There are various proposals regarding how to reform capital gains taxation in Australia. Using data on realised capital gains in 2022 for a subset of housing investors (those holding for between one and nine years) this paper describes how four different tax systems would have treated individuals differently.

The highlighted tax systems

1. 50% CGT discount: the current system in which half of the nominal gain is included in taxable income at realisation.
2. 33% CGT discount: a modification of the current system where the discount is reduced to 33%.
3. Cost base adjustment: no discount and instead adjusts for inflation by indexing the cost base and removing the deductibility of the inflation component of interest.
4. ILT-neutral system: adds income averaging to the cost base system. This treats the realised gain as if it was earned evenly over the holding period – making the system inflation, leverage, and timing (ILT) neutral.

In 2022, the current 50% discount would have been similar to the ILT-neutral system in a couple of key ways: it would have led to the same median tax rate being paid on capital gains, and it would have lead to a similar median tax rate among the bottom seven income deciles.

However, there were also significant differences. The median tax rate faced by the top three deciles was much lower than it would have been under the ILT-neutral system and tax revenue was only half the amount estimated to be raised under the ILT-neutral approach. Importantly, an inflation incentive to borrow excessively to invest in capital gains generating assets also exists under the discount. Overall, among this group of taxpayers reforming the capital gains tax would have raised more revenue in a more efficient and equitable way than simply reducing the discount.