Report: Taxing Times

The 50% capital gains tax discount will be replaced with an indexed cost base. A 30% minimum rate will apply for most taxpayers. Negative gearing – or tax loss deductions – will be restricted to new residential properties in the future. Importantly, negative gearing is preserved for existing landlords.

The new reforms make a bigger distinction between newly-built and older, second-hand housing stock. Negative gearing benefits still apply in full for new housing stock. There is clear policy intent here to incentivise new residential construction, in a bid to address the persistent undersupply in the housing market today.

These tax reforms are coming at a time of rising mortgage rates, which are driving modest pricing downturns in Sydney and Melbourne. The downward impact on prices will be more apparent for established housing and less so for new home construction, as investors reallocate to more tax efficient strategies.

These proposals are deeply unpopular with some investors, especially following promises of no policy change made last election. Moreover, these reforms will have disproportionate impacts on wealthier investors, particularly the top 1% of taxpayers, who have been outsized beneficiaries of these tax breaks in the past.

With these proposed tax reforms, there are big implications for investor strategy. Over time, we would expect a clear reallocation of investor capital from established to new housing, from individual holdings to managed funds and a shift in strategic focus from capital gains to income returns.