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. The capital gains discount, introduced in 1999, was meant to create a nation of shareholders but instead fueled property speculation.
The Howard-Era Capital Gains Discount
The 50% discount on capital gains was recommended by the Review of Business Taxation in 1998, aiming to turn Australia into 'a nation of shareholders and entrepreneurs.' However, share ownership has declined from 41% in 1998 to 38% in 2023, and the proportion of owner-managers fell from 20% to 15.3%. Instead, the policy turned Australia into a nation of property speculators.
The proportion of taxpayers reporting rental income rose from 14.3% in 1997-98 to a peak of 20.8% in 2013-14, remaining at 18% in 2022-23. The change effectively converted negative gearing from a tax deferral strategy to one that permanently reduces tax, as wage income is converted into capital gains taxed at half the rate.
Impact on Housing Market
The share of housing loans for investors rose from 26.4% in 1998-99 to 42.7% in 2003-04, peaking at 44.5% in 2014-15. Over 25 years, the average investor share was 35.7%, 9.2 percentage points above pre-reform levels. The revenue foregone from the discount grew from $860 million in 2000-01 to $21.8 billion in 2025-26.
Defenders argue that investor activity increases rental supply, but over 80% of investment loans go to existing housing, not new builds. When investors buy existing homes, they increase demand and supply equally, doing nothing to improve affordability. As Saul Eslake notes, 'if you tax something more, you’ll get less of it'—and less investment in established housing would make homes more affordable for first-time buyers.
The proposed changes, expected in the May budget, are a welcome step toward meaningful tax reform. Reducing the CGT discount could curb speculation, lower house prices, and increase homeownership, especially for younger Australians.
