Billions worth of lost revenue is escalating due to 50 per cent discounts on capital gains tax charges for investors – a situation that’s expected to be rectified now.
Australia’s biggest bank CBA says $18 billion in tax perks for property investors – from CGT discounts to negative gearing – are now ‘most likely’ to be slashed.
Analysis of Treasury estimates has the government currently foregoing about $15-18 billion worth of lost tax revenue by allowing individuals and trusts to use these discounts and deductions on their property sales and rentals – with CGT making up the bulk of about $13 billion. It’s believed the figures could run higher given record home price gains since the pandemic.
Commonwealth Bank chief economist Luke Yeaman said “housing will bear the cost of stronger growth”.
Mr Yeaman, who was federal Treasury’s deputy secretary and head of the government’s macroeconomic group throughout the pandemic, flagged the measures as the “most likely step” by policymakers seeking to reform the government’s generous tax breaks.
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Luke Yeaman is chief economist for CBA now and was deputy secretary for federal Treasury during the pandemic.
”With rate hikes back in focus, public spending at historically high levels as a share of GDP and productivity stuck in the slow lane, pressure will grow for more substantive economic reforms and deeper cuts to government spending,” he said.
“We still expect to see some substantive new measures in the May Budget, but final decisions won’t be taken until close to Budget night. In our view, the most likely step is a phasing out of the 50 per cent Capital Gains Tax (CGT) discount for housing and/or a cap on negative gearing.”
For housing investors, the CGT discount slashes the tax on profits from rental property sales by 50 per cent, while negative gearing reduces tax annually on any property losses. Cutting or phasing out these perks would bring billions in income back into the federal budget – but significantly more from the CGT change.
According to a Grattan Institute submission to the Senate Select Committee in December last year – by Brendan Coates, Joey Moloney and Aruna Sathanapally – “the 50 per cent CGT discount for individuals and trusts should be reduced to 25 per cent, with a gradual phase-in over five years (rather than grandfathering)”. That would mean no investor with properties now will be exempt from the change.
“This would better balance competing objectives, and raise about $6.5 billion a year for the federal budget,” their submission said.
Cutting capital gains tax concessions for investors profiting off the housing price boom is the ”most likely option on the table for policymakers.
Mr Yeaman said various business tax reforms have also been floated but “there is little agreement on the solution” with some facing major implementation challenges.
“If business tax reform is pursued, expect a lengthy design and consultation process, not rapid action. Other ways the government could save will be considered, but given the huge structural spending pressures in health, disabilities and defence, overall spending levels are unlikely to shift much,” he said.
CBA has this week revised its housing outlook, now expecting home prices to rise 5 per cent in 2026, easing from 8 per cent growth in 2025, as higher interest rates and potential tax reforms cool demand.
CBA now expects at least one more RBA rate hike in May, meaning borrowers could face two increases so far in 2026.
“As outlined by Belinda Allen, we now expect the RBA to deliver one more 25 bp rate hike in May, to take more heat out of demand and ensure inflation moves back to target,” Mr Yeaman said.
“Every rose has its thorns … in this case the rose is stronger growth, and the thorn is higher inflation and interest rates,” he added.
Rising household disposable income has fuelled demand, intensifying the impact on borrowers.
Consumer demand has strengthened off the back of sharp increases in household disposable income, supporting spending despite higher interest rates,” Mr Yeaman said.
“Consumers continue to build confidence, public spending remains strong and private business investment starts to lift and demand starts to exceed supply, putting upward pressure on inflation,” Mr Yeaman said.
“Most importantly, inflation has again reared its ugly head,” he said, a development that led to the Reserve Bank lifting interest rates in February.
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