Treasurer Jim Chalmers is set to scrap negative gearing and replace the 50 per cent capital gains tax discount with indexation in the upcoming federal budget, according to a preview by Commonwealth Bank economists.
Key Changes Expected
The Commonwealth Bank economics team indicated the change in its federal budget preview on Wednesday. 'Major changes to CGT and negative gearing appear locked in,' CBA chief economist Luke Yeaman said, as reported by the Daily Telegraph. 'This will boost revenue but won't shift the dial on productivity or housing affordability. Boosting supply is still the key.'
The changes are expected to raise up to $30 billion in additional revenue over ten years.
Understanding the Tax Mechanisms
Capital gains tax (CGT) is applied to the profit made from selling properties and currently allows a 50 per cent discount. Indexation would replace this discount, adjusting the original purchase price for inflation before taxing the profit.
Negative gearing permits investment property owners to deduct costs like loan interest and rates from their taxes, encouraging investment in rental properties.
Impact on Taxpayers
Approximately 800,000 Australian taxpayers claim negative gearing on one property, while about 275,000 claim it on two or more properties. Prime Minister Anthony Albanese previously stated the government had 'no plans' to reduce property investment incentives.
The two changes together are expected to generate about $5 billion per year in revenue. 'We expect a package that includes replacement of the CGT discount with indexation for all assets with grandfathering and the abolition of negative gearing for all new investments to generate revenue of circa $2 billion over the first four years and $25-30 billion over 10 years,' Mr Yeaman said.
Housing Affordability Concerns
While the changes are likely to be framed as improvements for 'intergenerational fairness,' Mr Yeaman argued they would not significantly improve housing affordability. Instead, he and co-author Harry Ottley called for 'concrete steps' on Australia's corporate tax system. 'That would make it a really successful budget but that's the piece we have the least conviction on,' Mr Ottley said.
