The federal government's decision to replace the 50% capital gains tax discount with inflation indexation has been widely framed as a tougher tax treatment for property investors. Ray White Group chief economist Nerida Conisbee (pictured) argues the reality is considerably more nuanced — and in current market conditions, the change could actually reduce the tax paid by some investors.
"This is not a niche tax change affecting a small group of investors," said Dan White, managing director at Ray White Group. "It reaches directly into the housing security of nearly a third of Australian households. It affects labour mobility; it affects how young Australians build wealth. And it affects the 31% of households who rent and have no say in any of this."
But the technical mechanics of the change tell a more complicated story. Under the old system, investors holding property for more than 12 months paid tax on half the nominal gain. Under indexation, they pay tax only on the real gain — the amount by which the property's value grew above inflation. When inflation is running high and price growth is modest, the indexed cost base can rise faster than the asset value, leaving little or no taxable gain at all.
"If inflation is running at 4% or 5% and property prices are growing at only 1% or 2%, then the indexed cost base rises faster than the asset value," Conisbee said. "In that scenario, there may be little or no taxable real gain."
Ray White's scenario analysis illustrates the point concretely. For a property purchased at $1.75 million and held for six years, indexation raises more revenue than the 50% discount when price growth is strong and inflation is contained.
But in conditions of high inflation and weak price growth, the outcome reverses — at annual inflation of 5% and annual price growth of 5%, indexation produces around $89,000 less tax than the current system. At inflation of 4% and price growth of 3%, the gap is approximately $51,000.
The conditions that matter most are already taking shape. National annual house price growth is running at 10.5%, but that figure masks significant divergence — Sydney and Melbourne are growing at just 2.7% and 2.5% respectively. Ray White's open home attendance data underscores the softening, with the national four-week rolling average falling to 2.5 attendees per open home by late May.
At the same time, inflation remains well above target. The ABS reported annual CPI of 4.2% in April, with trimmed mean inflation also remaining elevated — meaning the gap between price growth and inflation is narrowing in key markets.
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Beyond the maths, there is a behavioural dimension that could further compress CGT receipts. In a softer market, investors with strong rental yields may simply choose to hold rather than sell — reducing transaction volumes and shrinking the taxable base regardless of which system applies.
"A policy that relies on taxing capital gains is only a strong revenue measure when there are capital gains to tax," Conisbee said. With the Reserve Bank having lifted rates three times this year to 4.35%, borrowing capacity has tightened, investor demand is under pressure, and Morgan Stanley has reportedly predicted prices could fall by as much as 10% as investors reassess after-tax returns.
For mortgage brokers advising property investors, the key takeaway is that the true impact of the CGT change will depend heavily on how the market moves from here.
"In the market conditions Australia now faces, the shift from the 50% discount to indexation could reduce, rather than increase, near-term CGT revenue from property investors," Conisbee said.
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