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Treasurer Jim Chalmers is preparing to deliver the Australian federal budget on May 12, 2025, which is expected to include significant changes to capital gains tax (CGT) and negative gearing rules. The reforms are framed by the government as an effort to address housing affordability and intergenerational equity. The budget is also set to include a $2 billion infrastructure fund for housing, productivity measures, and spending cuts across multiple government programs.
Proposed Tax Reforms
Capital Gains Tax Discount
The government is considering replacing the current 50% CGT discount for assets held longer than 12 months with a system that adjusts asset values for inflation before taxing gains—returning to the system that existed prior to 1999. The 50% discount was introduced in 1999 under then-Treasurer Peter Costello, replacing the original inflation-indexation system created in the mid-1980s under Treasurer Paul Keating.
Financial impact:
- Under the current 50% discount system, a $750,000 capital gain results in tax on $375,000
- Under the proposed inflation-adjusted system, the same gain would result in tax on approximately $420,000
- The CGT discount is estimated to cost $19-21.8 billion in foregone revenue annually
- Approximately 83-90% of the CGT discount benefit accrues to the top 10% of income earners
Negative Gearing
The government is reportedly considering either limiting negative gearing to a specific number of investment properties or abolishing it entirely for new investments. Negative gearing allows property investors to deduct rental losses from their taxable income. It was temporarily removed in the 1980s under the Hawke government.
Financial impact:
- Abolishing negative gearing for new investments is projected to raise approximately $5 billion per year, though with possible exemptions this could drop to under $1 billion per year
- Combined CGT and negative gearing reforms are projected to generate $2 billion over the first four years and $25-30 billion over 10 years
- Deloitte Access Economics estimates that grandfathering existing investments would generate $500 million over four years, while phasing in changes over three years for all investors would generate $18.8 billion over four years
Transition Arrangements
Treasurer Chalmers has indicated that any changes will include transitional arrangements, likely grandfathering existing investments. He stated the government aims to "recognise the decisions that people have taken in the past." The Grattan Institute estimates that halving the CGT discount and phasing it in over five years for all investments would generate $6.5 billion annually.
Trust Taxation
The budget is expected to include less generous rules for trusts, estimated to raise approximately $2 billion per year.
Housing Policy Measures
Infrastructure Funding
The government will allocate $2 billion over four years for a Local Infrastructure Fund to support enabling infrastructure—roads, water, power, and sewerage—for housing construction. Key details include:
- Funds will be distributed to local councils and utilities providers
- 25% ($500 million) is reserved for regional areas
- Projected to enable construction of up to 65,000 additional homes over the next decade
Other Housing Measures
The government has previously announced:
- $3.1 billion for 100,000 first-home buyer properties
- $1.2 billion in state infrastructure assistance
- $10 billion in loans and grants partnered with states and territories for first-home buyer housing
- Housing Minister Clare O'Neil announced $250 million for infrastructure to support approximately 4,900 new homes in the ACT, with over 1,700 reserved for first-time buyers
Housing Supply Target
The National Housing Supply and Affordability Council reported Australia is on track to build 980,000 homes by 2029, short of the government's target of 1.2 million homes over five years.
Projected Economic Impact of Reforms
House prices: Estimates suggest CGT changes could lower house prices by 1-4%, and negative gearing abolition could reduce prices by an additional 2%. The Grattan Institute estimates removing the discount could reduce house prices by 1%.
Home ownership: Research suggests abolishing negative gearing and halving the CGT discount could increase home ownership rates by three percentage points.
Construction industry: The Housing Industry Association research suggests removing the discount without grandfathering could reduce home construction by 33,000 properties and end 3,000 construction jobs. The Grattan Institute estimates a smaller impact of 10,000 fewer homes over five years.
Investor behavior: Analysts predict a potential rise in 'never-sell' strategies, where investors hold property indefinitely to avoid triggering capital gains events, which could constrain market supply. Investors may shift focus to income-generating properties or those with development potential.
Productivity and Regulatory Measures
The budget includes a productivity package with the following measures:
- Changes to skilled migration to reduce the time for migrant tradespeople to enter the workforce by six months
- Adjustments to the immigration points system to select younger, more educated migrants
- Making certain Australian standards free for construction and safety firms
- Establishing a permanent $20,000 instant asset write-off for small businesses
- Harmonizing retail tenancy regulations
- Standardizing agricultural chemical regulations
- Spending $655 million on expanding Digital ID
- Promoting modern construction methods like modular homes
The government claims these reforms could reduce red tape costs by $10 billion annually and boost GDP by $13 billion.
