Significant alterations to the taxation framework are on the horizon as the upcoming federal budget is set to introduce modifications to capital gains tax, negative gearing, and trust fund regulations.
These issues were central to Labor’s campaign during the 2019 elections, where the party criticized existing tax benefits as inequitable, favoring wealthier individuals. This time around, the Albanese administration plans to present these changes as initiatives aimed at facilitating access to the housing market for younger Australians.
As with any tax reform discussions, the proposals are anticipated to spark debate, with intricate details still emerging. Below is a summary of key elements concerning negative gearing and capital gains tax.
Negative gearing and capital gains tax are applicable to various financial assets, particularly investment properties. These tax structures have made property investment a favored method of wealth accumulation in Australia.
A negatively geared property incurs losses, typically because expenses such as mortgage payments exceed rental income. These losses can be deducted from taxable income, allowing investors to reduce their overall tax burden.
While negative gearing has existed for nearly a century, its popularity surged after 1999, when the Howard government introduced a more attractive capital gains tax discount.
Capital gains tax is incurred when an asset is sold for a profit, with the taxable amount being the increase in value since its purchase. Initially, in 1985, gains were taxed as part of an individual’s regular income tax, but adjustments were made to account for inflation. This structure was replaced in 1999 with a 50% discount on gains, where half the profit is taxed as income while the other half is untaxed. This change was justified as a means to incentivize investment, despite often resulting in what is seen as excessive compensation for inflation.
From an investment perspective, the tax benefits associated with property and shares make them more appealing than traditional options like interest-bearing bank accounts, which do not offer inflation adjustments.
In the past year, 1.2 million investment properties were negatively geared, representing about half of all investment properties, while 1.1 million individuals realized capital gains. Generally, the primary beneficiaries of these tax policies are those with higher incomes and asset wealth. In the 2022–23 period, the top 10% of income earners received 83% of the benefits from the capital gains tax discount and 37% from negative gearing.
Officials from the Treasury have previously noted that income may not accurately reflect the distribution of capital gains tax benefits, as individuals often experience income spikes during the year they realize gains. According to estimates from the Grattan Institute, the wealthiest 20% of Australians capture over 90% of the benefits, largely due to a small number of individuals holding extensive property portfolios.
However, many individuals who negatively gear do not fall within the highest income brackets; approximately two-thirds of those who negatively gear own a single investment property. Younger demographics also participate, with around 150,000 individuals in their 30s engaging in negative gearing, which may include ‘mum and dad’ investors or ‘rent-vestors’ who rent a home while renting out their own.
The federal budget lost $3.9 billion in revenue from negative gearing and $23.5 billion from the capital gains tax discount in the 2022–23 fiscal year.
Concerning anticipated changes to negative gearing and capital gains tax, Labor’s 2019 proposal aimed to phase out negative gearing for future investments, excluding newly constructed homes, while allowing existing investments to be exempted under a ‘grandfathering’ provision. The capital gains tax discount was set to be reduced to 25% for all assets, also with grandfathering in place.
This time, speculation suggests that Labor may revert to the pre-1999 approach, aligning the discount with inflation rates, or consider a fixed discount rate of 25%, 30%, or 35%. For negative gearing, the government might eliminate it entirely or limit the number of properties eligible for negative gearing, likely incorporating grandfathering provisions. In terms of capital gains tax, partial grandfathering might be on the table, potentially taxing past gains at 50% and future gains according to inflation.
Another point of uncertainty is whether new homes will be exempt, allowing Labor to promote its policy as one that actively supports housing supply by directing investors toward new developments.
Economists have produced various models to assess the potential impacts of changes to negative gearing and capital gains tax, with results differing widely.
