Massive $23 Billion Tax Break Faces Potential Overhaul in Upcoming Months

It’s easy to understand why some might think they’ve heard it all before when it comes to the capital gains tax discount, as it often resurfaces as a contentious issue in political debates every few years.

However, this time around, there are some new dynamics influencing the conversation.

One major development is a Senate inquiry spearheaded by the Greens, which has collected numerous submissions and is scheduled to present its findings next month.

This inquiry follows a suggestion from Paul Erickson, the ALP national secretary credited with orchestrating Labor’s recent electoral successes, that the upcoming May 12 budget could feature bold reforms.

That, in turn, followed ALP national secretary Paul Erickson, the mastermind of Labor’s last two election victories, hinting this year’s budget on May 12 will include some significant, ambitious reform.

Senior Labor figures have since had the opportunity to categorically rule out the changes, but declined.

Take a look at what Deputy Prime Minister Richard Marles said in October 2024, when he was asked to rule out changing the discount:

“I just did. And not only have I done that, the prime minister has made that clear.”

Compare that to yesterday morning, when Marles was asked about capital gains once again but wasn’t quite as demonstrative:

“Our position in respect of housing policy is clear. And that hasn’t changed. And nor has our position in respect of the tax arrangements around housing. 

“And we’ve got to have more houses in this country and that is a real challenge.”

Why is the capital gains tax discount so controversial?

Alongside negative gearing, the CGT discount provides property investors with generous tax incentives at the same time as housing has become unaffordable for many, particularly young, Australians.

Introduced in 1999 by the Howard government, the policy allows investors to sell an asset they’ve owned for at least a year and to only be taxed on half of the profit.

While it applies to all types of assets, it has coincided with a significant increase in property prices:

Unsurprisingly, the policy is popular with many Australians who have benefited from it over the past three decades, and a proposal to wind back the provisions has been widely cited as a reason why Labor lost the 2019 federal election.

But, at the same time as the concession is costing the nation’s coffers around $23 billion a year – a number that will only rise – the government desperately needs to find new revenue for the federal budget, which is forecast to be stuck in the red for the foreseeable future.

Parliamentary Budget Office modelling commissioned in early 2024 by independent senators Jacqui Lambie examined five options for winding back both negative gearing and the CGT tax discount for property, all of which included so-called “grandfathering” provisions – that is, exemptions for existing property investors from the changes.

The analysis found reducing the concessions could save the federal budget between $15.6 and $59.9 billion over the next 10 years, while also making housing more affordable.

Leading economists including former Treasury secretary Ken Henry, Saul Eslake and Richard Holden have also thrown their support behind various changes to the CGT tax discount.

Would any changes get through parliament?

One factor in the government’s favour is that, if it does decide to go ahead with winding back the tax discount for investment properties, the overhaul would likely sail through parliament.

Labor easily has the numbers to get any bill through the lower house, and only needs the support of the Greens – who have long supported scrapping tax concessions for property investors – to get laws past the Senate, where the likes of Pocock and Lambie are also likely to lend their support.

“There’s a real opportunity here for sensible reform to the capital gains tax discount on investment properties to incentivise the new housing supply our country so desperately need,” Pocock said earlier this week.

“It won’t solve housing affordability on its own but it will help.”

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