Australia's CGT Discount and Negative Gearing: Reform Review Underway

The Australian federal government is actively reviewing potential reforms to the capital gains tax (CGT) discount and negative gearing rules. Discussions are centering on their impact on housing affordability, intergenerational inequality, and the federal budget.

These considerations are occurring in the lead-up to the May federal budget and a Greens-led parliamentary inquiry into the CGT discount.

Government Review and Policy Objectives

Treasurer Jim Chalmers has indicated that the Treasury department is modeling various options for tax reform. The focus is on intergenerational fairness and addressing challenges within the housing market. While no final decisions have been made, and government sources state that specific proposals are not yet advanced in internal discussions, a review of negative gearing and the capital gains tax discount is underway. Prime Minister Anthony Albanese and Treasurer Chalmers have consistently stated that increasing housing supply remains the government's primary strategy for addressing the housing crisis.

Understanding Capital Gains Tax and Negative Gearing

The capital gains tax applies to profits from the sale of assets like properties and shares. Australia introduced a CGT in 1985, specifically exempting the family home.

A significant change occurred in 1999 when the Howard government introduced a 50% discount on capital gains for assets held for at least 12 months. This discount replaced a previous inflation adjustment method and effectively halves the taxable profit from an asset sale.

Negative gearing allows property investors to deduct property-related losses (such as interest, rates, and maintenance) from their annual income, thereby reducing their overall tax liability. Currently, there is no limit on the number of properties that can be negatively geared.

Rationale for Potential Reforms

Housing Affordability

Critics argue that the CGT discount and negative gearing promote housing as an investment asset, increasing investor demand and contributing to higher property prices. The NSW government, in a submission to the federal inquiry, stated that CGT rules have contributed to increased property prices and reduced housing affordability, particularly for first-home buyers. Lending patterns show a significant increase in lending to investors compared to first-home buyers since the discount's inception.

Intergenerational Inequality

Concerns have been raised by Treasurer Chalmers and others regarding intergenerational inequality. Research by the Australian Council of Social Service (ACOSS) and the Parliamentary Budget Office (PBO) indicates that the benefits of the CGT discount primarily accrue to high-income earners, older individuals, and residents of wealthy electorates.

The Greens-led inquiry found that the discount has skewed housing ownership away from owner-occupiers towards investors and disproportionately benefits affluent Australians. Figures suggest that 89% of the benefit goes to the top 20% of income earners, with individuals over 60 receiving 52% of the benefit.

Budget Revenue

Treasury figures from December project the capital gains discount to result in $21.8 billion to $23 billion in forgone revenue for the federal budget in 2025-26. The PBO projects the discount will cost $247 billion over the next decade. The revenue foregone from negative gearing is estimated at approximately $6.9 billion in 2024-25, with capital gains discounts on residential properties costing an estimated $5.4 billion.

Proposed Reform Options and Suggestions

Various individuals and organizations have put forward specific proposals for reform:

• Australian Manufacturing Workers' Union (AMWU): Advocates for phasing out the capital gains discount and eliminating negative gearing. They also propose reallocating recovered revenue to support Australia's modular housing industry.
• Australian Council of Trade Unions (ACTU): Suggested restricting negative gearing and capital gains tax breaks to a single investment property, with a five-year grandfathering period.
• Greens: Campaign on limiting negative gearing and the 50% capital gains tax discount to one investment property, also subject to grandfathering provisions. Greens Senator Nick McKim, chairing the Senate inquiry, argues the discount subsidizes speculation and makes home ownership more challenging for renters.
• NSW Treasury: Recommended a reduction or restructuring of the CGT discount.
• Grattan Institute: Submitted that the 50% discount was excessive.
• Former RBA Governor Bernie Fraser: Advocated for the complete abolition of the CGT discount to improve housing affordability.
• Commonwealth Bank CEO Matt Comyn: Supported government consideration of reducing the CGT discount, emphasizing non-retrospective application and broader reform.
• Allegra Spender MP: Proposed reducing the CGT discount to 30%, "ring fencing" negative gearing (allowing losses to be deducted only against rental income), and using the estimated $29 billion in proceeds to fund income tax cuts for workers, making the proposal revenue-neutral.
• ACOSS: Proposed halving the CGT discount and ending negative gearing within five years, suggesting proceeds be invested in social housing and increased income support payments.
• Keith Wolahan (former Liberal MP): Proposed limiting negative gearing tax concessions to one established property while allowing deductions on up to five new builds, suggesting this could increase housing supply and appeal to first-home buyers.
• Treasury Modeling: Is considering options such as reducing the CGT discount to 33% for housing investors while potentially retaining the 50% rate for shares and other investments. Labor's 2019 proposal aimed to halve the discount to 25%.
• Other suggestions: Include reverting to the pre-1999 inflation-adjusted system, indexing the discount to actual inflation, or spreading CGT payments over several years (e61 Institute) to address "lumpiness" upon sale.

