Negative Gearing Cap & CGT Discount Changes: What the Policy Debate Means for Australian Investors
Treasury is modelling a cap at 2 properties and reductions to the 50% CGT discount. Here's what the proposals mean, what New Zealand and Canada's experiences actually showed, and why Australia's situation is materially different.
In late 2024, Treasurer Jim Chalmers confirmed he had personally requested Treasury advice on two of the most significant potential reforms to property investor taxation in decades: capping negative gearing at two investment properties and reducing or eliminating the 50% capital gains tax discount on investment property.
The documents — partially released under Freedom of Information — confirmed what many investors had suspected. After years of heated debate, Treasury was actively modelling what would actually happen.
So what exactly is being proposed? What do the experiences of New Zealand and Canada actually show? And why does Australia's unique property market change the calculus in ways that direct comparisons miss?
⚠️ Important: These are proposals under active Treasury modelling — not law. No legislation has been introduced. Labor's post-election position (May 2025) is that negative gearing changes are "not something we are proposing." This article explains what is being discussed and what the international evidence suggests, so investors can make informed decisions if the debate intensifies.
At a Glance: The Two Key Proposals
- ✓Negative gearing cap: Limit rental loss deductions against salary income to a maximum of 2 investment properties per investor.
- ✓CGT discount reduction: Cut the current 50% CGT discount on investment property gains — potentially to 33%, or eliminated entirely.
- ✓Who's directly affected: Estimates vary by threshold: PBO modelling (2025) found ~306,000 investors (13.5%) affected under a 'more than 1 property' phase-out; ATO data suggests ~9–10% of investors hold 3+ properties, which is the group directly exposed to a 2-property cap. Source: PBO ECR 2025-3414; ATO Taxation Statistics.
- ✓Budget cost: Both concessions combined cost approximately $20 billion per year — $10.9B in negative gearing deductions alone (2023–24).
- ✓Return impact: PBO modelling found removing both concessions would reduce the overall rate of return on investment property by 15–30%.
- ✓Current status: Proposals only. Labor's post-May 2025 election position: changes are not being proposed. But Treasury modelling exists.
What Exactly Is Being Proposed?
The Negative Gearing Cap
Under the most-discussed scenario — modelled by both Treasury and the Parliamentary Budget Office — investors would only be able to offset rental losses against ordinary income (wages, salary, business income) for up to two investment properties. Losses from a third, fourth, or fifth property would either be:
- Quarantined and only usable to offset future rental income from the same property, or
- Carried forward to reduce the capital gain at eventual sale — but unable to touch salary income in the meantime
The PBO modelled a more aggressive version (phasing out for investors with more than one property — see PBO ECR 2025-3414) and found that removing both concessions would reduce the overall rate of return on investment property by 15–30% — based on scenarios assuming 2025-era interest rates and typical residential rental yields. Under a more targeted 2-property cap, the impact on each affected investor would be similar, but fewer investors would be caught. Importantly, grandfathering would protect the first property acquired before any start date — leaving the majority of existing negatively geared investors unaffected.
How Grandfathering Would Work in Practice
Both Treasury and the PBO assume a grandfathering start date — any property acquired before that date retains its existing deductibility under the old rules. Properties acquired after the start date would be subject to the new cap. In the most common modelling scenario:
- →Investors with 1–2 properties (all acquired pre-start date): fully protected, no change to deductibility.
- →Investors with 3+ properties (all acquired pre-start date): the first two are fully protected; losses on the third and beyond remain deductible under existing rules for pre-start-date holdings.
- →Investors who acquire a new (third+) property after the start date: losses on that property can only be quarantined against future rental income from that same property — not offset against salary.
The practical result: existing portfolios are largely protected at the point of enactment. The cap bites most sharply on future acquisitions beyond the threshold — fundamentally changing the economics of expanding a portfolio rather than dismantling existing ones. Investors who have already purchased their third+ property before any legislation would retain their existing deductibility on those assets.
The CGT Discount Change
Currently, investors who hold any asset — property, shares, business interests — for more than 12 months pay capital gains tax on only 50% of their gain. Under the proposals being discussed:
| Reform Option | Taxable Portion of Gain | Tax on $400K Gain (45% rate) | Extra Tax vs Current |
|---|---|---|---|
| Current 50% discount | 50% of gain | $90,000 | — |
| Reduced to 33% discount | 67% of gain | $120,600 | +$30,600 |
| Discount removed entirely | 100% of gain | $180,000 | +$90,000 |
| Indexation only | Inflation-adjusted gain | Varies (lower for long holds) | Depends on CPI |
These aren't annual costs — they arrive as a single bill at exit. For investors who bought in the 1990s or 2000s and are approaching retirement, this is a significant planning consideration. A property bought for $300,000 in 2002 and now worth $1.3M carries a $1M gain. Under the current 50% discount, that's $500K taxable. Eliminating the discount makes the full $1M taxable — a difference of potentially $200,000–$235,000 in additional tax for someone in the top bracket.
