With one sentence, treasurer drops major hint on $22 billion tax overhaul

The federal government has dropped its two clearest hints to date it is preparing to wind back the capital gains tax (CGT) discount for property investors in the upcoming budget.

The federal government has dropped its two clearest hints to date that it is preparing to wind back the capital gains tax (CGT) discount for property investors in the upcoming budget.

Yesterday, two Labor senators endorsed a parliamentary inquiry's report into the controversial tax break, which found the discount's design is flawed, distorts investment, benefits investors over first-home buyers, and can drive intergenerational inequality.

And this morning, Treasurer Jim Chalmers left the door well and truly ajar when asked whether the May 12 federal budget would include changes to the CGT discount.

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"We have made it clear that we are considering our options on tax," he told ABC radio.

"We have indicated publicly for some time now, really since the reform roundtable in (August) last year, that we have an open mind to tax reform if we can afford it… I've tried to be up front in saying that we are working up some options," he added. 

"I'm not going to come out with what those options look like, but there's certainly some and there's certainly appetite for more tax reform if we can land it."

Introduced by the Howard government under then-treasurer Peter Costello in 1999, the CGT discount and negative gearing provisions have been blamed by critics for house prices surging out of reach for many working-class Australians.

At the same time, it has become an increasing drain on a federal budget that has since fallen into structural deficit.

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"Revenue foregone as a result of the capital gains discount has risen from $860 million in 2000–01 to $22 billion in 2025–26," independent economist Saul Eslake told the committee.

"Or, if you like, from 1.1 per cent of total personal income tax collections to 6.1 per cent of total personal income tax collections over that 25-year interval."

Yesterday's Senate inquiry report made four findings which were endorsed by Labor MPs Richard Dowling and Ellie Whiteaker, although its recommendations differed from party-to-party.

Greens senator Nick McKim, who chaired the committee, made eight recommendations, including reining in the CGT discount and completely abolishing it for property investors.

"The combination of negative gearing and the capital gains tax discount has driven rampant property speculation and inflated house prices over the last 26 years," he wrote. 

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"This interaction has been cataclysmic for housing affordability."

He also said "grandfathering" – an exemption to changes for Australians who have already invested based on the current tax settings – should not be included in any reform.

Former Treasury Secretary Ken Henry, who authored a comprehensive but to-date unused blueprint to reform the tax system in the early 2010s, also argued against grandfathering to the committee.

"Grandfathering changes would exacerbate poor intergenerational outcomes," McKim said.

"To ensure a significant release of housing is made available for renters to buy, hard limits and a phase-out of existing arrangements must be part of any negative gearing and capital gains tax reforms."

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Labor's senators, though, didn't propose any specific reform, instead recommending tax changes be considered as one element of an overall policy approach to the housing crisis.

Dowling and Whiteaker also said tax reform should deliver a "fair go" for working and young people, address intergenerational inequality, incentivise business investment, and make the overall system "simpler and more sustainable".

The two Liberal senators on the committee, though, argued vehemently against changes to the CGT, saying a lack of supply was the driver of the housing crisis and labelling McKim's report "simplistic and one-dimensional".

"Supply of housing has collapsed in Australia as the population has surged," senators Andrew Bragg and Dave Sharma wrote. 

"Supply is at the heart of the housing crisis, as repeatedly stated by representatives from the housing sector during the hearings."

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Rumours of the government making changes to Australia's generous tax incentives for property investors in the May budget have been growing since the start of the year.

Senior ministers, including Chalmers and Prime Minister Anthony Albanese, have repeatedly turned down the chance to rule out changes following reports of Treasury modelling CGT discount reductions and limiting negative gearing to two properties.

This morning, Chalmers insisted no decision has been made.

"The big focus on tax policy is rolling out income tax cuts," he said.

"We haven't changed our policy beyond that, we haven't taken any decisions…

"At the end of the day, they will be decisions for the cabinet. I don't want to pre-empt those decisions or those discussions and deliberations."

The treasurer is due to give a major budget preview speech in Melbourne tomorrow.

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