Pending Property Tax Changes
Beyond the usual media scare tactics, lately I've been hearing from a few of my investor clients that they are concerned about possible changes to capital gains tax and negative gearing - but in doing so, many are overlooking what really matters.
There’s a lot of noise out there – CGT (Capital Gains Tax) changes, Negative Gearing limits, talk of property crashes. But history tells us, ‘That won’t happen’.
These types of changes don’t bring prices down. If anything, they tend to push prices and rents higher. (Just like the Governments 5% Deposit scheme has.) And this isn’t just opinion. We watch the impact of Government Policy changes regularly and on top of that, it’s been modelled. Multiple universities, along with the Grattan Institute, have all looked at it.
Certainly in Queensland, we continue to have an under-supply so the basic principles of supply and demand still reign true.
So, let’s start with Negative Gearing.
One proposal is to limit this to two properties. This sounds significant - but when you dig into the data, Australia has roughly 2.2 to 2.7 million property investors, and only about 6% own more than two properties (Sources: ATO and ABS data).
So realistically, this mooted change impacts around five to six percent of investors. And even within that group, many experienced investors don’t hold property in their personal names anyway - they use trusts or company structures, where negative gearing doesn’t apply in the same way.
In reality, this potential change moves the needle very little.
So, What About Capital Gains Tax?
Presently, if you hold an investment property for more than 12 months, you get a 50% discount on the increased value of the Property, consequently you only pay CGT on 50% of your actual profit. There’s been talk of reducing that - first to 25%, more recently closer to 33%.
If changes are coming, they should be structured properly.
In my personal opinion, a more balanced approach could look something like this:
Less than 1 year: 0% discount
1–2 years: 10%
2–3 years: 20%
3–4 years: 30%
4–5 years: 40%
5+ years: 50%
This would likely discourage short-term speculation without punishing long-term investors who are actually building wealth and ultimately taking pressure off the pension system down the track.
What many people are unaware of is that Australia used to have a completely different system - the Indexation Method. Instead of a flat discount, your capital gain was adjusted for inflation. In essence, you only paid tax on the actual gain, not the inflated one.
For example, if you bought a property at $500K and sold it for $700K - it represents a $200K gain. But if inflation over that time was 30%, your cost base might rise to around $620K. That means your taxable gain is closer to $80K, not $200K.
That’s a very different outcome.
If indexation were reintroduced, it would actually favour long-term investors in a high-inflation environment by reducing the tax burden on genuine gains. The trade-off? Less tax revenue for the government - which is why it was replaced with the simpler 50% discount. And we could confidently predict that we won't see the old system reintroduced.
But here’s what most people are missing… and what the Government won’t ever acknowledge.
Even if taxes increase, the fundamentals don’t change.
Fewer investors = Less housing supply
Demand doesn’t disappear – and rents rise
As rents rise, investors come back
That’s basic economics - the “invisible hand” at work. And who loses? Renters and First Home Buyers.
And remember:
We’re already facing a housing shortage projected out to at least 2032
Even if 20–30% of investors exited the market, the shortage would still exist if not, get worse.
Now if we project out further…
Australia is carrying over $1 trillion in government debt - the highest it’s ever been.
Growth has been driven by two main factors: high immigration and massive public (Government) spending. So, like it or not, taxes are likely heading higher. But while the Media are focused on tax settings, the real driver of wealth hasn’t changed:
Leverage and Asset Growth.
Take a simple example.
A property grows from $450K to $600K. You can potentially access up to 80% of that new value and reinvest it - often tax-free because it’s debt, not income.
Now ask yourself - would most people borrow 80% to invest in shares, then refinance and repeat? Probably not. But they will with property - because in Australia, property has consistently behaved like a blue-chip asset class.
Yes, there are peaks & troughs. The GFC saw around an 8% drop. 2017 had a similar pullback. But outside of those periods, the long-term trend has been clear.
So, whether CGT shifts from 50% to 33%, or negative gearing is tweaked - it doesn’t change the game.
As the quote says, “Don’t wait to buy real estate – Buy real estate and wait - In time:
Prices rise
Rents rise
Assets outperform income
And as we’ve already seen, even well-intentioned policies like the 5% deposit scheme end up pushing prices higher.
So maybe the better question isn’t what the next policy change will be…
Maybe it’s:
Are you on the asset side of the economy - or not?
If you're looking at Buying, Selling or just want to have a chat about anything real estate, please feel free to give me a call on 0405 102210
Sources: Various Contributors much smarter than Me.
*Nb. For sound advice around investment, I recommend you engage a professional Financial Planner and or your Accountant.
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