With billions at stake and housing affordability under strain, the long-protected capital gains tax discount is back in the political spotlight. Supporters warn of investor flight and rental chaos; critics argue reform is overdue. Who’s right?

Politics is akin to the bear pits that were once the stock exchange trading floor, where the ones with the loudest voices waving their arms around the most got the deal done.

The debate around capital gains tax (CGT) reform has played out in a similarly animate fashion, with vested interests and political opportunists shouting loudest and getting their way when push comes to policy.

Since John Howard’s Liberal Government introduced the 50 per cent CGT discount in 1999, applying to any asset held for at least 12 months, Australians have been reluctant to give up this investment perk.

But 27 years later, it’s a very different world and economy.

In 1999, the ratio of house prices to household income in Australia was significantly lower than today, with national average home prices roughly 3 to 4 times the average household income.

Fast forward to today and the median house value has reached 8.9 times the average income. This even a major increase from just five years ago when that figure was 6.6.

Costly tax benefit
In the midst of a chronic housing crisis and with property investors still being rewarded at the expense of the public purse for accumulating properties and selling at a profit, the capital gains tax discount is under serious scrutiny.

Media reports around Cabinet leaks suggest changes to capital gains tax discounts could form the centrepiece of the next federal budget in May.

On the surface, it seems an easy political sell.

The discount will cost the federal budget $21.9 billion in this financial year, and official figures suggest 90 per cent of this flows to the wealthiest 20 per cent of taxpayers.

Given the housing crisis, politicians need to be seen to be doing something.
- Professor Steven Rowley, Curtin University

Logic suggests the other 80 per cent would welcome moves to cut or eradicate the CGT discount. A 50 per cent cut is the most widely anticipated Labor sales pitch.

On top of that, the discount will cost nearly $250 billion over the next decade, more than twice as much as the concession has cost in its entire 25-year history.

But while the numbers might look like they sell themselves, Labor is also wary of becoming a target of accusations that they “are the party of raising taxes”. Bill Shorten’s loss of the “unlosable election” in 2019 on the back of plans to wind back the negative gearing tax perk is still a raw scar on the party’s psyche.

Aside from the impact on the public purse, the question is, would winding back CGT discounts help renters buy a home, improve housing supply or impact property prices?

The answer depends on who you talk to.

CGT discount: cause or cure
The Property Council, which represents construction interests and opposes changes to capital gains tax, warns that cutting the CGT discount in half would sharply curtail residential building activity. It argues that a smaller adjustment, reducing the discount to 40 per cent, would limit disruption to the sector.

The Grattan Institute, which supports CGT reform, also accepts that a halving would lead to fewer new dwellings, but puts the impact at roughly 10,000 homes over a five-year period.

A more alarmist Property Investment Professionals of Australia argues investors would initiate a market exodus, leaving “a rental market on the brink”.

PIPA Chair Cate Bakos said any policy that accelerates investor withdrawal would have immediate and severe consequences for renters.

“Alarmingly, 19 per cent of investors who had sold one or more properties over the previous year said they did so because of the perceived risk of Federal Government tax reforms, while 51 per cent of current investors cited the same concern as a key reason why they may sell in the next 12 to 24 months.

“These numbers are not hypothetical because investors are already leaving,” Ms Bakos said.

“Our 2025 survey found that 16.7 per cent of investors had sold at least one property in the year to August – up from 14.1 per cent the year before and 12.1 per cent in 2023.

“Of those who sold, 19 per cent already did so because they fear tax changes, and another 35 per cent are telling us they will walk if CGT reforms proceed, which is an extraordinary red flag for policymakers.”

Curtin University’s Professor Steven Rowley is also Director of the Australian Housing Urban Research Institute’s (AHURI) Curtin research centre.

He dismissed the idea that any political party would erase the CGT discount for investors already in the market but said it could be introduced as a reform applicable only to new investors.

Such a move would not be a property market gamechanger, he said.

“If it applied only to new investors, the impact would be only minimal in terms of reducing property market demand.

“With the array of government incentives, such as the 5 per cent deposit scheme, there are ample incentives for buyers to fuel competition,” he told API Magazine.

He said the chances of current investors being subject to any loss of their discount would be politically fraught and highly unlikely but added that some reduction seemed probable.

“Given the housing crisis, politicians need to be seen to be doing something.”

CGT just part of the puzzle
Proponents of the CGT discount reduction, or eradication, argue that fewer investors would translate to lower property prices that would help renters buy their own homes.

Ms Bakos told API Magazine that the potential negative impact on the rental market and property prices “could be catastrophic”.

“With so much rental supply stripped from the market. rents will likely rise sharply, making it more difficult for first home buyers to save a deposit. 

“Likewise, with reduced demand from investors, property prices could fall significantly, which might be viewed positively by first-time buyers in the short-term, but not so much in a year or two when their homes are worth less than what they paid for them.” 

Professor Rowley was less convinced that would be the outcome.

“A reduction centred on new investors would only have a small impact on affordability.”

Reform was commendable, according to Dr Mustapha Bangura, Senior Lecturer in Property, Finance and Economics at University of Technology Sydney.

Citing the huge cost to the government’s revenue coffers, he said tax reform was one part of the solution to Australia’s housing shortfalls, but not the whole answer.

“Negative gearing and the CGT discount cost the budget around $20 billion per year, more than twice the $8.4 billion state and territory governments spent on public and community housing in 2022-23.”

“This is how much the federal government tends to lose in tax revenue each year due to negative gearing and capital gains tax.

“In my view, the federal government should consider applying some reforms to negative gearing and the capital gains tax.

“In doing so, the government should consider using the gains to invest in the housing sector to promote homeownership.

“They can also expand the rental market by supporting state governments in providing more affordable dwellings,” Dr Bangura told API Magazine.

Dr Sherman Chan, Chief Economist at the Australian Property Institute, agreed that a potential review of property-related taxes was just part of a bigger picture.

“The current challenges being experienced by the Australian housing sector are a complex mix of supply and demand-side issues.

“Discussions about changes to the capital gains tax are still at a speculative stage and until any policy reform has been articulated, it is not possible to give meaningful commentary on potential investor or consumer reactions and the subsequent impact on valuations.

“That said, the institute’s most recent Australian Property Market Outlook, which surveyed Australia’s property valuation professionals, has identified construction costs, interest rates, population growth and a lack of supply as the major drivers of residential property prices.”

“We also surveyed property professionals on which tax and contribution policies should be reviewed by government to improve our economic conditions, and CGT ranked third (selected by 44 per cent of respondents), behind stamp duty on property transactions (68 per cent) and land tax (63 per cent),” Dr Chan told API Magazine.

As new figures from the Parliamentary Budget Office show the top 1 per cent of taxpayers will receive nearly 60 per cent of the benefit this financial year, scaling back the 50 per cent discount is now uncomfortably nestled in the lap of politics.