To understand how negative gearing currently works and who benefits most, read our complete guide to negative gearing for Australian property investors.
Does This Apply to Commercial Property?
The negative gearing cap proposals are specifically targeting residential investment property. Commercial, industrial, and retail properties are not part of the current Treasury modelling under discussion. Investors holding offices, warehouses, or retail tenancies would not be directly affected by a 2-property residential cap.
The CGT discount is a different matter. It currently applies to all assets held for more than 12 months — residential property, commercial property, shares, and business assets alike. Any reform to the CGT discount rate would therefore affect commercial and industrial property investors equally. High-net-worth investors with diversified portfolios should note this distinction: the negative gearing cap would leave commercial holdings untouched, but a CGT discount change would not.
What New Zealand and Canada Actually Tried
This isn't purely theoretical. Two comparable economies have recently restricted property investor tax benefits — and then reversed course. What happened is instructive, though not a direct blueprint for Australia.
New Zealand: The Interest Deductibility Ban (2021–2025)
In March 2021, the Ardern Labour government banned property investors from deducting mortgage interest as a rental expense. The goal was to cool investor demand and improve first-home buyer access. New builds were initially exempted to maintain housing supply incentives.
What About New Build Exemptions?
NZ's interest deductibility ban deliberately carved out new builds — properties completed after a certain date were exempt — to protect new housing supply. The theory: restrict tax concessions on established properties (where investors compete with first-home buyers) while preserving incentives for new construction.
Australia's Treasury modelling appears to contemplate a similar approach. The PBO's June 2025 costing referenced grandfathering provisions and indicated new residential construction could be treated differently to limit disruption to building starts. If a new build carve-out survives into any final legislation, investors in new construction — off-the-plan apartments, house-and-land packages — could be materially better positioned than holders of established investment properties. This is one more reason why the new build vs established decision carries more strategic weight in 2026 than in previous years. See our new build vs established property investment guide for the full trade-off analysis.
Canada: The Capital Gains Inclusion Rate Hike (2024)
Canada's April 2024 Federal Budget proposed raising the capital gains inclusion rate from 50% to 66.67% for individuals on gains exceeding $250,000 — structurally similar to Australia's proposal to reduce the 50% CGT discount.
How Australia Is Different — Why Simple Comparisons Don't Hold
The temptation is to read those case studies and conclude "restricting investor tax benefits always backfires." That's an oversimplification. There are genuine lessons, but also genuine differences that materially change the expected outcomes in Australia.
| Factor | New Zealand | Canada | Australia |
|---|---|---|---|
| Policy type | Removed holding costs (interest deduction) | Raised exit costs (CGT inclusion rate) | Proposed: BOTH — cap deductions AND raise CGT |
| Rental vacancy rate at reform | Low | Moderate | ~1–1.5% (late 2025, SQM) — acute crisis level |
| Investors with 3+ properties | ~20% | Varies by region | ~13.5% (lower proportion) |
| Build-to-rent sector | Small | Established and growing | Nascent — almost non-existent |
| Investor income profile | Mixed | Mixed | 66.5% earn under $80K — predominantly middle income |
| Existing state property taxes | No equivalent | Provincial taxes | Already heavy land tax obligations |
| Policy reversed? | Yes — April 2025 | Yes — March 2025 | Not yet implemented |
The Five Key Differences That Matter
Australia proposes a dual hit
NZ restricted interest deductions — an ongoing holding cost. Canada raised the CGT rate — an exit cost. Australia is considering doing both simultaneously. The combined effect on investor returns would be significantly more severe than either country experienced in isolation.
Australia's rental market is already at crisis point
Australia's national rental vacancy rate was approximately 1–1.5% as of late 2025 (SQM Research), compared to a healthy 3% — leaving almost no buffer before a reduction in investor activity translates directly into rental hardship for tenants. PIPA's 2025 investor survey found 53% of investors would stop investing if negative gearing was altered, with a further 25% unsure. Any significant investor withdrawal hits renters first and hardest.
There's no institutional landlord sector to fill the gap
In Canada, pension funds and REITs increasingly fill the landlord role as smaller investors exit. In Australia, the build-to-rent sector is still in its infancy. If 50,000–100,000 private investors sold in response to reform, there is no equivalent substitute supplier of rental housing ready to absorb that gap.
Australia's investors are predominantly middle-income
ATO data shows a majority of negatively geared investors report taxable income under $80,000, with an average annual deduction of $8,700. Important caveat: ATO taxable income figures are measured after negative gearing deductions are applied, which mechanically lowers reported incomes. Pre-deduction incomes are somewhat higher. Even accounting for this, the distribution shows these concessions are not exclusively — or even primarily — used by high-income earners. CGT discount changes would disproportionately hit investors who've held property for 10–20 years as they approach retirement. See: ATO Taxation Statistics 2022–23.
