Since 1985, Australia has operated under two different capital gains tax systems. And now the government’s 2026 federal budget has introduced a completely new third CGT system.
Every version of Australia’s capital gains tax has answered the same question differently: What should the tax system actually reward?
The government’s latest changes are being sold as a means to fix intergenerational inequity and introduce taxation fairness between asset and wages based income.
But the biggest issue it is attempting to fix is housing affordability.
The latest changes represent the biggest redesign of Australia’s capital gains tax system since 1999. But will they have the intended impact, or simply result in a more complex and expensive system to manage?
Will the new system result in equity and fairness for the next generation or create an ever-increasing welfare state that is impossible to fund?
Imagine No Capital Gains Tax!
It is easy to assume capital gains tax has always existed in Australia. It hasn’t!
Until September 1985, Australians could generally sell investment assets without paying any capital gains tax. In other words, Australia has spent more years without capital gains tax than with today’s version.
Some economists argue that assets are usually purchased with income that has already been taxed. Therefore, the gains on those assets should be tax-exempt.
So what exactly should we be taxing and why?
Let’s Tax Everything!
Three capital gains taxation systems, each attempting to answer different problems of the day;
- Bob Hawke: tax all real gains, wages or assets treated equally.
- John Howard: encourage investment while keeping administration simple.
- Anthony Albanese: prioritise equity over investment incentives through higher taxation of capital gains.
Three Capital Gains Tax Systems
To understand the issue around how asset gains and property investment have been taxed, we need to look at the three systems. But most importantly, we need to understand the core philosophy each is trying to achieve:
- The pre-1999 system, implemented by the Hawke/Keating government, focused on taxing capital gains in line with income tax, taking into account the longer-term nature of capital growth and adjusting for inflation.
- An adjustment to the cost base of the asset to account for growth that occurred through inflation – so you only paid tax on the actual asset growth.
- An averaging concession, to reduce the tax spike of realising the gain in one year, even though it was held and grew over multiple years.
- The final taxable amount is added to the total income for the year and applied to the standard income tax brackets.
- The post-1999 system, introduced by the Howard/Costello government, shifted the focus slightly to one of system simplicity and incentives to invest in Australia.
- The total growth of the asset (purchase costs minus sell price) has a 50% discount applied to arrive at the final taxable amount.
- The asset must be owned for a minimum of 12 months for the 50% discount.
- The final taxable amount is added to the total income for the year and applied to the standard income tax brackets.
- The current system to be introduced in Financial Year 27/28, introduced by the Albanese/Chalmers government, has increased tax on capital gains versus income tax, while focusing on greater equity and redistribution of wealth.
- An adjustment to the cost base of the asset to account for growth that occurred through inflation – so you only paid tax on the actual asset growth.
- The final taxable amount is added to the total income for that year, with no concession across multiple years, magnifying the tax impact of the gain.
- A minimum tax of 30% is applied to any capital gains, with the tax rate then increasing across the standard income tax brackets for larger capital gains.
Three Tax Systems – Three Different Ideas of Fairness
Is a tax system better because it collects more revenue…
or because it creates less economic distortion?
The Introduction of Capital Gains Tax
The Hawke/Keating governments introduced a capital gains tax system with the aim of applying tax to all income equally. It attempted to apply a reasonable tax while taking into account the differences between a long-held asset versus individual income earned annually.
This was done in two ways:
Adjusting the cost base of the asset to remove the inflationary effect over the life of the assets being owned. This has an increasing effect the longer an asset is held.
An averaging concession to account for the fact that the capital gain is applied to the income of a single year. Naturally, this would push the tax into higher tax brackets.
So, an averaging is allowed to lower the tax impact, as if it was applied over a number of years, not just a single year.
Simplifying Capital Gains Tax
Why replace a system that was already working?
In this case, not because the government wanted higher taxes. But because the system had become expensive and complicated to administer.
In 1999, the Howard/Costello government introduced changes to the capital gains tax, based on the Ralph Review, conducted by John Ralph. One of the key objectives was to simplify how capital gains were handled, a long-standing criticism of the Australian taxation system in general.
The general brief of the Ralph Review was:
- Reduce complexity and cost in the system
- Improve tax neutrality between investment vehicles and asset classes
- Encourage entrepreneurship and risk-taking capital
- Improve international competitiveness
The interesting thing is that the tax changes needed to be tax neutral, meaning that they should bring in similar tax income to the government. The Ralph Review wasn’t trying to lower taxes, it was attempting to remove friction.
In simple terms, the pre-1999 system of inflation adjustment and average concession calculations was replaced with a simple calculation of a 50% discount of the total taxable capital gain.
How did this compare?
The core difference between the two systems revolves around the inflation rate at the time of asset ownership. Over the past 20 years, there have been reviews of the 50% structure, with valid criticism that it may be too generous to investors.
It is often suggested that the discount should be closer to 40% to be more in line and balanced with the previous system.
The Big Tax Pendulum Swing
If the Howard/Costello 50% discount structure was seen as too relaxed in its approach to taxing capital gains, the Albanese/Chalmers system is now the complete opposite.
The first point is the return to an adjustment of the cost base due to inflation. But this is where the comparison to the pre-1999 system ends.
There is no averaging concession, allowing for the distortion of gains impacting a single year’s tax. Then there is an additional minimum tax of 30% on all capital gains.
So if an asset is sold in a low-income tax year, the gain is not applied to the standard tax brackets, but instead taxed immediately at 30%, then increases through the higher tax brackets (ie 37% to 47%), depending on the actual gain.
This has a huge impact on the level of tax received from capital growth, as well as complexity and cost of the system.
How does this now compare?
Australia is moving towards one of the highest effective capital gains tax regimes in the developed world.
If the Howard/Costello system was meant as an incentive for Australians to invest in the country and their future, then this new system may have the opposite effect.
The 50% discount structure came from a brief to incentivise capital investment over simple wages. The current system being introduced specifically reverses this, believing that tax on capital investment should be higher than on wages.
Two very different philosophies that no doubt will drive two very different outcomes.
If investment becomes less attractive, where does that capital go instead?
Will the Changes Work?
What is the most interesting about the two recent systems is the shift in the framing:
- Howard asked how do we increase efficiency and encourage growth?
- Albanese asked how do we increase equity and redistribute investment gains?
Same tax, different purpose.
Only time will truly tell if the changes will have the desired effect – with a good number of economists already expressing their doubts.
Tax policy doesn’t just collect revenue. It quietly shapes the behaviour of an entire nation.
What Should Taxing Capital Gains Achieve?
Perhaps the real debate isn’t whether capital gains should be taxed. Australia settled that question forty years ago.
The real debate is what the tax system is trying to achieve.
Is it there primarily to maximise government revenue?
To encourage investment?
To improve housing affordability?
Or to redistribute wealth?
Every version of Australia’s capital gains tax has answered those questions differently. Before deciding whether the latest changes are fair, it may be worth deciding which objective matters most.
Tax systems are never just about raising revenue. They are expressions of what a society chooses to reward—and what it chooses to discourage.
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