The Commonwealth Government’s Capital Gains Tax (CGT) reforms begin with a sensible principle: tax real financial gains rather than inflation. To advance this principle, Parliament passed the Treasury Laws Amendment (Tax Reform No. 1) Act 2026 in June, which will see changes to the CGT from 1 July 2027. Under the current system, individuals generally pay tax on half of nominal capital gains on assets held for over a year, while the new system will introduce indexation based on the Consumer Price Index (CPI), with a minimum 30 per cent tax on gains.
CGT can be an important element in a tax system by helping reduce exploitable loopholes. Without CGT, taxpayers may be incentivised to package income as capital appreciation, for example through retained earnings. Taxpayers with identical real incomes can face different tax bills simply because they receive income in different forms. This can lead to higher tax rates generally to make up the difference.
CGT, however, should reflect a taxpayer’s genuine increase in purchasing power. This requires taxing real gains rather than inflationary gains, which is where the recent tax reforms come in. However, the new tax reforms only go halfway to meeting this overarching principle. Under the measures proposed, gains are fully indexed, but losses are not. According to our new research, this change in design could impose higher taxes on directly held assets than the design it replaces.
With a further technical bill later this year, there is time to make changes to better reflect the underlying principle behind these reforms. This would mean indexing capital gains for inflation, while also recognising real capital losses where assets have not kept pace with inflation.
Why taxing real gains implies recognising real losses
Real gains and real losses are the same economic object, just from opposite perspectives. Under a CGT that taxes real gains in asset values, assets that outpace inflation generate taxable income, and assets that lag inflation generate losses to recognise. If this symmetry is broken, the tax base no longer properly measures real income, and the tax system creates costly distortions.
The new CGT design does just this. It will mean that over time, every directly held asset will fall into one of three tax zones. If its value ends above the indexed cost base, the resulting real gain is taxed. If its value falls below the original purchase price, only the nominal loss is recognised as a capital gains offset against the asset’s full real loss. Between these outcomes sits a middle band of assets that have risen in nominal terms but failed to keep pace with inflation. On these assets, the investor suffers a loss in purchasing power just as real as the gain in purchasing power generated by assets in the first zone. But the tax system recognises no loss.
Consider a simple example. An investor buys three assets, A, B and C, for $10,000 each. After five years of 3% annual inflation, the inflation-adjusted cost base of each asset is $11,593. Assume the assets are now worth $19,619, $10,031, and $5,129 respectively. Hence, in total, the portfolio is worth $34,779, exactly equal to its inflation-adjusted cost base. In real terms, the investor has made no gain. Yet, under the new CGT system, the investor is taxed on a gain of $3,155. This reflects the real gain on asset A, less only the nominal loss on asset C. The real loss on asset B, and the inflation component of the loss on asset C, are ignored. At the top marginal tax rate, the taxpayer faces a $1,483 CGT liability, despite no real gain. This example shows how the system taxes upside without treating downside outcomes equally. The result is that investors can face CGT bills even when they have earned no real gain overall.
The economy comprises millions of assets, many directly held, and individual investors typically hold portfolios of assets. At both the national and individual levels, the new CGT design creates a system under which upside outcomes are taxed on full real gains, while real losses on downside outcomes are recognised only partly, or not at all. Expected tax therefore rises with the spread of outcomes across assets, even when the portfolio yields no real gain.
Comparing CGT systems
Our paper studies a diversified share portfolio whose value, on average, merely keeps pace with inflation. This is a portfolio with no real gain and hence, in principle, there is nothing to tax.
The table below reports expected tax liability under the current and new CGT systems, generalising impacts over investment holding periods longer than 5 years under 3 per cent inflation and no real capital growth. Under the current system, an investor on the top marginal tax rate faces an expected CGT liability of 13.8 per cent of the portfolio's final value after 30 years, purely for standing still against the CPI. Over long periods of time, this liability approaches 23.5 per cent. That is the defect that indexation is meant to fix.
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Holding period
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Current system: nominal gains, 50% discount
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New system: indexed gains, unindexed losses
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10 years
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6.0% (62 basis points/year)
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7.5% (78 basis points/year)
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20 years
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10.5% (55 basis points/year)
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14.3% (77 basis points/year)
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30 years
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13.8% (49 basis points/year)
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19.9% (74 basis points/year)
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50 years
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18.1% (40 basis points/year)
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28.4% (67 basis points/year)
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But under the new system, the same investor faces an expected burden of 19.9 per cent at the 30-year horizon: around six percentage points of total accumulated value more than under the system being replaced. In annual terms, this is a tax drag of about 74 basis points, compared with 49 basis points under the current system.
A symmetric real gains tax would collect nothing from this portfolio, because there is no real income to tax, while still taxing genuine real gains where assets grow faster than CPI.
Creating a fairer, symmetric CGT system
Why might policymakers resist symmetric treatment of real losses? A potential objection is that recognising indexed losses might encourage taxpayers to realise losses and defer gains. The pre-1999 Australian regime restricted loss recognition partly for this reason. However, capital losses are already quarantined against capital gains, limiting this possibility. While anti-avoidance concerns deserve attention, they must be weighed against the efficiency costs created when losses are not treated in the same way as gains.
Our research focuses on the tax penalty created by treating gains and losses differently. But the costs of the new system extend beyond this. Lock-in is likely to worsen. Taxpayers with long-held assets and large accrued gains now face tax on disposal at the higher of their marginal rate and 30 per cent, which will create distortions that are difficult to quantify but potentially large in their impact on economic efficiency. Investors may hold portfolios that are poorly suited to their evolving circumstances because rebalancing is costly; business founders may stay on as managers beyond the point at which transfer to new owners would be efficient; and shareholders in established companies that might be more efficiently managed via takeover could require higher premiums before selling.
The regime is also likely to push asset ownership into more institutionally mediated forms. Companies and superannuation funds retain their existing CGT treatment, while direct personal holdings face the new regime. This is itself an economic distortion. However, it also means fewer individual investors participating directly in asset pricing and capital allocation, and a narrower channel via which the ultimate owners of capital hold management to account.
Compliance costs are also likely to rise. Investors will need to keep records of the purchase price, cost base changes and inflation adjustments for every CGT asset. For assets held when the new system begins on 1 July 2027, they may need valuations at that date (so that prior gains can be taxed under the old system and subsequent gains can be taxed under the new system) or opt for apportionment between the two systems when CGT is triggered. Hence, many investors will need to maintain records that work under both the old and new rules. For many households, direct asset ownership will be unattractive.
The reform correctly recognises that inflationary gains are not income. A similar logic, which has been missed, is that inflationary losses must not be ignored. With a further technical bill later this year, there is an opportunity to align the treatment of capital gains and losses with the effects of inflation.
James Giesecke is a Professor; and Jason Nassios is an Associate Professor and Deputy Director (Engagement and Impact) at the Centre of Policy Studies, Victoria University.
This article was originally published by The Policymaker, a digital publication of the Australian Public Policy Institute, and is republished with permission.