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The capital gains tax (CGT) discount has come under increased scrutiny as a Senate select committee investigating its operation gains momentum.
The longstanding tax concession, whch has been in place since the 1990s, reduces the taxable portion of a capital gain by 50 per cent for assets held for longer than a year.
Critics have said that the CGT discount pushes up prices by encouraging investment and brokers have told Broker Daily that the policy plays a limited role in housing affordability. They have suggested that removing it would fail to address the market’s structural problems.
Speaking to Broker Daily, Josh Corley, general manager at The Brokerage, said that the root problem remains supply, and reducing the CGT discount will do nothing to address that.
“There are really two housing crises happening at once – the difficulty of buying a home, and the difficulty of renting one,” he said.
“Removing the CGT discount might make property investment less attractive, meaning more homes could end up with owner-occupiers. But that comes at a cost: it reduces rental stock at a time when vacancy rates are already at historic lows.
“It risks solving one side of the housing problem by worsening the other – essentially robbing Peter to pay Paul.
“The core issue remains supply, and without increasing the amount of housing being delivered, CGT changes alone won’t fix affordability.”
Similarly, Alex Veljancevski, director at Sydney-based Eventus Financial, told Broker Daily that CGT reform wouldn’t materially increase housing supply, but would put further pressure on the rental market.
He said: “Supply constraints are far more driven by planning, construction costs and labour shortages. If investor demand fell sharply, the more immediate impact would likely be reduced rental supply, putting further pressure on rents.
“In my view, keeping the CGT discount – while addressing supply-side issues separately – remains the more balanced approach for the housing market overall.”
Matt Spears, managing director of Sydney brokerage Evoke Capital, said that the CGT discount wasn’t the primary driver of demand, but rather successive government first-home buyer incentives. These schemes are reportedly fuelling strong price growth in lower-priced markets.
Spears said: “These policies are politically popular because they expand access to home ownership, but they also push more buyers into the market without addressing the constraint that actually matters: supply.
“The problem is that governments keep claiming they want to ease housing affordability, while continuing to pull the demand levers – yet their main supply lever (building more homes) can’t scale fast enough in the current environment of high construction costs, labour shortages, and slow planning approvals.
“So the mismatch is structural: demand gets juiced quickly, while supply responds slowly – and prices rise as a result.”
Investment behaviour
Veljancevski also said that in his experience, the CGT discount encourages long-term investment over short-term speculation.
“Most investor clients I work with are not chasing quick gains. They’re typically holding property for many years, providing rental stock along the way, and factoring CGT into a broader, long-term financial plan,” Veljancevski said.
“The discount helps offset risks such as interest rate cycles, vacancy periods, maintenance costs and regulatory changes.
“Removing it would likely reduce investor confidence and could discourage new investment, particularly in higher-risk or marginal markets.”
What do others think?
The broker comments come as the Senate select committee receives submissions to its inquiry.
The NSW Treasury has submitted its own findings to the committee, saying that the discount skews incentives towards property investment and raises prices, undermining buyer assistance policies and shutting first home buyers out of the market.
The submission reads: “While originally intended to simplify the tax system and encourage investment, (CGT discount) now delivers the most benefits to higher-income households and amplifies challenges in housing affordability and home ownership.”
The submission added that the discount costs the federal budget about $23 billion in foregone revenue, with $8.7 billion coming from NSW.
It added: “There is a strong case for reviewing the CGT discount to ensure it is fit for purpose.”
Meanwhile, The Adviser has reported that the Grattan Institute and ANU’s Tax and Transfer Policy Institute believe the discount overcompensates investors for inflation and, when combined with negative gearing, incentivises speculative, debt-fuelled property investment.
Grattan has called for the discount to be halved to 25 per cent, estimating this would raise $6.5 billion a year, while ANU has proposed a reduction to 40 per cent with no grandfathering.
The government has modelled potential changes to the discount, but has not implemented any policy changes so far.
Led by Greens Treasury spokesperson Nick McKim, the committee’s findings are due to be published on 17 March.
What do you think should happen to the CGT discount? Let us know in the comments below!
[Related: Greens take aim at capital gains tax discount]