Housing has formed a major part of the 2026 federal budget, and property, along with other assets, are set be taxed differently. But what are the likely impacts?
One of the most highly anticipated announcements relates to the capital gains tax (CGT) discount, which is set to get an overhaul from the current 50% discount, and instead be replaced with an inflation indexation model that will tax only the real gains on assets.
The federal government has confirmed the capital gains tax discount will get an overhaul. Picture: Getty
The changes are set to be legislated. Here's what it could mean for the property market.
Jump ahead to see:
- Who will be impacted by CGT discount changes
- Share of investors that could benefit from new method
- What the changes could mean for the property market
What has been announced
From 1 July 2027, the 50% capital gains tax (CGT) discount that applies to assets held for more than one year will revert to an indexation method that was in place until 1999.
In general, those changes mean that realised capital gains will be taxed only on the asset's real return.
So, when someone sells an asset, be it a property or otherwise, after holding for at least one year, the purchase price is adjusted to sale-year prices using the consumer price index. The sale price less the inflated purchase price is the amount of taxable capital gains.
That is then taxed at either an income earner’s marginal rate or 30% - whichever is larger at the point of sale.
Newly built residential properties will be exempt. The change includes pre-1985 assets which were previously exempt.
What are capital gains?
In an economy, there are what economists call factors of production: land, labour, capital and enterprise. There are others, but they are not important here.
Those are basically the things needed to grow an economy. Though they are all taxed differently.
Capital is mostly made up of assets, be they property, stocks, bonds, or businesses.
New homes will be exempt from the capital gains tax (CGT) discount changes unveiled in the federal budget. Picture: Getty
Over time, the value of that capital can go up or go down. But capital gains tax only occurs when the gain is realised, as in when it is sold.
If that sale is above the purchase price of the property, then it has made a gain; if below, then it is not taxed because a capital loss has occurred.
In Australia, capital gains are not assessed for one’s primary residence. However, it applies to investors.
Who will be impacted?
Investors’ after-tax returns might be lower as a result of this change.
When properties or other assets – such as shares – are sold the before-tax return will be the same, but the after-tax return will be changed, assuming no behavioural changes.
The presumption among investors to date has been that they will have a larger taxable gain, which, for the majority, is true; however, the switch is more technical than arbitrary.
Housing has featured heavily in this year's federal budget. Picture: Getty
That is, indexation will move with the economy. Most progressive taxes, such as income, should be indexed so that households and firms are only ever taxed on a real gain, rather than be taxed on nominal gains - which could potentially be inflation driven.
During the recent period of higher inflation following the pandemic, we heard a lot about ‘bracket creep’ for labour income, which is essentially what indexation should remove.
Could the new inflation method benefit investors?
Analysis by realestate.com.au comparing the capital gains tax outcomes under the blanket 50% discount vs. the new inflation model shows that, for some residential property investors, the new tax treatment would have been more beneficial - meaning, it results in a lower taxable gain than an investor would have achieved under the 50% discount.
Over the past decade approximately 27% of properties that received a capital gain would have been better off under the indexation model over the 50% discount.
This peaked at 39% in the last quarter of 2023, 12 months after the peak of headline inflation in Australia, the minimum threshold for claiming a capital gains discount.
Even in pre-pandemic inflation times, when Australia had low inflation, around 26% of investor property capital gains would have had a lower taxable gain under indexation.
Markets matter
Like all things in the Australian property, the market of the investment property matters, as does the time held and the real returns of the asset.
If an investment property was sold in Sydney between 2016-2022 then the capital gain discount would have been significantly more favourable towards the 50% discount. Though in recent times that has become a lot less likely.
While Melbourne has followed Sydney as more investor asset sales, particularly in recent years, the Victorian capital would have had a lower taxable gain with indexation than a 50% discount.
Brisbane on the other hand has moved in the opposite direction and will likely have a higher taxable capital gain as a result of the budget changes.
What will happen to the property market and economy?
It is likely that, in isolation, changes to the capital gains discount will lead to a decline in investment flows into Australia. Though this will most likely occur in an absolute sense, not a relative one.
As all capital assets will have the same tax discount changes, except for new builds. That would mean that, relative to other domestic assets, the property market will likely have slightly higher investment flows due to the preferential treatment of new builds in the capital gains discount change.
As such, we will likely see a slight decline in new dwellings in future, compared to a scenario where the current 50% discount system stays in place.
Though with the new build carve-out, the magnitude of investment into the property market may soften.
In isolation, the CGT reforms aren't expected to significantly impact property prices. Picture: Getty
The change, in isolation, is unlikely to have a significant impact on property prices, rents, or dwelling supply. Mostly because the fundamentals of supply and demand for housing in Australia have not changed.
The combination of the policy changes isn’t fully understood, as limited modelling of the exemptions and specific structure exists in the public domain. Though we can infer that from the budget over the short-term, home prices will slightly decline, and rents will marginally increase.
Over the longer term, the quantum of impact is less clear, given the current supply side restrictions for new construction at the state and local level. The budget aims to ‘max out’ the investment into new builds whilst subsequently reducing the aggregate investment into the sector.
The relative incentives to investors will mean that new builds will have a slightly better tax treatment than established dwellings, which will mean stronger capital flows. Without state reforms to upzoning, stamp duty or planning then the new supply will be unlikely to fix Australia’s long term housing supply shortfall.
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