Ray White modelling shows the CGT overhaul could leave the government with less revenue from property investors in current market conditions
The federal government's decision to replace the 50% capital gains tax (CGT) discount with inflation indexation has been widely characterised as a tougher regime for property investors. Ray White chief economist Nerida Conisbee (pictured top) contends the outcome may be far less straightforward — and potentially counterproductive to revenue — given current market conditions.
"If property values grow slowly, or fall, while inflation remains high, indexation can significantly reduce the taxable gain," Conisbee pointed out. "That means over the next few years, if inflation remains elevated and price growth weakens, the new system could raise less tax from some property investors selling than the old 50% discount would have."
Under the existing arrangement, investors who hold a property for more than 12 months receive a 50% discount on any capital gain. Under the incoming system, the cost base is instead indexed to inflation, meaning only the real gain — growth above inflation — is taxed. Where inflation outpaces property price growth, the indexed cost base can rise faster than the asset's value, leaving little or no taxable gain.
"If inflation is running at 4% or 5% and property prices are growing at only 1% or 2%, then the indexed cost base rises faster than the asset value," Conisbee said. "In that scenario, there may be little or no taxable real gain."
The timing of the transition also tempers any near-term revenue benefit. Gains accrued before the change takes effect are expected to remain eligible for the 50% discount, meaning the new rules will apply only gradually to post-change appreciation.
The broader market backdrop strengthens the case for caution on revenue assumptions. National house prices rose 10.5% annually in recent data, with particularly strong results in Perth, Brisbane, Adelaide and Darwin. Sydney and Melbourne, however, recorded annual growth of just 2.7% and 2.5% respectively, suggesting momentum is already uneven.
The Reserve Bank has lifted the cash rate three times this year to 4.35%, raising holding costs and reducing borrowing capacity. The Australian Bureau of Statistics reported annual inflation of 4.2% in April, down from 4.6% in March but still well above the Reserve Bank's target band.
Ray White's own market data points to a softening in buyer activity. The national four-week rolling average for open home attendance fell to 2.5 attendees per open home by late May, with Sydney and Melbourne both sitting close to two attendees.
Morgan Stanley has reportedly forecast that house prices could fall by as much as 10% as investors reassess after-tax returns on residential property. Even a more modest decline would suppress the capital gains available to tax.
Conisbee also flagged a behavioural dimension: investors facing lower price growth may choose to hold rather than sell, particularly where rental yields remain firm, further reducing CGT receipts regardless of which system applies. "The outlook is now likely to become weaker," he said.
The reforms have cleared the House of Representatives but still require Senate approval to become law. Opposition Leader Angus Taylor has pledged to block the measures, describing them as "toxic taxes," while Treasurer Jim Chalmers has said he is "proud to make the tax system fairer for the next generation."
The policy may be defensible on grounds of taxing real rather than nominal gains. However, Ray White's analysis suggests the government should not assume the shift will produce a near-term revenue increase from property investors, given the combination of elevated inflation, rising interest rates, and weakening price growth that now characterises much of the Australian market.
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