Why Labor's Capital Gains Switch Might Have Cut Tax for Many Investors
Most Australian property investors would have paid less capital gains tax under Labor's plan to replace the 50% discount with cost-base indexation. That finding comes from analysis by the e61 Institute reported on 23 September 2026. It complicates the politics of a budget package sold as tightening investor concessions The Guardian.
The negative gearing part of the package pulls in the opposite direction. Half of all landlords would have faced higher costs from losing negative gearing between 2008 and 2025 if the new system had applied across that period. Negative gearing lets investors deduct rental losses, often mortgage interest, against other income. Combined, 53% of housing investors would have paid more tax in total over 2008 to 2025, while 43% would have paid less, according to the e61 research reported by the ABC on 23 September 2026 ABC News.
The margin is thin. The result turns on the interaction between leverage, or how much borrowing investors use, holding periods and inflation.
The sample covers nearly 921,000 homes bought and sold between 2008 and 2025. The median home earned an average annual capital gain of 3.3% after sales costs. Inflation averaged roughly 3% a year over the same period.
The tax maths follow from that gap. Under indexation, the purchase price is adjusted for inflation and only the real gain above inflation is taxable. Under the current 50% discount, half the nominal gain is taxable after a 12-month holding period. When price growth runs only just ahead of inflation, indexation can leave the smaller taxable amount.
That arithmetic explains why the capital gains change alone would have favoured many past sellers. It also explains the split. Investors with low leverage and modest nominal gains benefit most from indexation. Highly geared investors in existing homes lose more from curbs to interest deductibility than they regain at sale.
The legislative vehicle is the Treasury Laws Amendment (Tax Reform No.1) Bill 2026. Schedule 1 covers capital gains tax reform and Schedule 2 covers negative gearing reform. The bill would replace the 50% capital gains tax discount for individuals, trusts and partnerships with cost-base indexation Parliament of Australia. The negative gearing change would limit deductibility for residential property to new builds from 1 July 2027. Treasury describes that limitation as designed to direct tax support towards new housing.
The stated policy objectives are to make the tax system fairer, support home ownership and help fund tax cuts for workers, according to Treasury consultation material Treasury. The capital gains tax and negative gearing changes were expected to raise just over $40 billion over 10 years. Treasury modelling cited in May suggested the reforms would result in about 75,000 additional owner-occupiers over the next decade.
Market pricing has moved ahead of commencement. New investor loan applications fell 28% in two months at Commonwealth Bank after the budget's release. Reserve Bank Governor Michele Bullock said the budget reforms had "very directly" impacted the property market.
The e61 work sits within a longer research program. The institute published research titled 'Housing leverage and the capital gains tax discount'. In that work it describes limiting interest claims linked to negative gearing as ring-fencing. A related e61 paper identifies reducing the percentage-based capital gains tax discount to 33% as a prominent reform proposal. Earlier analysis reported in April found the capital gains discount and negative gearing reduced the probability of a property investment being economically unprofitable from 40% to 35%.
The broader context here is that headline revenue and headline fairness can point in different directions once different types of investors are counted. A package that raises revenue in total and shifts homes toward owner-occupiers can still leave a large minority of investors better off after the fact, especially if inflation stays high relative to house-price growth. For fiscal analysts, the question is not only the 10-year revenue but how sensitive that revenue is to the gap between inflation and housing returns.
Looking at what this means for the policy debate, the e61 results give both supporters and critics material to work with. Supporters can point to the narrow majority paying more overall and to support for new supply. Critics can point to the large share paying less at sale and question whether indexation tightens the concession when real returns are low. Neither reading settles the efficiency question. Ring-fencing interest deductions changes after-tax cash flow while holding. Indexation changes after-tax proceeds at sale. Investors price both.
In my view, the near-term variable to watch is timing and selection rather than long-run ownership numbers. A 28% fall in applications at one major lender and a direct acknowledgement from the central bank point to a pause as investors reassess deductibility, resale tax and new-build prices. Whether that pause brings sustained building of new homes, or simply delayed buying of existing homes until the 2027 start date is clarified in law, will determine how closely Treasury's 75,000 owner-occupier projection tracks reality.
