One objective of Australia’s CGT discount is to approximate inflation and tax real gains. But because real returns vary widely across investors, a flat discount systematically misses the mark.

Using data on 1.5 million property investments (2008–2025), we show real returns range from losses (below -1.6% at the 25th percentile) to strong gains (above 5% at the 75th).

This dispersion drives large tax mismatches. High-return investors are under-taxed, while low-return or loss-making investors are over-taxed. Changing the discount rate simply shifts who wins and who loses, it doesn’t fix the underlying dispersion in circumstances.

A system that adjusts the cost base for inflation would better align taxable and real income, improving equity and likely raising revenue.