Negative gearing and CGT discounts reshape who can afford property

A new Parliamentary Budget Office analysis has put numbers to what economists have argued for years: Australia's property investor tax breaks, negative gearing deductions and the 50 per cent capital gains tax discount, cost the federal budget billions annually, and the overwhelming share of those benefits flows to high-income Australians at the direct expense of the people trying to compete with them for housing.

The tax system doesn't just leave high-income investors alone — it subsidises them at a higher rate than everyone else

The mechanics are not complicated, but they are worth spelling out clearly because they tend to get lost in the political noise. Negative gearing allows an investor to deduct losses on a rental property against other income, including wage income. The more income you earn, the more that deduction is worth: a loss that reduces taxable income for someone on the 47 per cent marginal rate is worth nearly twice as much as the same loss for someone on 32.5 per cent. The CGT discount compounds this. An investor who holds a property for more than twelve months and sells at a profit pays tax on only half of that gain. Again, the value of the discount scales with your marginal rate. The tax system, in other words, does not simply leave high-income property investors alone. It actively subsidises them at a higher per-dollar rate than it subsidises anyone else.

The PBO was asked by Greens Senator Larissa Waters to quantify the annual revenue forgone from both concessions for residential investment properties, covering individuals, trusts and partnerships, across the past ten years and projected out to 2035-36. The distributional analysis, broken down by income decile, shows what the aggregate numbers obscure: these are not broadly shared concessions. They are concentrated in the upper deciles, where investors are more likely to own multiple properties, more likely to realise large capital gains, and more likely to be on the marginal rates that maximise the value of every dollar of deduction or discount.

A subsidised investor and a first home buyer are not bidding on equal terms

This matters for housing affordability in a direct and measurable way. A subsidised investor and a first home buyer bidding on the same property are not operating on equal terms. The investor can accept a pre-tax loss because the tax system converts part of that loss into a deduction against other income. The owner-occupier cannot. The effective subsidy raises the price at which investing remains rational, which raises the floor on what properties trade for. That is not a theoretical concern. It is the standard mechanism by which demand-side subsidies in constrained markets get capitalised into prices. First home buyer grants do it too: designed to help buyers in, they end up being paid back through higher purchase prices, with the windfall captured by sellers rather than buyers.

A concession that forgoes ten billion dollars in revenue but distributes it evenly across the income spectrum is a different policy problem than one that forgoes ten billion dollars and concentrates the benefit in the top two deciles.

The distributional picture from the PBO analysis makes a different kind of argument than the revenue cost alone. A concession that forgoes ten billion dollars in revenue but distributes it evenly across the income spectrum is a different policy problem than one that forgoes ten billion dollars and concentrates the benefit in the top two deciles. The latter is a transfer from the general tax base, which everyone funds, to a subset of the population already holding the most assets. It is also, by extension, a transfer away from the public goods that revenue could otherwise fund, including the social and affordable housing supply that might actually address the problem these investors are profiting from.

Demand-side reform without supply-side action shifts the pain rather than resolves it

None of this settles the policy question automatically. The case for the CGT discount has always rested partly on the argument that taxing nominal rather than real gains discourages investment in long-term assets. There is something to that, though the discount as currently designed is not well-targeted at that problem. And any serious reform to negative gearing or the CGT discount would need to think carefully about transition effects, particularly for landlords already holding property under the current settings, and about the risk that a demand-side fix to an investment-incentive distortion runs headlong into a supply-side constraint that makes housing scarce regardless of who owns it.

The evidence on supply is not encouraging. Australia has chronically underbuilt housing relative to population growth for years, and the planning and construction bottlenecks that produce that outcome would not be touched by a change to negative gearing rules. A reform that reduces investor demand without unlocking supply could, in theory, lower prices somewhat while also reducing rental supply, shifting the pain rather than resolving it.

That tension does not vindicate the current settings. It just means the PBO's analysis is the beginning of the argument, not the end of it. What the numbers show is that the tax system as designed has a thumb on the scale, and it is pressing firmly in the direction of those who already own the most. That is a policy choice. Whether to make a different one is the actual question on the table.

Frequently Asked Questions

What is negative gearing and why does it favour high-income earners?
Negative gearing allows property investors to deduct rental losses against other income, including wages. Because the deduction's value scales with your marginal tax rate, a high-income earner on 47 per cent gets nearly twice the benefit from the same dollar of loss as someone on 32.5 per cent — making it structurally more valuable to those who already earn the most.

How much does Australia's capital gains tax discount cost the federal budget?
The Parliamentary Budget Office was asked to quantify the annual revenue forgone from both negative gearing and the 50 per cent CGT discount on residential investment properties, covering the past ten years and projected to 2035-36. The specific figures are contained in the PBO report; the analysis confirms the cost runs to billions annually.

Would scrapping negative gearing make housing more affordable?
Removing negative gearing would reduce the effective subsidy that allows investors to outbid owner-occupiers, which could lower the price floor on investment properties. However, if supply constraints remain unchanged, reduced investor demand could also shrink rental supply, shifting the affordability problem rather than solving it.

Why do first home buyer grants not actually help first home buyers?
In constrained housing markets, demand-side subsidies tend to be capitalised into purchase prices — meaning sellers capture the grant through higher sale prices rather than buyers keeping it as a genuine saving. The same mechanism applies to investor tax concessions, which raise the price at which investing remains rational and therefore lift the floor that all buyers face.

Who benefits most from Australia's property investor tax concessions?
The PBO's distributional analysis, broken down by income decile, shows that benefits are concentrated in the upper deciles. High-income investors are more likely to own multiple properties, realise larger capital gains, and sit on the marginal rates that maximise the per-dollar value of both negative gearing deductions and the CGT discount.