Taxation myths versus reality

With the Federal Budget landing this week, the housing tax debate has fired up again.

Negative gearing. Capital gains tax. Investor “perks”. Housing affordability.

You can almost set your watch by it. And what a yawn!

Every budget cycle the same arguments reappear. And every cycle the same myths get recycled as fact.

So before the big event - Tuesday 12th May for those who have been living on a deserted island over past couple of months - let’s clear a few things up.

Because when property and taxation collide, the amount of BS floating around can be impressive.

Let’s start with Negative Gearing.

Australia is the only country with negative gearing

Australia, we’re told, is some strange global outlier because we allow investors to deduct rental losses against their income.

But that simply isn’t true.

Germany, Japan, Canada and Norway all allow rental losses to offset total income.

Other countries - including the United States, Ireland and France - allow losses to be carried forward and offset against future rental income.

Spain and Sweden don’t allow full negative gearing, but they still allow rental expenses to reduce tax liability.

In other words, Australia’s system sits well within the international range.

We’re not special. We’re not radical. We’re just… fairly normal.

Negative gearing in plain English

The mechanics are simple. To “gear” an asset means you borrow to buy it.

In Australia that loss can be deducted against other income, usually wages. Which is why the strategy tends to be more attractive to higher-income earners.

But here’s something that often gets forgotten in the debate. Negative gearing isn’t unique to housing. It can apply to shares. It can apply to commercial property. It can apply to any income-producing investment.

Housing just happens to be where the politics lives.

How big is it?

Around 1.1 million Australians currently report rental losses, commonly referred to as negative gearing.

Treasury modelling suggests the policy reduces federal tax revenue by about $6–7 billion a year.

So yes it’s widely used.

Roughly one in nine taxpayers negatively gears in some form. Which means any policy change in this space will annoy a lot of people.

But when you hear negative gearing blamed for everything from housing shortages to rising rents, it’s worth remembering something.

Housing markets move primarily because of credit conditions and especially due the interplay between supply and demand. Tax policy sits around the edges.

The ghost story of 1985

Whenever reform is discussed, someone will eventually bring up what happened in the mid-1980s.

Negative gearing was removed between 1985 and 1987, and the popular version of the story goes something like this:

Rents exploded. Investors fled. The housing market nearly collapsed.

The reality was rather different.

During that period vacancy rates actually rose nationally, moving from about 2.2% to 4.4%.

Rents did increase in some cities - but largely because interest rates surged.

And when I say surged, I mean surged. At one point the official cash rate pushed close to 20%. Mortgage rates were eye-watering. Our first home loan sat at 17.5%. Developers were borrowing at 20% or more.

Under those conditions housing construction slowed and landlords tried to push rents higher.

Tax policy wasn’t the dominant driver. Interest rates were.

A heads up

• Also read:5 ways to make money through property investment
• Also read:Brisbane Property Market Forecast [2026 & Beyond] – What The Olympics Decade Means for Investors.
• Also read:Adelaide housing market update | April 2026
• Also read:Melbourne property market forecast for 2026 & 2027 | Why the opportunity is bigger than it looks
• Also read:Sydney property market forecast for 2026 and 2027 | Why the short-term softness is a long-term opportunity

Things are tightening up.

From May: Free = preview. Paid = the full picture

That means all charts, analysis, opinions - and the bit that matters, what I’d actually do - move behind the paywall.

May pricing: $300 p.a. / $30 p.m. Before lifting to $330 / $55 from June. Excluding GST.

Also…. the tone shifts. I’ve probably been a bit polite in recent times. Not anymore.

From May, I’ll be calling it as I see it - clearer, sharper, and with more bite.

And if you want that regularly, this is the only place you’ll get it.

Hope to see you on the inside.

Now the Capital Gains Tax myths

Capital Gains Tax (CGT) attracts its own batch of misunderstandings in the housing debate.

Let’s run through a few of the most common ones.

Myth 1: The CGT discount only applies to housing

If you get your intel from the press then it is reasonable to conclude that the CGT discount is some special concession designed only for residential property.

It isn’t. The discount applies broadly across the economy to shares, managed funds, commercial property, business assets and goodwill, as well as residential investment property. Even cryptocurrency and certain collectables qualify.

Treasury estimates the CGT discount costs the federal budget about $22 to $23 billion a year in forgone revenue across all asset classes. Residential housing accounts for roughly $10 to $11 billion of that total — about half. That reflects the size of Australia’s housing market rather than any special policy favouring property.

When the reform replaced the old indexation system in 1999, the goal was to simplify the tax system and improve Australia’s competitiveness for capital. It was designed as an economy-wide tax setting, not a housing policy.

Myth 2: Higher CGT would flood the market with homes

Another popular claim is that increasing CGT on investment property would suddenly boost housing supply.

On quick reflection the idea sounds logical: increase the tax and investors sell.

But economic theory suggests the opposite. It’s known as the lock-in effect.

Higher capital gains taxes discourage asset owners from selling because selling crystallises the tax liability. Instead, investors hold assets longer to defer the tax.

Research across multiple countries shows that higher CGT reduces asset turnover. Transactions fall and markets become less fluid.

And importantly, housing supply - like dur - comes from construction, not from changing the tax treatment of existing homes.

Myth 3: The CGT discount caused the housing boom

The claim that the 50% CGT discount introduced in 1999 caused the housing boom of the 2000s sounds neat.

But it doesn’t survive contact with the data.

Housing prices surged across the US, UK, Canada and New Zealand during the same period. None of those countries introduced the same CGT change.

What they did experience was something far more important:

• interest rates falling
• incomes rising
• unemployment dropping
• credit becoming easier to access
• mortgage terms extending

When borrowing capacity rises, buyers can pay more. That’s the fundamental maths of housing markets. Tax tweaks don’t override borrowing capacity.

Where I land on this

A few years ago I wrote about what I would do if I were redesigning housing policy in Australia.

In the taxation side of things I suggested:

• Remove stamp duty and replace with land taxation
• Remove negative gearing and the CGT discount for existing homes
• Keep negative gearing only for new housing, and even then only for a limited period, say five years from date of purchase

My goal was (and still would be) to shift investor activity toward creating new supply rather than bidding up existing homes.

If the tax savings from such reforms were then redirected toward building more social and community housing, the supply impact could be meaningful.

More homes built. More tenants housed. Less pressure across the system.

The reality

If negative gearing or CGT settings were changed tomorrow, the effect on house prices and rents would probably be modest.

Housing markets are shaped by bigger forces. Including credit costs and availability, plus housing supply.

Tax settings influence behaviour at the margins. But they rarely drive the whole story.