u/Kikooz

One of my biggest grievances with the CGT discount is that it’s based on your income.

If you are rich and retiring you might as well wait until a no income year to sell down your assets even though you may have been a top income earner throughout your life. That’s not progressive.

If we make CGT a flat 25% you simply pay tax when you sell no matter what circumstance. No more bullshit tax avoidance planning. You sell you pay.

This system would literally be the same as any other country.

If you want you could tier it. Have first 20k gains each year tax free. This helps the working man build some wealth and retirees relying on franked dividends. Then 25% up to $1m and 30% thereafter, in line with corporate tax rates.

The big property investors would pay the 30% because of the size of their gains and given they can’t partially sell property.

The max tax rate before was 23.5% but a flat 25% sounds a lot fairer?

**TLDR:** I modelled the tax difference between the 50% CGT discount and inflation-linked indexation across every return level and holding period. If your investment returns anywhere near the market average of 7% annually, you pay more tax under indexation at every timeframe. The discount wins in almost all realistic scenarios. Indexation only wins when your investment has basically returned nothing in real terms.

Hi everyone. I wanted to put a side by side comparison of the capital gains subject to tax under the Indexation method.

Assumptions:

- $100,000 cost base (This is your investment)

- 3% annual CPI

- Return % is your total nominal gain on cost base (e.g. 100% = you bought for $100k and sold for $200k in X particular year)

- I've added a 7% market benchmark at the top to represent the long-term average equity return. (This compounds). This is what your return should roughly be to have performed in line with the market.

How indexation works: Each year your cost base gets adjusted upward by CPI. So at 3% inflation, after 10 years your $100k cost base becomes $134,392. Your taxable gain is sale price minus the indexed cost base.

How the 50% discount works: Half your gain is taxable if held longer than 1 year.

Image 1 — Taxable capital gain under the indexation method. Your cost base gets adjusted for inflation each year.

Taxable capital gain under the indexation method

Image 2 — Taxable capital gain under the current 50% discount. Half your gain is taxable if held longer than 1 year. (Year 1 assumes This number never changes across years.

Taxable capital gain under 50% CGT discount (Held >1 Year)

Image 3 — The difference. Red means you pay MORE under indexation. Green means indexation is better. Look at how much red there is at holding periods across almost every return level. Indexation only wins at very low returns held for very long periods.

Difference in Taxable Gain ($)

Image 4 — To difference in % terms to understand the relative difference. How much more or less is the taxable gain.

Difference in Taxable Gain (%)

Image 5 — The actual dollar difference in tax payable at 47%. How much more or less you would be paying.

Tax payable at 47% Marginal Tax Rate

Image 6 — The effective tax rate on your gain under the Indexation method. Assuming your investment is performing at the market benchmark at each year, your effective tax rate climbs each year! In all scenarios it is more than maximum 23.5% under CGT discount.

Indexation Method effective tax rate

Under indexation you are paying materially more capital gains tax unless you are holding for a very long time and your investment has barely outperformed inflation. For anyone investing in shares with a 1-10 year horizon, the tax bill could be double. The effective CGT rate becomes one of the highest in the world.

Few thoughts of mine.

1. If your investment performs at the historical market growth rate of 7% annually, you lose under indexation at every timeframe. Short term the discount is obviously better. But even long term, a 7% annual return compounds well above what inflation indexation offsets. The only scenario where indexation wins is when your investment has essentially returned nothing in real terms and at that point you've got bigger problems than your tax bill.
2. This effectively kills active share investing. Active portfolio management is short-to-medium term in nature you're rebalancing, taking profits, cutting losers, rotating between sectors. All of that generates taxable events in the 1-5 year range where the tax hit under indexation roughly doubles. If the calculus no longer works, active investors move to passive ETFs or leave equities altogether. That sounds fine until you realise markets need active participants for price discovery and liquidity. A market where everyone is a passive ETF investor is an unhealthy market nobody is doing the work of pricing assets correctly, bid-ask spreads widen, and capital allocation gets worse. If I understand correctly this is one of the reasons why the CGT discount was introduced in the first place. (Having a liquid share market is especially important as the boomers draw down on their super).
3. Even the passive ETF investor gets hurt. Someone in their 20s investing in ETFs for 5 years before buying a house because it's a better return than a savings account is now going to pay significantly more tax on those gains. Tax that could have gone towards a housing deposit. This policy is supposed to help with housing affordability but it's literally taking money away from people trying to get ahead.
4. This hits founders and startups hardest. A founder building a business from scratch has an effective cost base of close to zero. Under the 50% discount, selling a business you built for $1m means $500k taxable. Under indexation, inflating a near-zero cost base by 3% a year gives you almost nothing your taxable gain is still close to $1m. We're talking about the people actually creating jobs and building productive businesses getting taxed the most, this is the exact wrong incentive. (Yes small business concessions exist but they have strict eligibility thresholds and don't cover every founder)
5. This doesn't level the playing field for property. It just makes investing overall more expensive. Property investors still have negative gearing, leverage at 80-90% LVR, depreciation, and the ability to refinance equity without triggering a CGT event. None of that changes under indexation. And the ultimate tax shelter remains untouched your principal place of residence is completely CGT free. So the rational response to this policy is to pour as much money as possible into an oversized PPOR. A $3m house you live in generates zero tax on any capital gain, forever. That's not productive capital. That's not funding businesses or creating jobs. If the goal was to improve housing affordability and redirect capital into productive investment, this policy achieves the exact opposite.

Happy to hear some of your thoughts!

Disclaimer: I used Claude to assist me in the modelling and my thinking.

Some people have pointed out the pre-1999 model also included an averaging mechanism that spread the gain across multiple years to avoid a tax spike. This is true but it only benefits people whose capital gain pushes them into a higher tax bracket. The comparable 50% CGT discount would still be less tax.