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Australian Government Considers Capital Gains Tax Discount Reforms Amid Housing Affordability Debate

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Australia's Capital Gains Tax Discount: A Deep Dive into Reform Debate

A federal parliamentary inquiry and ongoing government discussions are examining potential reforms to Australia's 50% capital gains tax (CGT) discount, a policy introduced in 1999. The debate centers on its impact on housing affordability, wealth inequality, and the federal budget, with various stakeholders presenting arguments for and against changes. While the government has ruled out alterations to negative gearing, reforms to the CGT discount remain under consideration, with a focus on increasing housing supply as the primary strategy to address the housing crisis.

Background of the Capital Gains Tax Discount

Australia's capital gains tax, introduced in 1985, applies to profits from the sale of assets held for investment, excluding the family home. Initially, the tax was applied to the gain in value above inflation. In 1999, the Howard government altered this to a flat 50% discount on capital gains for assets held for at least 12 months. This discount, alongside negative gearing rules, has been identified by some as promoting housing as an investment asset.

Calls for Reform and Associated Arguments

Several organizations and government bodies have advocated for changes to the CGT discount:

  • Australian Manufacturing Workers' Union (AMWU): Proposed phasing out the capital gains discount on investment properties and effectively eliminating negative gearing. They also suggested replacing the federal government's 5% home deposit scheme with a system allowing renters to allocate a portion of their rent towards property purchase, reallocating recovered revenue to support Australia's modular housing industry.
  • New South Wales (NSW) Government: Through its Treasury, called for a reduction or restructuring of the CGT discount, citing its role in increasing investor demand for property, leading to higher housing prices, worsening affordability, and making it more challenging for first-home buyers. NSW Treasury noted that the discount primarily benefits higher-income earners.
  • Australian Nursing and Midwifery Federation (ANMF): Recommended discontinuing the discount, citing concerns about its impact on inequality, housing affordability, and long-term social and economic stability.
  • Australian Council of Trade Unions (ACTU): Suggested restricting negative gearing and capital gains tax breaks to a single investment property. More recently, the ACTU supported reducing the CGT discount from 50% to 25%.
  • The Greens: Campaign on a policy of limiting negative gearing and the 50% capital gains tax discount to one investment property. Greens Senator Nick McKim has labeled it an "unfair" tax break that subsidizes speculation and costs billions annually.
  • Grattan Institute: Submitted to the Senate inquiry that the 50% discount was excessive. Research suggests that ending the discount without grandfathering could generate approximately $6.5 billion annually.
  • Housing Affordability Advocates: Argue that the CGT discount and negative gearing inflate demand and limit market access for lower-income Australians.

Advocacy groups broadly contend that the capital gains tax discount exacerbates housing affordability issues and wealth inequality by incentivizing property investment over other asset classes.

Data from the Australian Bureau of Statistics indicates that Australian home ownership rates decreased from 71% in 1999-2000 to 66% in 2019-2020. Lending patterns also show a significant shift: in 1994, $13 billion was lent to investors and $10 billion to first-home buyers. By the year ending September 2025 (or "last year"), lending to investors rose to $139 billion, more than double the $64 billion lent to first-home buyers.

Concerns Regarding Reforms

Opponents and cautious voices raise several concerns about changing the CGT discount:

  • Impact on Rental Market: Organizations like the Property Council of Australia and PIPA argue that reducing tax incentives for investors could decrease rental supply, potentially leading to increased rental costs and worsening the rental crisis. They contend that many investors are middle-income families, with 75% owning only one property.
  • Limited Effect on House Prices: Experts estimate that house prices would decrease by approximately 1% if the capital gains tax discount were reduced or eliminated. While acknowledging its contribution to investor demand, skepticism remains about its ability to substantially lower prices.
  • Investor Sentiment: A 2025 PIPA Investor Sentiment Survey found that 35% of investors would cease property investment if the CGT discount were reduced to 25%. Approximately one in five investors who sold properties in the past year cited the perceived risk of Federal Government tax reforms as a reason.
  • Broader Economic Implications: Some suggest that Australia already maintains relatively high capital gains tax rates. The e61 Institute noted that while the current regime is unequal, halving the discount might not necessarily improve neutrality across different asset taxation. The Property Council also advocated for a national review of all property-related taxes and regulatory settings, arguing that policies that reduce new housing construction could exacerbate rental shortages.

Critics of reform caution that changes could disrupt the rental market, have a minimal impact on house prices, and deter crucial investment, potentially worsening existing housing challenges.

Government Position and Historical Context

Federal Treasurer Jim Chalmers has consistently ruled out changes to negative gearing. However, he has not ruled out changes to the capital gains discount, with discussions ongoing within the government regarding housing-related reforms. The government's stated primary focus for addressing the housing crisis is boosting housing supply.

Previous Labor opposition under Bill Shorten proposed cuts to capital gains tax concessions and restrictions on negative gearing in 2016 and 2019. Treasury analysis of concession changes was conducted in 2024, but the government did not implement them prior to the most recent federal election. Prime Minister Anthony Albanese's recent property sales have also been noted in public discussion, though there is no evidence to suggest the timing of these sales was influenced by any planned changes in capital gains tax policy. Mr. Albanese has not committed to any reforms.

Financial and Distributional Impact

Treasury figures from December indicate that the capital gains discount is projected to result in approximately $21.8 billion in forgone revenue for the federal budget in 2025-26. Other estimates include $19.7 billion for 2024–25 and a total of $23 billion in forgone revenue. The Parliamentary Budget Office (PBO) projects the discount will cost the federal budget $247 billion over the next decade, more than double the $205 billion cost since its introduction in 1999.

The capital gains tax discount disproportionately benefits high-income earners and older individuals, with Treasury data showing that 89% of the benefit went to the top 20% of income earners. The PBO projects the top 1% of taxpayers will receive nearly 60% of the benefit this financial year.

Upcoming Developments

The Greens-led Senate inquiry into the 50% capital gains tax discount is scheduled to conduct public hearings and deliver its final report by March 17. The Treasurer is also expected to present the government's budget in May, which may include further details on housing policy reforms.