Comment: Returning to The CGT Indexation Method For Shares Would Be Bad, But This 1 Thing Would Soften The Blow

Two weeks out from the budget and it seems that what will happen is that we will return to the CGT indexation method, and for all asset classes, not just property. If you want to raise revenue, it is a no brainer. But if you want to shift capital toward more productive uses, then this will not do that. Instead it will help opponents frame it as a tax grab rather than a productivity measure. This will mean politics will collapse long before the economics is tested and any hope of changing our broken tax system will be gone.

We are not saying that the argument about equity between generations, housing affordability and the distribution of tax concessions do not matter, but we don’t think they are not the core problem. The core problem is that the current CGT settings have distorted capital allocation for twenty‑five years. They have pushed investment into housing rather than into businesses, innovation or equities. Reform should begin with that reality; otherwise it will fail on its own terms.

To understand why, it is worth revisiting how we arrived here.

The history of CGT shows how good intentions can produce bad incentives

Capital gains tax was introduced in 1985 to close a structural gap in the income tax base. Real capital gains increase purchasing power in the same way as wages or dividends; excluding them created avoidance opportunities and undermined the integrity of the system. The original design taxed only real gains through indexation. It was conceptually coherent and economically defensible, although administratively heavy.

The 1999 shift to the 50% discount was meant to simplify the system and encourage participation in equity markets. The Ralph Review argued that indexation was poorly understood and internationally uncompetitive; the discount was meant to “enliven and invigorate the Australian equities markets” and stimulate individual investment. It was also meant to reduce the lock‑in effect by making asset turnover less punitive.

Yet the timing was unfortunate. As Alan Kohler told the recent inquiry, the discount arrived just as the dot‑com boom was collapsing. Shares were falling out of favour; property was entering a long upswing. The discount, which was intended to support equity investment, instead became a lever for leveraged housing speculation. Kohler argued that had the discount been introduced earlier, it might have worked as intended; introduced when it was, it channelled capital into the wrong asset class.

Further evidence given by Saul Eslake reinforced this. Share ownership among adults fell from 41% in 1998 to 38% in 2023; the proportion of Australians running their own businesses fell from just under 20% in 1999 to 15.3%. Meanwhile, the proportion of taxpayers reporting rental income rose from 14.3% to more than 20%. The discount did not create a culture of equity investment; it created a culture of property investment.

This is the distortion that matters. The discount did not fail because it was too generous; it failed because it was too generous in a way that rewarded speculation over productivity.

Reform must be designed to redirect capital, not simply raise revenue

If the government wants to make the proposed CGT regime change, it must be clear about the purpose. Reform that is framed as redistribution between generations will be politically fragile and economically incomplete. Reform that is framed as a productivity measure and/or to ease the burden of income tax has a chance of succeeding.

The case for change is not that the discount is unfair; it is that the discount has misallocated capital. It has encouraged investment in existing housing stock rather than in productive assets. It has biased the system toward land rather than enterprise. It has contributed to the imbalance between household wealth and national productivity.

But even if that is the goal, the path is not straightforward. A return to indexation would, in theory, restore neutrality between real and nominal gains. It would remove the over‑compensation that Kohler highlighted; he noted that the 50% discount was roughly three times larger than the inflation adjustment it replaced.

Yet indexation would also reintroduce complexity, particularly for equities. Equity investors deal with frequent transactions, dividend reinvestment plans, rights issues and partial disposals; indexation requires tracking cost bases across time and adjusting for inflation. For property, this is manageable; for equities, it risks discouraging participation.

This is why extending indexation to shares is problematic. It is not a plea for special treatment; it is a recognition of administrative reality. If the government wants to reduce the discount for property, it can do so without forcing equity investors back into the pre‑1999 labyrinth. The irony is that a reform intended to redirect capital toward productive assets could, if poorly designed, do the opposite.

If a change back to the CGT indexation method for shares must occur, income‑tax cuts are the minimum offset required

However, whatever we say, it seems change will happen. If change has to happen then income tax cuts must come at the same time, if for no other reason, to avoid opponents framing it as a mere tax grab and having credibility to do so. It killed the mining tax; it killed the carbon price; it killed negative‑gearing reform in 2019. It will kill CGT reform too.

Teal independent Allegra Spender has argued that if the government reduces the CGT discount, it should simultaneously cut income‑tax rates. Her modelling suggests that a 2.5 percentage‑point cut across all brackets could be revenue‑neutral if the CGT change is “somewhat retrospective” (that is, allowing the 50% discount up to a certain point, with the new regime applying thereafter).

The economic logic is equally clear. If the goal is to redirect capital toward productive assets, then reducing the tax on labour income is a sensible complement. It improves after‑tax returns on work; it supports entrepreneurship; it offsets the behavioural impact of a higher effective tax on capital gains. It ensures that reform is not simply punitive.

There is also a broader structural point. Australia’s tax system is heavily reliant on income tax; any reform that increases the tax burden on investment without reducing the burden on labour risks entrenching that imbalance. A package that reduces the CGT discount while cutting income‑tax rates would be more coherent, more defensible and more durable.

The alternative (a standalone CGT change) would be politically fragile and economically incomplete.

Reform is necessary, but it must be purposeful and politically survivable

Australia’s tax system contains multiple distortions; no single reform will fix them. But the CGT discount is one of the most consequential because it shapes where Australians put their money. If the government wants to redirect capital toward productive assets, then revisiting the discount is a legitimate starting point.

Yet the design matters. Extending indexation to shares would create complexity and discourage participation. Reducing the discount without offsetting income‑tax cuts would be politically untenable. And framing the reform as a revenue measure would guarantee its failure.

A more credible path is a targeted, productivity‑focused reform that recognises the history of CGT, acknowledges the evidence from Kohler and Eslake, and pairs any change with income‑tax cuts that make the package neutral for most taxpayers. Reform should not be about punishing investment; it should be about encouraging better investment. And if the government wants Australians to accept that logic, it must give them something in return.