Capital gains tax (CGT) is part of Australia’s income tax system. One objective of the CGT discount is to approximate inflation and tax real gains. But because real returns vary widely across investors, a flat discount systematically misses the mark.

Using data on 1.5 million property investments (2008–2025), this paper shows real returns range from losses (below -1.6% at the 25th percentile) to strong gains (above 5% at the 75th).

This dispersion drives large tax mismatches. High-return investors are under-taxed, while low-return or loss-making investors are over-taxed. Changing the discount rate simply shifts who wins and who loses, it doesn’t fix the underlying dispersion in circumstances.

A system that adjusts the cost base for inflation would better align taxable and real income, improving equity and likely raising revenue.

Key findings

• Real gains differ significantly between taxpayers.
• The data indicates under-taxation of those with high gains.
•  Changing the amount of the percentage discount does not fix this problem.