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CGT, negative gearing changes to raise taxes for half of investors
Analysis based on investment data from previous income years suggests that the government’s CGT and negative gearing changes will only result in higher taxes for around half of all housing investors, according to the E61 Institute.
Analysis undertaken by the E61 Institute has found that taxes rise for around half of all property investments under the government’s changes to CGT and negative gearing, despite commentary suggesting that the changes will be heavily detrimental to housing investors.
Using data from 920,000 individual housing investments held between 2008 and 2025, the institute simulated the impact of the tax reforms to estimate how many investors would pay more tax under the reforms.
For negatively geared properties, the analysis found that while most investors would not pay more tax in dollar terms, they would pay more tax based on present value terms.
"The reforms delay rental income loss deductions until the investment is sold, and the rise in tax mostly reflects that earlier cash flows have higher present values than later ones of the same nominal value," the E61 Institute said.
Investments associated with lower labour incomes were less likely to have a rental income tax rise than others. Even at 90 per cent LVR, only 55 per cent of investments associated with income of $30,000 would pay more tax.
"This is because the reforms lower taxes for some negatively geared investments associated with labour incomes below the top tax bracket," the institute said.
"The reforms make rental income losses deductible against capital gains rather than against labour income, and CGT is often paid at a higher tax rate than labour income tax."
The analysis also indicated that capital gains would actually be lower for most investments because the majority of gains would fall below the return threshold at which the 50 per cent discount beats the inflation deduction regime.
It also showed that government revenue would increase substantially, with almost all the increase coming from the top 20 per cent of investments by performance, which have the largest capital gains.
The E61 Institute noted that the analysis did not model behavioural responses.
The reforms will directly affect after-tax returns, it said, which will indirectly affect the prices and rents that landlords are willing to pay and accept.
"The equilibrium price and rent responses that result are likely to partially compensate investors for the change, but [do not] undo or reverse whether tax rises or falls," it said.
"These equilibrium responses will also affect the housing supply reaction, which will also feed back into the equilibrium responses."
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The E61 Institute also highlighted that the changes to negative gearing will likely reduce the ability of some investors - those that are liquidity constrained – to leverage up into new investments, due to the changes delaying their cash flows.
The institute stated that the tax reforms introduced by the government are the most significant changes to housing taxes this century, with some predicting that the overall effect of the reforms on national prices could result in a decline of between 3 and 10 per cent.
However, the analysis paper noted that these predictions are premised on taxes rising for housing investors.
"Nothing about the reforms – which mostly change when tax is paid, and swap one type of CGT deduction for another – guarantees that investors will pay more," it said.
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