Changes to negative gearing and capital gains tax (CGT), areas that have been considered “no-go zones” for years, are now looking likely as the budget approaches. These shifts suggest a turning tide in political appetite regarding housing affordability and investor tax breaks.
Proposed Limits on Negative Gearing
Reports suggest the government may be looking to limit negative gearing to a maximum of two properties. Such a move could cover 90% of individuals who own an investment property.
This specific approach may serve to neutralize criticisms that the policy attacks “mum and dad investors.” Although the Liberal party has reportedly avoided the issue, Independent MP Dr Sophie Scamps has called for the government to reform housing tax concessions to address intergenerational inequity.
Revising the Capital Gains Tax Discount
The government is also reportedly set to change the CGT 50% discount, which was introduced by Howard and Costello in 1999. Before this discount, negative gearing was less prevalent, as investors were as likely to create a profit as they were to negatively gear.
Two primary options are being considered: cutting the discount or returning to the pre-1999 method of taxing “real” capital gains. The latter method adjusts gains by taking inflation into account.
For example, if a property bought for $575,000 is sold for $1,000,000 after a decade, the current system taxes only half of the $425,000 profit. Under a “real return” system, the tax paid would fluctuate based on inflation rates over those ten years.
Addressing Industry Claims
Industry bodies, including the Property Council and the Master Builders Association, often claim that the CGT discount encourages housing supply. However, evidence from the last 25 years suggests that housing construction has not improved since the discount was implemented.
Historically, former treasurer Joe Hockey argued in 2015 that negative gearing was necessary because rental prices rose when the Hawke government scrapped it in the 1980s. However, data shows that while prices rose in Perth and Sydney due to low vacancy rates, they did not rise in Adelaide, Brisbane, or Melbourne.
rental prices in Sydney and Brisbane grew faster after negative gearing was re-established.
What May Happen Next
As the budget nears, the government could formally announce a reduction of the CGT discount to 25% or a full return to pre-1999 inflation-adjusted taxing. A possible next step may also include the official implementation of the two-property cap on negative gearing.
Because the housing market functioned effectively in the 1990s—when housing was primarily viewed as a place to live rather than a financial asset—the government may find it easier to resist industry scare campaigns.
Frequently Asked Questions
What is the rumored change to negative gearing?
The government is reportedly considering limiting negative gearing to a maximum of two properties, which would apply to 90% of investment property owners.
How would the pre-1999 CGT method work?
Instead of a flat 50% discount, the pre-1999 method taxes “real” capital gains by taking inflation into account when calculating the return.
Does the CGT discount increase housing supply?
While some lobby groups claim it does, 25 years of evidence shows that housing construction has not improved since the CGT discount was introduced in 1999.
Do you believe limiting tax concessions for multiple property owners will improve housing affordability for the next generation?
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