This is a summary of CFRC’s December 2025 submission to the Australian Parliament’s Select Committee on the Operation of the Capital Gains Tax Discount.

Origins of the current CGT discount regime

Capital Gains Tax (CGT) was introduced in Australia in 1985 to recover part of the unearned income derived from appreciating assets. From 2000 CGT charges were based on nominal gains subject to a ‘50 per cent discount’ – that is, 50% of the gain taxed at the taxpayer’s marginal rate and the other 50% untaxed. The new regime arose from the 1998-99 Ralph Review of Business Taxation which argued that the reform was necessary for Australia’s internationally competitiveness.

The Ralph Review was entirely focused on business investment and silent on the residential property aspect. Nevertheless, by 2023-24 the annual cost to the federal budget incurred by income tax concessions to ‘rental investors’ under the CGT discount and negative gearing of rental business losses totalled $10.9 billion, projected to exceed $20 billion annually by 2032-33. At the same, the two tax provisions:

• Depress home ownership by inflating house prices, thereby making house purchase unaffordable for more marginal buyers
• Being untargeted, fail to comply with the general presumption that government financial support should be directed according to need
• Exacerbate wealth inequality by accruing disproportionately to the already wealthy.

CGT discount as a driver of rising wealth inequality

While not yet equating to the situation in comparator countries such as the United Kingdom or the United States, economic inequality in Australia has been growing in scale in recent decades. This is a problem substantially exacerbated by the operation of Australia’s housing system.

It is capital gains – largely involving housing – that are the main driver of rising wealth inequality. Contributory tax settings include both the limited rate at which CGT generally applies, and the range of assets, particularly owner occupied housing, that are entirely exempt. The effects of the Capital Gains Tax discount are greater the higher a beneficiary’s marginal tax rate, so those with higher incomes reap greater financial benefits – hence the highly regressive distribution of benefits.

While the impact of winding back landlord tax breaks (negative gearing and the CGT discount) might reduce house prices only relatively modestly, modelling by a NSW Government economist suggests that such reforms could restore the national home ownership rate to the historic peak from which it has fallen in recent decades.

It’s important to recognise, though, that these tax breaks are only two among a wider range of property tax concessions which compound their impact in incentivising rental housing acquisition; thus contributing to property market-driven inequality. Foremost among these are the complete exemption of owner occupied housing from CGT (federal) and from land tax (state) frameworks.

Although rental investment does not directly enjoy these preferential measures, landlords benefit indirectly because, since properties trade freely between sectors in Australia, landlords profit from the capitalisation of such treatment.

Should CGT discount reform be restricted to housing?

Albeit that the CGT discount is applicable equally across all assets held by income tax payers, it has long been apparent that the regime has especially magnetised rental housing. Borrowing for housing acquisition is fundamentally different from taking out debt to fund most other forms of business investment because of the relatively moderate risk (and therefore the lower loan rates) usually associated with acquiring and holding residential property. Thus, the stronger case for reforming GCT applicable to rental housing than applicable to other assets.

Problematically for national economic productivity, the magnetic attraction of property assets is liable to stifle investment in more productive activities such as small business start-ups and human capital formation. At the household level, meanwhile, the inflationary impact of tax-advantaged over-investment in residential property feeds through into higher rents and mortgage payments, exposing many housing consumers to stressful housing cost burdens. These, in turn, have the potential to crowd out other forms of household expenditure with greater employment-generating qualities.

The business model facilitated by the availability of the CGT discount alongside the ability to negatively gear operational losses is a capital growth-oriented strategy. Research evidence demonstrates that the prioritisation of capital growth over a rental income stream is dominant among Australia’s individual private landlords. As a result, individual investor behaviour is likely to be especially sensitive to capital growth prospects. In other words, a ‘speculative’ mindset. This importantly contrasts with the prime motivation of institutional investors in the purpose-built student housing and ‘build to rent’ sectors where long term rental yield is the key business motivation.

Housing markets – such as Australia’s – where individual private landlordism (encouraged by generous tax breaks) is strongly represented are markets therefore particularly vulnerable to the damaging effects of speculative activity in terms of price volatility that can result. Moreover, such housing market gyrations are liable to amplify booms and slumps in the wider economy.

Reform recommendations (for full details and justifications see our Inquiry submission pp15-17)

1. Initiate as soon as possible, a phased reduction in the 50% of CGT discount in relation to rental housing to 25% over five years – with the discount rate reduced by 5 percentage points each year. Alternatively, consideration could be given to restoring the calculation of CGT liability in real terms, as operated from 1985-99. In that event, the discount would be eliminated entirely.

2. CGT discount for capital gains of superannuation funds to be halved (from one third to one sixth of the 15% tax rate), so that accumulation accounts are taxed at around 12.5% rather than 10%. Self-managed superannuation funds (SMSFs) should also be prohibited from borrowing to invest in housing or other assets. Measures should also be introduced to prevent avoidance of CGT on assets in SMSFs by disposing of them when in pension phase (when the CGT rate on investment income is zero).

3. The Australian Government to take advantage of the dampening effect on private expenditure arising from Recommendation 1 by increasing expenditure on social and affordable housing.

Concluding comments

Consideration of possible modifications to the CGT regime in isolation from other possible tax reforms seems somewhat artificial, especially from a housing policy perspective. As we would see it, the design of such changes should be integrated within a more holistic review that, at the very least, also considers parallel changes affecting the practice of negative gearing. As in the 2010 Henry Review, state/territory housing-related taxation should also be part of this.

Better still, a review of all these provisions would be incorporated within the development of a much broader national housing strategy that encompasses housing regulation and expenditure as well as relevant aspects of taxation and other matters affecting housing demand.