The tax deduction that will cost Australia $250 billion over the next decade (and it’s not negative gearing)

The tax break on capital gains will cost the budget almost $250 billion over the next decade if the Albanese government does not water it down, with the benefits flowing strongly to people with the nation’s highest incomes.

As Prime Minister Anthony Albanese refused to rule out changes to the capital gains tax on Thursday, analysis compiled by the independent Parliamentary Budget Office for the Greens shows the cost of the current 50 per cent concession has swelled to extraordinary levels.

This masthead revealed the government is considering a cut in the CGT concession as part of a broader tax reform package aimed at helping younger Australians to buy their own home.

The budget office found that between this financial year and 2035-36, the foregone revenue from the concession will total $247 billion. Of that, $100 billion will be foregone by the end of the decade.

It dwarfs the $205 billion in foregone revenue the office estimates the concession has cost since it was introduced by the Howard government in 1999.

In contrast, the nation’s landlords will make $150 billion in deductions on their rental properties, including negatively geared properties, by the end of the decade.

The budget office analysis was commissioned as part of a Greens-led Senate inquiry into the CGT concession, its impact on federal finances and how it affects the property market.

Greens treasury spokesman Nick McKim, who is chairing the inquiry, said the figures were further proof the current concession had to be ditched.

“The CGT discount has blown out into a quarter trillion dollar joke that overwhelmingly favours the super-wealthy who have had it far too good for far too long,” he said.

“Instead of supporting productive investment, the CGT discount is now overwhelmingly used to subsidise speculation on existing properties, driving up prices and making homeownership even more difficult for renters.

“Labor cannot keep talking about a fair go for workers and fixing intergenerational inequality while defending the most unfair tax break on the books.”

The budget office noted that the benefits of the concession are “highly skewed” to higher-income earners.

The top 10 per cent of all income earners accrued 82 per cent of the tax savings generated by the concession. The top 1 per cent, or people with incomes of at least $363,000, gained 60 per cent of the savings.

The analysis also found people among the bottom 10 per cent of all income earners also benefited from the concession.

McKim said this was mostly retirees who deferred the sale of assets until they had no taxable income, maximising the tax benefit of selling their investment properties. Just 4 per cent of the total financial benefit of the concession goes to people under the age of 35.

When the concession was introduced, based on a recommendation by the Ralph review into business taxation, it was argued by supporters that it would encourage people to invest in shares. Critics warned at the time that Australians were more likely to sink their cash into property.

McKim said double the amount of the discount is claimed against property than shares.

Independent economist Chris Richardson cautioned that research on changes to the CGT and negative gearing had shown only marginal impacts on the price of housing.

He said reducing the concession to 33 per cent would have the same dampening impact on house prices as this week’s quarter percentage point increase in official interest rates.

“That means it would unwind two months of 2025’s growth in housing prices,” he said.

“That’s far from nothing. Yet it is neither apocalyptic nor revolutionary. If you are reading commentary that makes apocalyptic claims, then I suggest you take it with a grain of salt.”

Any tax change would feature prominently in the May budget, which Treasurer Jim Chalmers said will be focused on inflation and measures to boost productivity.

In parliament, Albanese was pressed by shadow treasurer Ted O’Brien to rule out a change to the CGT.

While noting that the Senate inquiry into the tax had been supported by the Liberal and National parties, he refused to be drawn on the government’s position.

“Every year in the lead-up to budgets, we have this gameplay … I will talk about what we are doing, not what we are not doing,” he said.

Housing Minister Clare O’Neil would not be drawn on whether a change to the CGT was being examined.

“We haven’t changed our tax policies in relation to housing or other areas. Our tax policy is to give a tax cut to every single taxpayer who’s watching right now,” she told Sky News.

“They’re going to get another tax cut this year and yet again another one next year. And with housing, our big focus is supply.”

What is capital gains tax and how does it work?

Capital gains are the profit made on an asset (this can include things like shares, as well as property/housing). Assets are taxed like other forms of income when you sell them, giving us the capital gains tax. The capital gains tax discount of 50 per cent is applied to assets if they have been held for at least 12 months.

Why does the government want to lower the discount?

Before 1999, capital gains tax was calculated by an indexation method (in essence, accounting for inflation). The 50 per cent flat rate for the capital gains tax discount was introduced as it was considered a simpler option.

However, the size of the discount has meant investing in assets – especially property, due to Australia’s decades-long rise in house prices – has become incredibly attractive. This is a problem for housing as investors can crowd out those wanting to buy their own home.

Proponents of changing the discount say it should at least be reduced for the purchase of existing homes in the hopes of pushing investors to new builds and increasing the nation’s overall number of homes.

The capital gains tax discount this year cost the federal budget $21.8 billion in foregone revenue.

Will this make house prices cheaper?

Treasury analysis has shown that reducing tax concessions – capital gains tax discount, negative gearing – for property investors could affect house prices, potentially reducing them by 4.5 per cent.

Why does the government not want to touch negative gearing?

Negative gearing is the practice where a person can reduce their taxable income by the amount they lose on an investment property – for example, charging less in rent than the mortgage repayments.

Critics argue it is the combination of the capital gains tax discount and negative gearing that has supercharged property investment in Australia.

Labor could argue that investors would be less likely buy property, and be more likely to invest elsewhere, if the interaction between negative gearing and the prospect of a capital gains tax discount was less generous.

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