Australian Government Announces Major Tax Reforms in May 2025 Budget

The changes target negative gearing, the capital gains tax discount, and discretionary trusts—aimed at addressing housing affordability and intergenerational equity.

The Australian federal government has unveiled a series of sweeping tax reforms in the May 2025 budget, designed to tackle housing affordability and concerns about intergenerational equity. The measures will be phased in over several years, with some provisions including grandfathering for existing investments.

Key Tax Reforms Announced

Negative Gearing

From May 12, 2025, negative gearing will only apply to newly built homes for properties purchased or exchanged after that date. Existing investment properties remain eligible under previous rules. The new rules take effect from July 2027. Investors may still deduct rental losses from rental income and carry forward excess losses.

Capital Gains Tax (CGT) Discount

From July 2027, the current 50% CGT discount for assets held over 12 months will be replaced with an indexation-based deduction for inflation, taxing only gains above inflation. A minimum 30% tax rate will apply to capital gains, with exemptions for pensioners and income support recipients.

Assets purchased before July 1, 2027, will be subject to old rules for gains accrued before that date. Taxpayers can choose between a valuation as of July 1, 2027, or a time-based apportionment. Assets held before 1985 will also become subject to CGT on gains after July 2027.

Discretionary Trusts

From July 2028, discretionary trusts will face a minimum tax rate of 30% on taxable income. The measure is projected to affect approximately 840,000 discretionary trusts.

Background and Policy Context

Negative gearing allows property investors to deduct rental property expenses (including mortgage interest) from rental income. If this results in a net loss, the loss can be deducted from other income. The CGT discount reduces the taxable gain on assets held for more than 12 months.

In 2022-23, the top 10% of income earners received 83% of the benefit from the CGT discount and 37% from negative gearing.

The federal budget "lost" an estimated $3.9 billion from negative gearing and $23.5 billion from the CGT discount in 2022-23.

The 50% CGT discount was introduced by the Howard government on September 21, 1999, replacing the previous indexation method based on inflation-adjusted profit. In the five years after the discount's introduction, inflation-adjusted housing prices rose by 50.4% , the largest increase since records began in 1970.

Expected Impact on Housing

The government expects the tax package to raise $3.6 billion in the short term and $77.2 billion over a decade.

Treasury estimates a net 75,000 homes will be sold by investors to owner-occupiers over 10 years. The changes are expected to reduce new housing supply by approximately 35,000 homes, but government spending on infrastructure ($2 billion) and other measures (e.g., extended foreign buyer ban) are projected to add 30,000 net new dwellings over four years.

House price growth is expected to slow by about 2% per year in the near term, with median rents increasing by approximately $2 per week.

Political Context and Reactions

Prime Minister Anthony Albanese previously ruled out changes to negative gearing before the 2025 election. Treasurer Jim Chalmers stated the government would explain any changes in the budget and that the tax system "got out of whack."

"The tax system got out of whack." — Treasurer Jim Chalmers

• Shadow Treasurer Tim Wilson criticized the changes, arguing they would increase rents and limit young Australians' ability to save for a home.
• Opposition Leader Angus Taylor indicated the Coalition is unlikely to support the changes.
• Nationals leader Matt Canavan expressed opposition to tax increases but said he would consider specific proposals.
• The Greens have advocated for abolishing negative gearing and the CGT discount.
• Commonwealth Bank CEO Matt Comyn expressed support for changes to the CGT discount, noting they should be part of a broader reform package.
• Independent MP Allegra Spender proposed ring-fencing rental property deductions and a 30% CGT discount as part of a broader tax reform package.

Economic and Demographic Context

• The National Housing Supply and Affordability Council projects 980,000 homes will be built by mid-2029, short of the 1.2 million target.
• According to the 2024 Household, Income and Labour Dynamics in Australia survey, 54% of men and 47% of women aged 18-29 lived with their parents.
• The Reserve Bank of Australia has raised the cash rate to 4.35% , citing inflation at 4.6% .
• A Sky News Pulse poll found that 36% of voters want the government to prioritize budget savings to pay down debt and avoid inflation.
• Australia's aging population — with four working-age people per retiree in 2025 (down from seven in 1975) — is straining public finances.

Expert Analysis

Multiple economists have expressed varying views on the likely effects of the reforms:

"The proposals might reduce house prices by one or two percent... the effect is tiny." — Peter Tulip, Centre for Independent Studies

• Peter Tulip (Centre for Independent Studies) stated the proposals might reduce house prices by one or two percent, calling the effect "tiny." He noted that rents could increase as landlords exit the market.
• Matthew Bowes (Grattan Institute) said research indicates the changes would have only marginal impact on affordability.
• Property industry-commissioned modelling found that combining CGT discount cuts with negative gearing restrictions could reduce dwelling starts by tens of thousands, pushing rents 2.4% higher by 2029-30.
• Rachel ViforJ (Curtin University) noted that sold investment properties become available for homebuyers, potentially stabilizing rents in the long run.
• AMP chief economist Shane Oliver expressed skepticism about the reforms' effectiveness for intergenerational equity, noting that older generations have already benefited from these concessions.

Additional Property Market Developments

A record 22,640 rental homes were sold by landlords in Australia over the three months to May, with 4,865 in Sydney and 5,565 in Melbourne.

However, an analysis by FoundIt reported that investors are not exiting en masse, as the 21% share of sales in Sydney and Melbourne is below the investor ownership share of housing stock. Investor demand, measured by new mortgages, is near decade highs, with investors accounting for 40% of new loans.

Sydney's median house price fell by approximately $7,000 to $1.593 million; Melbourne's median house price slipped below $1 million.