State-level taxes already compound the federal burden
Australian investors already face substantial state land taxes on multi-property portfolios — obligations that don't exist in NZ and are structured differently in Canadian provinces. A federal reform layered on top creates a compounding burden not experienced in either comparable country.
💡 Pro Tip: The NZ experience tells us what happens when you restrict holding costs in a tight rental market. Canada tells us what happens when you raise exit taxes. Neither tells us what happens when you do both simultaneously in one of the world's tightest rental markets. Australia would be charting new territory.
What Does This Mean for Your Portfolio?
You are unlikely to be directly affected by a negative gearing cap set at 2 properties. You may be affected by a CGT discount reduction at point of sale.
What to do now:
- →Don't make structural changes based on proposals that aren't law
- →If planning to sell in 2–3 years, monitor any legislative announcements closely
- →Ensure your properties are cashflow-resilient regardless of tax settings
You sit in the 13.5% directly impacted by a 2-property cap. The stakes are higher and planning is warranted — even without a law change.
What to consider:
- →Portfolio quality review: which properties justify holding on fundamentals, not just tax?
- →Shift toward neutral/positive cashflow to reduce dependence on gearing offsets
- →Understand your CGT exposure under current rules and potential reform scenarios
- →Get specific professional advice — a good accountant will pay for themselves many times over
For investors rethinking their overall portfolio construction, our property vs shares comparison guide explores how the tax treatment of each asset class stacks up and what a narrowing of property's tax advantage would mean for your wealth-building strategy.
If you're considering your ownership structure in light of potential reform, our trust vs personal name guide covers the key trade-offs — noting that trusts don't solve the negative gearing loss trap and in some states come with significant land tax penalties of their own.
The Political Reality in 2026
After the May 2025 federal election, Labor emerged with a strengthened majority. Both major parties campaigned explicitly on not touching negative gearing. Treasurer Chalmers has publicly stated that negative gearing changes are "not something we are proposing" (reported in The Nightly and subsequent post-election interviews).
However, several factors keep the debate alive:
- Treasury modelling exists and can be reactivated under any budget pressure
- The Greens and independent crossbenchers continue to advocate reform as a housing affordability measure
- The $20 billion annual budget cost is a standing fiscal pressure point in any tight budget environment
- A Senate crossbench leverage scenario in any future minority government could revive the debate
Treat this as a medium-term policy risk that warrants monitoring — not an immediate threat requiring drastic portfolio restructuring. The risk is real; it is not imminent.
💡 Pro Tip: The best preparation for a potential reform is building a portfolio that works without the tax concessions — not one that only makes sense because of them. Properties with strong capital growth fundamentals and improving yields are resilient to policy change in a way that purely tax-driven acquisitions are not.
What Other Options Is Treasury Weighing?
The negative gearing cap and CGT discount changes get the most media attention, but they are not the only levers on the table. Understanding the full menu of options helps investors assess which scenarios are most and least likely:
| Policy Option | How It Works | Who's Affected | Political Likelihood |
|---|---|---|---|
| Cap at 2 properties | No loss offset against salary beyond 2 properties | ~9–10% of investors (3+ properties) | Medium — most discussed |
| Full negative gearing removal | No cross-income loss offset for any investment property | All negatively geared investors (~49%) | Low — politically toxic |
| CGT discount to 33% | Pay tax on 67% of gain instead of 50% | All property investors at exit | Medium — more palatable than full removal |
| CGT indexation (replace discount) | Adjust cost base for inflation; no flat discount | Long-hold investors benefit most; short-term less so | Medium — technically complex |
| Means testing (income threshold) | Remove concessions above certain income level | Higher-income investors only | Medium — targeted, less politically costly |
| New build carve-out (supply protection) | Retain/expand concessions for new construction only | Established property investors vs new build investors | High — likely accompanies any reform |
| Build-to-rent incentives | Institutional landlords get separate concessions to replace private supply | Indirectly all renters | High — already underway (2025) |
What Should You Do Right Now?
Stay informed, don't speculate
Monitor actual bill announcements, not media speculation. Treasury modelling and policy proposals are very different from enacted law.
Stress-test without the tax offset
Can your investment properties remain viable — generating an acceptable return — if negative gearing deductions were capped? If not, that's a portfolio risk worth addressing regardless of policy.
Know your CGT exposure now
Understand what your tax bill looks like at sale under the current 50% discount, and what it would look like at 33% or zero. For long-held properties with large accumulated gains, this difference is substantial.
