Media expectation about the May 12 federal budget is growing, with commentators straining to compete on hyperbolic prose.

“Jim, this is the most important budget this century. You’d better not bottle it”, warned the Sydney Morning Herald on March 11. “Fix tax and cut NDIS, CEOs tell Chalmers”, demanded the Australian Financial Review (AFR) on March 3 and the ABC News on February 23 ventured its own “Reducing inequality means taxing capital more — including inheritances”.

A large part of the excitement has been Labor lifting people’s expectations that it may take action to reduce the Capital Gains Tax (CGT) discount (currently 50% for assets held for at least 12 months).

Abolishing the 50% GGT discount is considered one of the necessary steps to reducing housing price growth. However, Labor is not expected to go that far.

The CGT was introduced by the Hawke Labor government in 1985. It applies to assets (except the family home, which is exempt) sold in any tax year and is levied at the marginal income tax rate of the tax payer, with the overall increase in value of an asset (sale price less purchase price and capital costs, such as renovations) taxed alongside other income.

Theoretically, the higher your taxable income from other sources, the more you pay in CGT.

The John Howard Coalition government introduced the 50% CGT discount in 1999. It means that when an asset is sold, that tax is only paid on 50% of the capital gain. In other words, if you realise a capital gain of $500,000 from the sale of an investment property, you only pay tax on $250,000 of that: the other $250,000 is yours, tax-free!

This benefits the wealthier (those on the highest marginal personal tax rate of 45%, payable by those with taxable incomes........

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