This is a great question, especially given the uncertainty created by recent statements from the Albanese Federal Government.

Property investors are already on red alert amid speculation that Treasurer Jim Chalmers will reduce the capital gains tax (CGT) discount as part of his May budget. Adding to this, in a recent speech at the National Press Club in early April, the Prime Minister flagged the need to address “intergenerational inequity”. This phrase usually means a politician wants to improve housing affordability for younger Australians –and is also language widely interpreted by the property sector as signalling potential changes to negative gearing.

The key point is that, as history has demonstrated many times, tightening property-based tax concessions only serves to deter Australians from investing in residential property, which would likely result in a reduction in the supply of rental properties. This would be financially disastrous for the more than one in four Australians who rent their home from a landlord.

It’s also important to remember that most investors aren’t large-scale operators. The majority own just one property and are everyday Australians such as nurses, teachers and tradies, building long-term financial security[i]. So, with this in mind, it’s worth taking a quick look at the benefits of both negatively gearing a property and the capital gains tax discount as they currently stand.

CGT discount

When you sell an asset, such as property, shares, cryptocurrency or a business, you may be able to reduce your capital gain by 50% under the capital gains tax (CGT) discount, provided you’ve owned it for at least 12 months and are an Australian resident for tax purposes[ii].

To calculate the capital gain, subtract the original purchase price of the investment property and any associated holding costs, such as renovations and improvements, from the final selling price. The amount remaining represents your capital gain. For example, if you purchased an investment property for $600,000, spent $50,000 on improvements, and later sold it for $900,000, your capital gain would be $250,000.

Using the CGT Discount as it stands, the taxable capital gain is reduced by half, from $250,000 to $125,000. So, instead of paying tax on the full gain, you only pay tax on $125,000, which is then added to your taxable income for the year and taxed at your marginal rate. Keep in mind you will still pay tax on the capital gain, and over the period you owned the rental property, you have put a roof over the head of other Australians.

Negative gearing

Negative gearing, in simple terms, occurs when you borrow money to invest in an asset—such as a property—but the income it generates is not enough to cover the ongoing costs of owning it.

These costs can include interest on the loan, maintenance and repairs, council and water rates, insurance, strata fees, and depreciation, which reflects the property's wear and tear. Investors can claim depreciation on both the building (capital works) and assets such as appliances, carpets and fittings over time. Legal and accounting fees related to managing the investment, including tax return preparation, are also typically deductible.

When these expenses exceed the rental income, the resulting loss can generally be offset against your other income, such as wages, reducing your overall tax bill at the end of the financial year.

We know that most landlords own just one rental property, while one in ten self-managed super funds also invest in residential property[iii]. Therefore, any changes to the way property is taxed are likely to impact the retirement aspirations of tens of thousands of Australians.

If you’re considering selling or buying a residential investment property, contact your local Raine & Horne office today.

[i] https://www.ato.gov.au/about-ato/research-and-statistics/in-detail/taxation-statistics/taxation-statistics-2022-23/statistics/individuals-statistics#Table8Individuals

[ii] https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/cgt-discount

[iii] https://data.gov.au/data/dataset/2fd970ec-984e-4593-bbad-2e69a5fa7a89/resource/7a50c5c8-5c0e-4a4b-a11e-feaad39f2bd0/download/smsf-annual-overview-2023-24.xlsx