Economic Impact and Expert Perspectives

House Prices and Supply

Experts estimate that a reduction or elimination of the capital gains tax discount would lead to a minor decrease in house prices, approximately 1 percent. While some modeling suggests a modest reduction in housing supply from CGT and negative gearing changes, others argue that directing investment towards new builds (e.g., through conditional concessions or specific negative gearing caps) could boost supply.

The Property Council of Australia advocates for a national review of property-related taxes and regulatory settings, arguing that policies reducing new housing construction could exacerbate rental shortages.

Rental Market

Industry figures, such as real estate auctioneer Tom Panos and PIPA, express concerns that removing tax incentives for investors could reduce rental supply, potentially increasing rental costs and worsening the rental crisis. They highlight that many investors are middle-income families with one property, providing a significant portion of Australia's rental homes.

Conversely, Senator Nick McKim suggests that reining in tax breaks could prompt more investors to sell, increasing housing stock available for purchase by renters.

Intergenerational Equity

British economist Gary Stevenson warned Australia could follow the UK's path unless inequality is addressed through taxation policy and managing housing demand and supply.

The shift in the economy from labor to capital share and the preferential taxation of capital income are cited as factors in house prices rising at double the rate of incomes since 1999.

Broader Housing Context

KPMG analysis shows a significant shift towards the construction of high-value properties, reducing homes available for middle-income Australians due to soaring building material costs. The federal government is currently 80,000 properties behind its goal of 1.2 million new homes by mid-2029, with efforts ongoing to boost supply and revise planning restrictions.

Political Landscape and Historical Context

The Labor party had previously proposed cuts to capital gains tax concessions and restrictions on negative gearing in the 2016 and 2019 federal elections. These proposals were unsuccessful, and the Albanese opposition subsequently removed them from their platform before the 2022 election, focusing instead on increasing housing supply. Treasurer Chalmers has consistently ruled out changes to negative gearing in current discussions, though modeling of both policies is ongoing.

The Coalition, including Shadow Treasurer Tim Wilson and Opposition Leader Angus Taylor, has indicated strong opposition to changes to the CGT discount or negative gearing. They argue such measures would lead to less investment, impact investors, and not increase housing availability. Mr. Wilson, while affirming concerns about young Australians being disadvantaged by the tax system, suggested lowering the top marginal tax rate as an alternative.

Prime Minister Anthony Albanese's recent property sales, which would have been eligible for the existing CGT discount, have coincided with these discussions. There is no evidence to suggest that the timing of these sales was influenced by planned policy changes, and the Prime Minister has not committed to reforms. Expert commentary noted that the "optics wouldn't look good" for the Prime Minister if he were to reduce CGT discounts after his recent sales.

Upcoming Developments

A Senate committee inquiry into the capital gains tax discount, chaired by Greens Senator Nick McKim, is scheduled to deliver its final report by March 17. The findings indicate that the discount contributes to intergenerational inequality and skews housing ownership towards investors. The federal government is expected to address productivity and potential tax changes, including those related to capital gains tax, in the upcoming May federal budget.