Changes to CGT discount and its potential impact

While no legislative changes have been announced yet, a number of proposals are being discussed in Parliament, with Treasury reportedly modelling various reform options.

Current landscape

Broadly, the existing landscape is as follows: 

• General CGT discount: Individuals and trusts are generally entitled to a 50 per cent discount on capital gains for CGT assets held for at least 12 months (companies are excluded).
• Negative gearing: Net rental losses arising where deductible expenses exceed rental income can generally be offset against other assessable income (such as salary or business income).

This combination of mechanisms has been in place in their current form since 1999 and are often considered together, as negative gearing is frequently part of a wealth-building strategy that relies on capital growth taxed at a discounted rate.

What changes are being proposed? 

1. Reduction in the CGT discount

A range of proposals have been floated, most prominently by independent MP Allegra Spender and through the findings of the Senate Select Committee on the Operation of the CGT Discount.

Options discussed include:

• Reducing the CGT discount on investment properties and shares from 50 per cent to 30 per cent for individuals and trusts.
• Abolish the CGT discount entirely for investment properties.
• a return to indexation of the cost base for inflation (as applied between 1985 and 1999), instead of a flat percentage discount.

While there is broad agreement that capital gains need not be taxed identically to labour income, there is increasing debate about whether the existing 50 per cent discount remains appropriate. It has also been posited that a partial adjustment could improve revenue outcomes without materially affecting investment behaviour, contributing to a wider conversation about long‑term fiscal sustainability.

2. Changes to negative gearing

Proposals in relation to negative gearing have also gained renewed attention, although the government has historically been more cautious in this area.

Ideas publicly discussed include:

• ‘Ring‑fencing’ rental losses, so that losses can only be offset against other investment income, not against salary or wages.
• Limiting negative gearing to a single investment property, or to newly constructed dwellings.

These proposals are directed at reducing the perceived adverse consequences resulting from investor demand in residential property markets, particularly when negative gearing operates in tandem with the CGT discount. 

Industry response and economic concerns

The property and construction sectors have strongly cautioned against changes to the CGT discount and negative gearing rules. Industry‑commissioned modelling suggests that reducing or removing negative gearing or the CGT discount could reduce investment in new housing supply, lower dwelling commencements over the medium term and/or place upward pressure on rents, particularly in already tight rental markets.

This is in addition to broader economic consequences, such as a decrease in GDP and loss of jobs in the construction sector. These responses highlight the ongoing tension between tax reform objectives and broader housing supply challenges.

Key practical implications for taxpayers

While the proposed changes are still in the consultation stage, we expect more clarity in the Federal Budget in May, especially since housing affordability remains such a key policy issue. In the meantime, taxpayers may wish to consider the following:

• Transaction timing: Any future changes may include grandfathering or transitional rules, but historically this cannot be assumed.
• Ownership structures: Trusts, individuals and companies are affected differently by CGT discount rules, and structural flexibility may become more valuable.
• Portfolio composition: Reduced concessions can materially affect after‑tax returns, especially for highly leveraged or negatively geared investments.
• Modelling downside scenarios: Investors should stress‑test cashflow and exit positions assuming reduced access to current concessions.

Grant Thornton can assist clients to model the impact of potential CGT and negative gearing changes, review existing investment and ownership structures, and assess transaction timing and exit strategies. 

If you would like to discuss how these proposals may affect your circumstances, please contact your Grant Thornton adviser.

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