Effect of capital gains tax changes is emerging as a key issue as the Albanese government explores new policy options to tackle Australia’s housing crisis and has not ruled out increasing taxes on property investors by revisiting capital gains tax (CGT) rules. While no formal decision has been made, renewed discussion around CGT reform signals a growing focus on housing affordability.
Labor has travelled this path before. Ahead of the 2019 federal election, the party proposed halving the CGT discount for property investors and other asset holders. After losing the election, the policy was abandoned. At the time, the proposal was framed primarily as a fairness measure rather than a housing solution, with Labor arguing that the tax concession disproportionately benefited wealthier Australians.
Today, the political context is different. Housing affordability has become a central concern, though Labor continues to insist that boosting housing supply remains the only sustainable solution to the crisis. Any revival of CGT reform would therefore need to be positioned carefully to align with that message.
Effect of capital gains tax changes– How Capital Gains Tax Works in Practice
Despite its name, capital gains tax is not a standalone tax. It forms part of the income tax system. When an asset such as a house, share, or artwork is sold, any increase in its value is treated as taxable income.
Australia’s CGT system recognises that asset values often rise partly due to inflation. Prior to 1999, gains were adjusted to remove inflationary effects. Since then, however, a flat 50 per cent discount has applied to assets held for more than a year. The change was introduced for simplicity and to encourage investment.
In the case of property, this discount has produced unintended consequences. Inflation has averaged around 2.9 per cent annually since 1999, while house prices have risen by roughly 6.4 per cent per year. As a result, investors have been more than compensated for inflation.
The discount also encourages long-term holding strategies. Investors who sell properties after retirement may pay less tax due to being in a lower income bracket. When combined with negative gearing — which allows rental losses to be offset against taxable income — property investment becomes particularly tax-advantaged.
Who Benefits Most From the CGT Discount?
The current system has made property investment more attractive than other investments with similar returns. Critics argue this has contributed to higher house prices, lower home ownership rates, and a growing reliance on renting compared with other wealthy nations.
The benefits of the CGT discount are also unevenly distributed. The concession is expected to cost the federal budget nearly $22 billion this financial year, with around 90 per cent of the benefit flowing to the wealthiest 20 per cent of taxpayers.
Would CGT Reform Lower House Prices?
In 2019, Labor proposed reducing the CGT discount to 25 per cent for future investments, while grandfathering existing assets. This approach aimed to minimise backlash and avoid changing the rules for past investors. However, exempting existing properties significantly weakened the policy’s impact on house prices.
Treasury analysis at the time suggested the effect on prices would be modest — a point Labor used to defend the proposal. Independent modelling supports this view. The Grattan Institute estimates that even halving the discount and applying changes to existing properties would reduce house prices by only about 1 per cent over time.
More aggressive modelling, including Deloitte analysis from 2019, suggests that combining CGT reform with negative gearing changes could lower prices by up to 4 per cent. Still, Labor ministers have consistently stressed they do not want house prices to fall sharply, citing risks to financial stability and household wealth.
Impact on Housing Supply
While CGT reform may slightly affect prices, its influence on housing supply is even more limited. Industry groups such as the Property Council argue that reducing the CGT discount would discourage construction and slow new housing development.
The Grattan Institute agrees that there would be some impact but estimates it would amount to around 10,000 fewer homes built over five years — a relatively small figure compared with the government’s target of 1.2 million new homes.
Given that the housing target is already behind schedule, Labor MPs have indicated that policies perceived as undermining supply are unlikely to gain traction.
Designing a Housing-Focused Tax Reform
One possible compromise would be to exempt newly built homes from CGT changes, making new investments more attractive than purchases of existing properties. This could allow the government to frame the reform as pro-supply.
However, economists warn that such exemptions reduce efficiency. Experts from institutions such as the Grattan Institute, the e61 Institute, and the Australian National University argue that varying tax rates across asset classes distorts investment decisions.
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Past reviews, including the Henry Tax Review, have advocated for a simpler system with a consistent, low tax rate across all forms of investment. These competing views are now under consideration by a Senate committee reviewing capital gains tax settings.
Conclusion
Any changes to capital gains tax are unlikely to dramatically improve housing affordability on their own. The design of the policy will determine whether it meaningfully affects prices, supply, or investment behaviour. While CGT reform could address fairness concerns and generate revenue, its role in solving Australia’s housing crisis would remain limited unless paired with broader supply-focused measures.
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