Budget Context and Economic Outlook
Fiscal Position
The budget deficit for the current financial year may be smaller than previously projected. For the first six months of 2025-26, income tax collections totaled $170.3 billion, an increase of nearly $15 billion (10%) compared to the same period in 2024-25. Stronger-than-expected collections are attributed to a jobless rate of 4.1% and higher commodity prices.
The government has identified $64 billion in savings from the National Disability Insurance Scheme (NDIS) and defense spending. The NDIS is projected to be reduced from growth of over 10% per year to about 2%, with approximately 160,000 people being removed from the scheme.
Economic Projections
Treasury forecasts indicate:
- Economic growth is anticipated to be 0.25 to 0.5% lower than previously forecast in coming years
- Productivity levels are not expected to return to long-term average until the early 2030s
- Higher inflation and unemployment are expected due to the war in Iran
- The budget will revise the assumed productivity improvement to 1.2% annual growth over five years, rather than two
Reserve Bank and Inflation
The Reserve Bank has indicated a low likelihood of rate reductions in 2025. The OECD projects scope for "modest" rate cuts in 2026. Australia's variable-rate mortgage system was identified by the OECD as a factor in inflation containment, as interest rate adjustments were rapidly transmitted to households.
Industry and Expert Perspectives
Startup and Venture Capital
Paul Bassat, co-founder of Seek, stated on LinkedIn that removing the 50% CGT discount would be "disastrous" for entrepreneurs, arguing founders could leave Australia. Alan Jones, a venture capitalist, noted changes would make it harder for startups to attract talent. John Storey of The Tax Institute stated that carving out startups would create complexity and changes should apply to all asset classes.
Property and Construction
Housing Industry Association managing director Jocelyn Martin welcomed the infrastructure funding. The Housing Industry Association has warned about potential negative impacts on construction jobs. Business and agricultural groups have called for a 25% reduction in "unnecessary regulation" by 2030.
Academic and Think Tank Analysis
Saul Eslake, an independent economist, stated that the 1999 change led to Australia becoming "even more of a nation of speculators." Ken Henry, former Treasury boss, argued that wealthy investors have used property investment as a tax-minimization strategy. Peter Tulip, chief economist at the Centre for Independent Studies, noted that removing the CGT discount would have an "ambiguous" effect on housing affordability.
Political Context
Government Position
Treasurer Chalmers described the budget as the government's most ambitious and consequential, aiming to manage disruption from the war in Iran and address intergenerational equity. He stated the government is considering "a whole bunch of options" for tax reform. Prime Minister Anthony Albanese had previously ruled out changes to negative gearing and CGT.
Chalmers described the goal as giving younger people a "toehold" in the property market, emphasizing housing supply as the main solution. He stated the government is not targeting specific price changes but aims to rebalance home ownership composition away from investors toward owner-occupiers.
Opposition Position
Shadow Treasurer Tim Wilson criticized the government's fiscal management. Opposition leader Angus Taylor rejected changes to the CGT discount, arguing it would lead to fewer homes being built, and committed to income tax reductions. Taylor also proposed establishing a bipartisan taskforce to identify federal budget savings.
International Organizations
The International Monetary Fund (IMF) suggested removing the CGT exemption among other proposals to create a more equitable tax system. The OECD recommended broadening the GST, reducing superannuation concessions, and reducing CGT concessions. Chalmers stated the government would not adopt every recommendation from international organizations.
Public Opinion
A Resolve Political Monitor poll of 1,800 respondents (February 8-14) found:
- 40% supported reducing the 50% CGT concession, with 17% opposed and 42% undecided
- Support for cutting negative gearing concessions was stronger than for CGT changes
- 51% supported increased taxes on mining companies
- 54% supported increased taxes on banks
- 54% opposed an increase in the GST
- Two-thirds of respondents supported government spending reductions
- Half of respondents supported income tax cuts
A separate Resolve poll (April 13-18, 2023) found 42% of respondents supported reducing the 50% CGT concession, with 9% opposed and 39% unsure.
Historical Context
- Capital gains tax was introduced in the mid-1980s under Treasurer Paul Keating
- The original system required tracking inflation from asset purchase to sale
- In 1999, Treasurer Peter Costello replaced it with a flat 50% discount for all asset holders
- The 1999 change was recommended by the Review of Business Taxation (Ralph Review) to encourage shareholding and entrepreneurship
- Median house prices in Sydney and Melbourne have increased by 575% and 450% respectively since 1999
- The proportion of taxpayers reporting rental property income rose from 14.3% (1997-98) to 18.0% (2022-23)
- The investor share of housing loans increased from 26.4% (1998-99) to 40.0% in the first half of 2025-26