Capital gains tax and negative gearing changes headline housing reforms in Federal Budget

The worst kept secret in Australian politics is finally out, with the Albanese Government fessing up to a major overhaul of negative gearing and capital gains tax rules for investors.

After categorically ruling out changes to capital gains tax and negative gearing rules during last year’s Federal election campaign, Prime Minister Anthony Albanese has done a U-turn – his Treasurer Jim Chalmers outlining changes in Tuesday’s Federal Budget.

The Albanese Government has sold the new investment rules as “changing Australia’s tax system to level the playing field” for young people locked out of the housing market – arguing they are often competing with cashed up investors buying multiple investment properties to take advantage of generous tax concessions.

WA property experts warn negative gearing and capital gains tax rules aren’t just for the rich, but for every day mums and dads trying to build wealth for themselves and for future generations – fearing changes will see investors leave the established property market, forcing up rents and shrinking supplies.

Under the changes, anyone who had an investment property before Budget night will still be able to negatively gear their properties.

But as of July 1 next year, the Government will limit negative gearing to just new builds.

Investors who buy an investment property after Budget night will be caught up in the new rules.

“Investors who buy established housing after Budget night will still be able to deduct losses against residential property income,” according to budget papers.

“They will be able to carry forward unused losses to future years but won’t be able to deduct them against other income like wages.”

The Government will replace the 50 per cent capital gains tax discount with a discount based on inflation-adjusted indexation.

The CGT reforms will only apply to gains arising after July 1, 2027.

Investors in new builds will be able to choose the 50 per cent CGT discount or the new arrangements.

“We’ll also introduce a minimum 30 per cent tax rate on capital gains from July next year, and on discretionary trusts from July the year after,” Dr Chalmers said.

Figures released by the Federal Government on Tuesday showed declines in home ownership have been most significant for younger Australians.

Home ownership for people aged 25-34 fell by seven percentage points in the two decades from 2001 to 2021 and 17 percentage points since 1981.

In 2021, only half of people aged 30-34 and about one-third of those aged 25-29 owned their own home.

The Government believes the new tax measures announced in the Budget will help 75,000 more Australians into their first home – by encouraging new builds.

“Our tax changes will help about 75,000 Australians achieve the dream of home ownership,” Dr Chalmers said.

Respected WA property analyst Gavin Hegney warns the new property tax rules will mean rental properties near the City will shrink as investors pull the pin on buying established properties.

He did not believe investors would want to put their money into new builds – many of which would be in outer suburbs.

“By removing negative gearing on established properties, it does not address the intergenerational wealth divide but rather cements it,” Mr Hegney said.

“If we fast forward a decade or two it will become very difficult to rent near city houses unless they were brought as new apartments by investors under the changed tax law.

“This will limit tenant choice.

“You’ll be unable to rent a larger, near-city home.”

He said investment in housing would no longer be attractive as a way of building wealth.

“I suppose I’m left to ask for a young person looking to create wealth: Where are they now going to invest if not housing,” he said.

“Are they suddenly going to take an interest in the share market?

“Are they confident to borrow large sums of money to put into the share market?

“Will banks lend to them to do this?”

Currently, there are just 2246 dwellings advertised for rent in Greater Perth.

The median dwelling rent at the end of April was $720 a week.

REIWA boss Suzanne Brown also said this week she was worried that changes to the Capital Gains Tax discount and negative gearing would hit rental supply as investors left the market.

“While supply has increased over the past two years, it remains below the peak set in February 2021,” Ms Brown said.

“Our population has grown significantly since then, and we need to exceed that peak if we want to see the market improve.

“The changes will have an effect on rental supply.”

Treasurer Jim Chalmers said this Budget provided first home buyers with a fairer playing field.

He appeared to explain the U-turn on negative gearing and capital gains tax rules by saying this Budget was about “responding to the pressures of the here and now while embracing our intergenerational responsibilities”.

“We’re delivering a fairer tax system for workers, first home buyers and future generations,” Dr Chalmers said.

“This will help rebalance a system where house prices have decoupled from incomes.

“Since 1999, house prices have risen over 400 per cent, more than twice as fast as average incomes.”

The Government has outlined ambitious plans to build more homes throughout Australia – with a heavy emphasis on creating more homes for first home buyers.

“The reforms in this Budget will lift our total investment in housing to a record $47 billion,” Dr Chalmers said.

A $2 billion fund is being provided to for a Local Infrastructure Fund which aims to help local councils and State utilities unlock undeveloped land by paying for essential services such as water, power, sewerage and roads.

The Albanese Government has also provided $1 billion towards a joint Commonwealth-WA $2 billion deal to deliver 34,000 new homes in the next eight years – 11,000 just for first home buyers.

The ban on foreign buyers purchasing established homes is extended till mid-2029.

“The ban means Australians will be able to buy homes that would have otherwise been bought by foreign investors, while maintaining incentives to invest in additional housing supply,” the Budget says.

The Federal Budget also spruiks a $59.4 million spend on helping Community Housing Providers provide social housing for over 4000 young people aged 16-24.

“This Budget also releases a further $100 million from the Housing Australia Future Fund to improve the quality of housing for First Nations Australians to remote communities,” the papers reveal.

Housing Industry Association WA boss Michael McGowan has welcomed investments in unlocking land for new housing.

But he said WA desperately needed more tradies to build houses.

“Under the Housing Accord target of 1.2 million homes nationally between 2024 and 2029, WA should be aiming to complete 25,000 homes per year,” Mr McGowan said.

“Through the first two years WA has completed about 42,000 of the 50,000 home target.

“As an industry was need to continue to deliver and grow the target.

“We need more tradies, apprentices and skilled workers from interstate and overseas to help turn these policy statements into new homes for Western Australians.”