Review your ownership structure
Particularly if you hold multiple properties, understanding how structural choices affect your exposure matters — though note that trusts don't solve the negative gearing loss problem and come with land tax costs of their own in most states.
Don't make property decisions based primarily on tax
The underlying asset quality — location, growth drivers, rental demand — matters more than the current tax treatment. Strong fundamentals provide resilience that tax optimization alone cannot.
Get qualified professional advice
This is a situation where a conversation with a tax accountant and financial adviser pays for itself many times over. Your situation is specific; generic commentary (including this article) cannot substitute for personalised advice.
The NZ and Canada experiences are genuinely useful — not as direct predictions of what will happen in Australia, but as evidence that restricting investor tax benefits in an undersupplied rental market tends to hurt renters before it helps them. Australia's structural context — the acute vacancy crisis, the middle-income investor base, and the absent institutional landlord sector — makes the stakes even higher. Any reform that reduces the supply of private rental housing needs a credible plan for what replaces it, and that question remains unanswered.
Disclaimer: This article provides general educational information only and does not constitute financial or tax advice. Tax legislation is subject to change. Always consult a qualified financial adviser and registered tax agent for advice specific to your circumstances before making any investment decisions.
Sources & Further Reading
- 1. PBO ECR 2025-3414: Phase out negative gearing and CGT for investors with more than one investment property
- 2. PBO ECR 2025-3414 Full PDF (modelling scenarios and assumptions)
- 3. The Nightly: Chalmers floats limiting negative gearing to two properties
- 4. PBO: Cost of Negative Gearing and Capital Gains Tax Discount (July 2024) — budget cost figures
- 5. Treasury.gov.au: Negative Gearing (Tax White Paper)
- 6. IRD New Zealand: Residential property interest limitation rules (official NZ government source)
- 7. The Conversation: NZ interest deductibility — a flawed law from the outset
- 8. Canada.ca: Government announces deferral of capital gains inclusion rate (Jan 2025)
- 9. Canada Revenue Agency: Capital gains inclusion rate — current rules (2025)
- 10. CBRE Canada: How Capital Gains Tax Hike Could Impact Real Estate Investment
- 11. PIPA 2025 Investor Survey: Rental crisis worsens as investors exit
- 12. The Conversation: How many of Australia's 2.2M property investors would lose out?
- 13. ATO Taxation Statistics 2022–23 (investor income distribution data)
- 14. SQM Research: National rental vacancy rate data
Frequently Asked Questions
Treasury has modelled limiting negative gearing deductions to a maximum of 2 investment properties per investor. Losses from additional properties would be quarantined and could not offset salary or wage income. As of March 2026, no legislation has been introduced. Labor's post-election position is that changes are not being proposed.
Currently investors pay capital gains tax on only 50% of their gain after holding property for 12+ months. Reducing the discount to 33% — or eliminating it entirely — would significantly increase the effective tax at exit. On a $400,000 capital gain, an investor on the 45% marginal rate would pay approximately $90,000 more in tax if the discount were removed entirely.
New Zealand removed interest deductibility for rental investors in 2021. The result was higher rents, no meaningful improvement in first-home buyer access, and the policy was fully reversed by April 2025. The experience demonstrates that restricting investor tax benefits in a supply-constrained rental market typically hurts renters more than it helps them.
Canada proposed raising its capital gains inclusion rate from 50% to 66.67% in 2024 — structurally similar to reducing Australia's 50% CGT discount. It triggered a rush of pre-reform asset sales, significant investor uncertainty, and fears of reduced housing investment. Prime Minister Carney cancelled the policy outright in March 2025 before it took full effect.
Key differences include Australia's approximately 1–1.5% rental vacancy rate as of late 2025 (SQM Research) — one of the world's tightest — a predominantly middle-income investor base (ATO data shows a majority report taxable income under $80,000, though this is measured post-deduction), an almost non-existent build-to-rent sector to absorb supply if investors exit, and a dual proposed reform combining both negative gearing restrictions AND CGT discount cuts simultaneously — a combination neither NZ nor Canada attempted.
No. Making major portfolio decisions based on proposals that have not become law is generally not prudent. Review your portfolio's cashflow resilience and understand your exit tax position under current and potential future rules, then speak to a qualified financial adviser and registered tax accountant before taking any action.
Based on Treasury and PBO modelling, the most likely approach involves a grandfathering start date. Properties acquired before that date would retain their existing deductibility under the old rules. Under the most common scenario: investors with 1–2 properties already purchased would be fully protected; investors with 3+ properties would retain deductibility on all pre-start-date holdings; only new acquisitions beyond the threshold after the start date would face restricted deductibility. The cap is designed to change the economics of future portfolio expansion — not to retrospectively strip concessions from existing holdings. No legislation has been introduced, so these grandfathering details remain subject to change.
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