What each method does
The 50% discount halves your realised gain before adding it to your assessable income. It's simple, and it taxes the inflation portion of a gain along with the real wealth.
Indexation lifts your cost base by CPI from acquisition to sale and then taxes the real gain at your full marginal rate, with no discount on top - and from 1 July 2027 with a 30% minimum effective rate on the net gain.
The 2× rule (and where it breaks)
The headline rule that keeps surfacing in the analysis: if your total nominal return over the hold period is more than twice the cumulative inflation over the same period, the 50% discount produces less tax than indexation. Below that ratio, indexation is better.
That's an aggregate rule, not an annualised one. Annualised it skews slightly - at 3% inflation the breakeven annualised return is a bit under 6% for a 10-year hold, and below 6% for longer holds. Compounding makes the gap widen with duration. For typical equities (8–10% p.a.) or growing property (5–7% p.a.) in a 2.5–3% inflation environment, the discount wins at every horizon.
The compound annual return below which indexation produces less tax than the 50% discount, for a 10-year hold at 3% inflation. Higher inflation lifts the threshold; longer holds nudge it down.
Worked example - 10-year hold
Take a $100,000 purchase that grows at 10% p.a. for ten years. Final sale value is roughly $259,400. Cumulative inflation at 3% p.a. over the same period is ~34.4%.
50% discount. Gross gain $159,400 → taxable $79,700 → stacked on your marginal rate.
Indexation + 30% floor. Indexed cost base ~$134,400 → net real gain $125,000. Tax is the higher of your marginal stack and 30% of $125,000.
On a 37% marginal rate (including Medicare), the discount produces roughly $31,000 of CGT. Indexation produces roughly $48,500. The ratio is about 1.56× - and gets worse with higher growth, longer holds, or higher marginal rates.
Who wins under each model
Indexation wins: low real returns, very long holds in high-inflation periods, assets that just track CPI, capital losses you can offset against future gains tax-free.
The 50% discount wins: normal equity returns, well-located property, anything compounding faster than 5–6% in a low-inflation environment. For most investors, most of the time.
For Age Pension recipients the 30% floor doesn't bind, which meaningfully narrows the gap. For new residential builds the investor elects whichever produces less tax.