The 50% CGT discount on shares: Here’s how it works, and if it is under threat

The 50% CGT discount on shares is one of the key mechanisms that helps investors keep as much of their cash as they have earned on their investments. We felt that it was time to write a stand-alone article about this in light of the inflation crisis and how it could lead to investors seeking more money, and how it could lead to a curtailment of this scheme.

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Recap of the CGT discount on shares and how it works

Mechanically, the 50% CGT discount applies when an individual (or trust) sells an asset such as shares that has been held for more than 12 months. Instead of taxing the full nominal capital gain, only half of the gain is included in your assessable income and taxed at your marginal tax rate. So if you realise a $20,000 gain, only $10,000 is added to your taxable income. Superannuation funds get a one-third discount (effectively 10% tax if in accumulation), and companies get no discount at all.

Before we go further, let us demonstrate how it works so you can see where the discount actually bites.

Say you bought 1,000 shares in an ASX-listed company at $10 each in July 2022, costing $10,000 all up, not counting $100 brokerage. Then, in August 2024, more than 12 months later, you sold all 1,000 shares at $18 each. Your sale proceeds are $18,000. You also pay $100 in brokerage on the sale, which reduces your proceeds for CGT purposes, so your net proceeds are $17,900.

Your capital gain is calculated as:
$17,900 (net proceeds) minus $10,100 (cost base) = $7,800 capital gain.

Because you held the shares for longer than 12 months and you’re an individual taxpayer, you are entitled to the 50% CGT discount. That discount does not reduce the tax rate — it reduces the amount of the gain that gets taxed.

So you discount the gain:
$7,800 × 50% = $3,900.

That $3,900 is the amount that gets added to your taxable income for the year.

Now let’s put that into an actual tax context. Suppose your other income (salary, etc.) for the year is $96,100. Adding the discounted capital gain brings your taxable income to $100,000. The $3,900 is taxed at your marginal tax rate, not at a special CGT rate.

If your marginal tax rate is 37% (ignoring Medicare for simplicity), the tax on the capital gain is:
$3,900 × 37% = $1,443.

So even though the economic gain was $7,800, the actual tax you pay is $1,443. That works out to an effective tax rate on the capital gain of about 18.5%, which is exactly half your marginal rate — that’s the practical effect of the 50% discount.

For contrast, if you had sold the shares within 12 months, the discount would not apply. The full $7,800 would be added to your taxable income. At the same marginal rate, the tax would be:
$7,800 × 37% = $2,886.

Same trade, same gain, same income — just a different holding period, and the tax outcome is dramatically different.

That’s why the CGT discount matters so much in real life: it doesn’t just reduce tax, it strongly incentivises investors to hold assets for longer than 12 months and shapes behaviour across the whole market.

But could it be under threat?

With the RBA’s dramatic U-turn on rates, and the Albanese government’s spending being blamed and pressured to reign in spending and/or provide working people with further income tax relief, there is talk that the CGT discount could be curtailed – either just for properties or even for shares. It could be a standalone measure, or perhaps part of a broader tax reform package.

Let’s take a history lesson here. Before 1999, Australia used a different system. Capital gains were taxed in full, but the cost base of the asset was indexed to inflation using CPI. That meant you were only taxed on real gains, not inflationary ones.

In theory, that’s economically cleaner. In practice, it became messy. Every parcel of shares needed CPI adjustments based on acquisition date, partial disposals were painful to calculate, and the rise of online share trading and high transaction volumes in the 1990s made compliance increasingly complex for both taxpayers and the ATO.

The Howard government’s 1999 reform scrapped indexation for assets acquired after 20 September 1999 and replaced it with the flat 50% discount. The motivation wasn’t just simplification, though that was a big part of it. The discount also deliberately favoured long-term investment, reduced lock-in effects, and in many cases went further than indexation by taxing less than real gains during periods of low inflation. That generosity is why the discount has remained politically controversial ever since.

Now, on the question of changing or abolishing it, which comes up regularly in policy debates. The impact on investors would depend heavily on how it’s changed. Would it be a reduced discount or back to the pre-1999 system?

If the discount were reduced (say from 50% to 25%), after-tax returns on long-term investments would fall, especially for high-income investors. That would likely push some investors toward holding assets longer to defer tax, shift portfolios toward superannuation where CGT treatment is softer, or favour income-producing assets over growth assets. You’d also expect downward pressure on asset prices at the margin, because buyers would demand higher pre-tax returns to compensate for higher future tax.

If the discount were abolished entirely and replaced with full taxation of nominal gains, the effects would be stronger. Effective tax rates on equity investment would rise sharply, particularly during low-inflation periods where indexation would have made little difference. That would disproportionately affect growth assets like shares and property, increase lock-in behaviour (people holding assets just to avoid triggering tax), and likely reduce market liquidity.

If policymakers instead returned to indexation, the impact would be more nuanced. Long-term investors would be protected from inflation erosion, but gains during low-inflation periods would be taxed more heavily than under the current discount. This would be fairer in an economic sense but more complex administratively, especially again in a world of frequent trading and fractional share ownership.

What if the discount was only cut for housing but retained for shares

If the CGT discount were reduced or removed for housing but kept at 50% for shares, you may think it won’t affect equity markets at all. But it would by making shares more attractive.

For investors, property’s appeal already relies heavily on two things: leverage and preferential tax treatment (CGT discount plus negative gearing). If you reduce the CGT discount on housing — say from 50% to 25%, or abolish it entirely — the expected after-tax payoff at sale drops materially, especially for high-income investors who rely on capital growth rather than rental yield. That would make marginal property investments less attractive, particularly in markets where price growth expectations are already stretched.

By contrast, shares retaining the 50% discount would look relatively more attractive on a risk-adjusted, after-tax basis. For investors choosing where to allocate new capital, equities would benefit at the margin. You might see more wealth flow into listed markets, ETFs, and superannuation contributions, rather than leveraged property. Importantly, this wouldn’t require investors to become “anti-property” — it just nudges portfolio construction toward assets with better tax efficiency.

Politically and administratively, this approach is also more feasible than a universal CGT change. Property is immobile, easier to classify, and more visibly linked to affordability concerns. Shares are already highly mobile and sensitive to tax changes, so governments tend to be cautious about touching their CGT treatment. The main design challenge would be defining which housing assets are affected — investment property versus principal place of residence (which is already CGT-exempt), build-to-rent, trusts, and so on.

Conclusion

The key point is that the current discount doesn’t just reduce tax — it shapes investor behaviour. It encourages long holding periods, favours growth over income, and tilts investment toward assets with capital appreciation. We’d expect any meaningful change would ripple through asset prices, portfolio construction, and even housing and equity market dynamics, not just individual tax bills.

We think it is realistic the discount could be removed, but potentially only with housing but keeping it for shares. Such a move would tilt incentives away from leveraged property speculation and toward financial assets, cool investor demand over time, and likely slow house price growth at the margin — without blowing up equity markets or punishing long-term share investors. It’d be a scalpel rather than a sledgehammer which a reduction in CGT for all assets would.