Changes to tax breaks for property investors would be a 'welcome change from the masterly inactivity which has characterised Australia's tax system for most of this century thus far,' writes Saul Eslake. In a recent analysis, Eslake, a vice-chancellor's fellow at the University of Tasmania, argues that the proposed reforms to the capital gains tax (CGT) discount could help address housing affordability issues.
The Origins of the CGT Discount
The 50% discount on capital gains was introduced by the Howard government in 1999, following recommendations from the Review of Business Taxation led by John Ralph. The goal was to transform Australia into 'a nation of shareholders and entrepreneurs.' However, the outcome has been different: the proportion of adults owning shares dropped from 41% in 1998 to 38% in 2023, while the share of owner-managers of independent enterprises fell from just under 20% in 1999 to 15.3% in 2024.
Instead, the policy turned Australia into a nation of property speculators. The proportion of taxpayers reporting rental property income rose from 14.3% in 1997-98 to a peak of 20.8% in 2013-14, and remains at 18.0% in 2022-23, still above pre-reform levels.
Impact on Negative Gearing
The 1999 change effectively converted negative gearing from a tax-deferral strategy into a permanent tax reduction tool. By converting wage and salary income into capital gains taxed at half the full marginal rate, investors could reduce their tax burden significantly. Consequently, the proportion of negatively geared property investors rose from 50.3% in 1997-98 to a peak of 70.4% in 2007-08.
Revenue Foregone and Housing Market Consequences
The CGT discount costs the federal government billions in foregone revenue, rising from $860 million in 2000-01 to an estimated $21.8 billion in 2025-26. Moreover, it has distorted the housing market. The share of housing loans taken out by investors increased from 26.4% in 1998-99 to an average of 35.7% over the 25 years since the reform, peaking at 44.5% in 2014-15.
Defenders argue that increased investor activity boosts rental supply, but over 80% of investment property loans are for established housing, not new builds. When investors buy existing homes, they increase demand for rental housing by outbidding prospective homeowners, effectively not adding to net supply.
A Case for Reform
Eslake notes that the argument 'if you tax something more, you'll get less of it' actually supports making the CGT regime less generous, especially for investors in established housing. Reducing such investment would make housing more affordable for homebuyers, increase homeownership rates, and reduce rental demand. 'If we are serious about wanting to make it easier for Australians – and especially younger Australians – to own their own homes, what's not to like about that?' he concludes.
