Australia to Overhaul Capital Gains Tax, Targeting Property Investors' Windfalls

Key facts

• The May 12 budget is expected to roll back the 50% CGT discount for assets held over 12 months, potentially reverting to the pre-1999 inflation-adjusted system.
• Treasurer Jim Chalmers confirmed any changes would be at least partially grandfathered to 'recognise the decisions that people have taken in the past'.
• The Grattan Institute estimates halving the CGT discount and phasing it in over five years would generate $6.5bn a year.
• CBA estimates a fully grandfathered package of pre-1999 CGT and negative gearing changes would yield just $2bn in extra revenue in the first four years.
• Revenue gains over 10 years are estimated at $25-30bn, though actual investor tax bills depend on economic conditions.
• Inflation rose to 4.6% in March, complicating budget forecasts amid uncertainty over the Strait of Hormuz.
• Prime Minister Anthony Albanese linked housing affordability to social cohesion, arguing young people need a 'fair crack' at the market.

A Return to Pre-1999 Tax Rules

The Australian government is preparing to overhaul capital gains tax (CGT) in the May 12 federal budget, with Treasurer Jim Chalmers widely expected to scrap the current 50% discount on profits from assets held for more than 12 months. The proposed system would revert to the pre-1999 method of taxing only inflation-adjusted 'real' gains, a shift that could apply to both property and shares. Chalmers has signaled that the changes will be at least partially grandfathered, meaning existing investments would be shielded from the new rules. 'Without getting into hypotheticals about policies, what you try and do is to make sure that we recognise the decisions that people have taken in the past,' he told the CommBank View podcast.

Grandfathering and Transitional Complexity

The treasurer's comments suggest that only future gains on existing investments would be subject to the new CGT rules, a stance that has drawn both support and criticism. Luke Yeaman, CBA's chief economist and a former Treasury deputy secretary, argued that applying the new rules only to investments made after budget night would be the 'simple, clean' option. However, he warned that a partial or staged grandfathering approach would 'add complexity to the system, which I think is a risk.' Chalmers played down expectations of a revenue windfall, stating that 'even if we went down the path that has been speculated about... people shouldn't expect there to be this huge amount of new revenue show up over the course of the next few years in the budget.'

Revenue Projections and Economic Impact

The Grattan Institute has calculated that halving the capital gains tax discount and phasing it in over five years to include all investments would generate $6.5bn a year for the budget. In contrast, a fully grandfathered policy package—returning to the pre-1999 inflation-adjusted CGT regime and scrapping negative gearing—would generate just $2bn in extra revenue in the first four years, according to recent estimates by CBA. However, the benefits to the budget bottom line would grow over time, with revenue gains estimated at $25-30bn over the first 10 years. Whether investors end up paying more or less capital gains tax than under the flat 50% discount would depend on economic conditions, the bank said.

Housing Affordability and Social Cohesion

The framing of the CGT changes has increasingly focused on housing affordability, with Prime Minister Anthony Albanese using the argument when asked about whether the government was about to move on negative gearing and the capital gains tax discount. He argued that resilience was not just about being prepared for global shocks but also about 'giving people a sense of ownership over the economy.' Albanese linked the issue to social cohesion, suggesting that young people not getting a 'fair crack' at the housing market could be a threat to societal stability. This marks a shift from seven years ago, when proposed changes to CGT and negative gearing were named as part of the reason Labor lost the 'unlosable' 2019 election.

Budget Constraints and Global Uncertainty

The budget is not yet finalised, with uncertainty over the Strait of Hormuz making it difficult to forecast how high inflation will rise. Inflation rose to 4.6% in March, as confirmed by the Australian Bureau of Statistics, and is expected to climb higher, though by how much remains unclear. Chalmers has acknowledged that the budget he is handing down in two weeks is not the one he originally envisioned, but noted that 'there are some common elements.' The budget must respond to multiple pressures: the Iran war, inflation, and the need for major reform. However, the idea of introducing any form of gas export tax in this budget has been ruled out, despite some proponents being briefly confident that the prime minister's language meant it was still on the table.

Political Stakes and Historical Context

Seven years ago, proposed changes to CGT and negative gearing were blamed for Labor's unexpected defeat in the 2019 federal election, which was widely seen as 'unlosable.' The political landscape has shifted dramatically since then, with housing affordability now a central concern for voters. Chalmers and Albanese are walking a tightrope, seeking to reform tax settings that many economists argue distort investment incentives while avoiding a repeat of the 2019 backlash. The use of buzzwords like 'intergenerational fairness' and 'resilience and reform' has become frequent, though critics argue they risk losing meaning. The government's approach—grandfathering existing investments—appears designed to mitigate political fallout, but it also limits short-term revenue gains.

Outlook: A Budget of Compromises

The May 12 budget is shaping up to be a 'frankenbite,' as one commentator described it—a patchwork of measures responding to domestic and international pressures. The CGT changes, while significant, are unlikely to produce immediate fiscal relief, with Chalmers cautioning against expectations of a revenue surge. Over the long term, the reforms could reshape investment patterns in property and shares, but their impact on housing affordability and budget revenue will depend on the final design and economic conditions. As the government finalises its budget, the tension between reform and political pragmatism remains at the forefront.

The bottom line

• The government plans to return to pre-1999 inflation-adjusted CGT, scrapping the 50% discount for assets held over 12 months, likely applying to property and shares.
• Existing investments will be grandfathered, meaning only future gains on new investments will be taxed under the new system, limiting short-term revenue.
• Revenue estimates vary: $6.5bn/year under a phased approach (Grattan) vs. $2bn in first four years under full grandfathering (CBA), but $25-30bn over a decade.
• The changes are framed as addressing housing affordability and social cohesion, with PM Albanese warning that young people's exclusion from the market threatens stability.
• The budget faces multiple pressures: inflation at 4.6%, uncertainty from the Strait of Hormuz, and the need for reform, but a gas export tax has been ruled out.
• Political lessons from 2019, when similar proposals contributed to Labor's election loss, have shaped the government's cautious, grandfathered approach.