50% discount figure was introduced to remove the requirement to constantly update the cost base of every asset. I understand that 50% was selected as the appropriate rate based on the escalation of values and inflation rates pertinent at the time.
    Without understanding the origin, it is easy to categorise the discount has a mistake by the government of the time (albeit with bilateral support when the motion was passed in Parliament) with excess benefits to asset holders.
    In my view, the only mistake was that the treasurer of the day did not foresee reducing inflation, nor contemplate excessive increases in value in certain asset classes during low inflation periods, and provide some process to regularly review whether 50% was the appropriate number in the changed circumstances. Had that been done, the discount would probably now only be about 20%, and as inflation increases again, may go back to 50%.
    I’m always disappointed that recently graduated analysts and upcoming journalists provide their solutions to problems as they perceive them without referring to the origin of the position and thus having a better understanding of what solutions should be considered.

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