Anyone watching the smoke signals from Canberra knows that moves are afoot to try and increase capital gains tax (aka "cut the discount").

Subscribe now for unlimited access.

Login or signup to continue reading

A Greens-led Senate inquiry has been stoking the "national conversation" that Treasurer Jim Chalmers wants to promote about the details.

Now we can see where this sort of conversation could go in Chalmers' May budget thanks to last week's tax plan from Sydney teal MP Allegra Spender, and the release this week of the report of the Senate committee tasked with reviewing the capital gains tax discount.

It is not surprising that an inquiry spearheaded by the Greens would enthuse about the alleged benefits of cutting the 50 per cent CGT discount, especially for investor housing.

The problem is that the focus on capital gains tax is narrow and the conversation one-sided. It is a group-think exercise propagating myths and over-blown claims and dismissive of any suggestion that the current capital gains tax settings are justified.

The current system is built on the widely accepted principle that capital gains should not be taxed the same as ordinary income. It is a principle observed in many other countries and it was observed in the design of Australia's first comprehensive capital gains tax in 1985.

The version put in place by the Howard government in 1999 allows a 50 per cent discount of gains on disposals of assets held for more than 12 months.

This replaced the 1985-1999 indexation system that exempted purely inflationary gains from taxation and allowed averaging to limit the impact of lumpy capital gains on individuals' average tax rates.

On close inspection, the 50 per cent discount, on average, results in tax burdens not much less than the indexation plus averaging system. That is, the discount is not that generous.

Costello's 1999 change was intended as a simplification; not only to compensate for........

© Canberra Times