There is a question Australians have been asking, in varying tones of frustration, for the better part of a decade: why does the tax system seem designed to freeze everyone in place? Investors are rewarded for holding property and penalised for selling it. Retirees are urged to downsize but charged tens of thousands of dollars to do so. First home buyers compete against a tax code that effectively subsidises their rivals. And yet the settings have barely moved.
That may be about to change. With the May 2026 federal budget approaching, the two biggest levers in Australia's property tax system — negative gearing and the capital gains tax (CGT) discount — are facing their most credible threat of reform in years. At the same time, a separate but related conversation about stamp duty for downsizers is gaining real political traction at the state level.
A Depression-Era Policy in a 21st-Century Crisis
Negative gearing — the ability to offset rental property losses against other taxable income — has been part of Australia's tax framework since the 1930s. The context was stark: unemployment had soared past 30 per cent during the Great Depression, and the government rethought its fiscal and taxation policies to stimulate recovery, with the Australian Taxation Office introducing negative gearing as part of broader reforms aimed at encouraging investment. The rationale was to incentivise property investment as a way to boost construction, create jobs, and stimulate the economy — at a time when banks were reluctant to lend and private investment had dried up.
The policy has outlived the crisis that created it by nearly a century. Negative gearing has been a recurring political issue, featuring prominently in the 2016 and 2019 federal elections, when the Australian Labor Party proposed restricting it to newly constructed housing and reducing the CGT discount from 50 per cent to 25 per cent. Labor lost both campaigns. After 2019, Anthony Albanese dropped the policy entirely, and at both the 2022 and 2025 elections, Labor promised no changes to negative gearing or capital gains tax.
Fast forward to early 2026, and the mood has shifted dramatically. The Australian Financial Review has reported, citing confidential government sources, that changes to the CGT discount are being seriously considered for the May budget. Treasury is actively modelling changes to the 50 per cent CGT discount, a Senate inquiry is hearing submissions from economists and industry groups, and the Prime Minister has pointedly refused to rule out reform.
What the Numbers Actually Say
The fiscal case for reform is not subtle. The Parliamentary Budget Office estimates the CGT discount will cost the federal budget close to $247 billion in foregone revenue over the coming decade, with more than 80 per cent of those benefits flowing to the top income quintile. The same analysis suggests the richest 1 per cent of Australians will receive about 59 per cent of the benefit this year, while people under 35 receive roughly 4 per cent.
The Grattan Institute has estimated that reducing the CGT discount to 25 per cent would raise approximately $6.5 billion a year for the federal budget. Treasury is reportedly modelling a more modest reduction, from 50 per cent to 33 per cent on investment properties. Grattan's research suggests trimming the discount would reduce house prices by less than 1 per cent, while planning reform and allowing more homes in established areas would have a far larger impact on prices and rents.
Opponents are not without arguments. Master Builders Australia, the Property Council of Australia, and the Real Estate Institute of Australia warn that cutting the discount would deter investors, reduce new housing supply, and ultimately worsen rental affordability by reducing rental stock. There is a recent precedent for concern: investor tax changes in Queensland and Victoria contributed to hundreds of investors selling up, particularly in Brisbane and Melbourne, leading to rental shortages and rent increases of 10.7 per cent and 14 per cent respectively over the following year, according to Domain.
The historical record on quarantining negative gearing is genuinely mixed. The Hawke government quarantined negative gearing between 1985 and 1987, preventing property losses from being offset against labour income, and property investors argued the change had reduced investment in rental accommodation and caused rents to rise. Economist Saul Eslake, however, has argued that rent increases during that period were limited to Sydney and Perth, which already had unusually low vacancy rates, suggesting other factors were responsible.
The Stamp Duty Trap for Retirees
While tax reform debate fixates on investors, a separate but equally important supply constraint is building in plain sight. As reported by 9News, data from KPMG shows that Baby Boomers hold property wealth averaging $1.36 million per household, while Gen X households average $1.455 million, putting both well ahead of Millennials. Yet asset-rich does not mean cash-liquid, and for many in those cohorts, the cost of moving is the problem, not the willingness.
9News reports that in Sydney, stamp duty on the median home price of $1.75 million reaches $78,262. In Melbourne, the same tax on the median property of $1.083 million amounts to $62,326. Director of Metropole Property Strategists Michael Yardney told 9News that the numbers "simply don't add up" for homeowners considering selling later in life. "For downsizers, it means paying up to $100,000 in tax just to free up equity and move to a more suitable home," he said. Yardney has also noted that middle-ring suburbs, where many older homeowners live, are "woefully underdeveloped when it comes to medium-density housing", leaving retirees who want to stay in their communities with few viable options.
REIWA found that 63 per cent of Western Australian retirees said stamp duty costs stopped them from being able to downsize, according to its 2025 Housing Issues Survey. Reserve Bank governor Michele Bullock has also weighed in, blaming state stamp duties for preventing older Australians from downsizing and describing stamp duty as "a tax on mobility" and "a barrier to people moving to find jobs".
South Australia Charts a New Course
The political momentum is now visible at state level. South Australia is poised to become the first state in the nation to completely abolish stamp duty for eligible downsizers, with Premier Peter Malinauskas announcing that, if re-elected, a Labor government would scrap stamp duty for South Australians aged 60 and over who sell their existing family home and purchase a newly built or off-the-plan property valued at up to $2 million. Eligible buyers could save up to $103,830 in stamp duty on a $2 million purchase, while a $1 million purchase would attract a concession of $48,830.
With housing supply and affordability central to voter concerns, stamp duty reform has again emerged as a powerful political lever, and if South Australia proceeds with a full exemption for downsizers, it may place pressure on other states to consider similarly bold measures. The move comes as the federal government reportedly considers changes to the capital gains tax discount for property investors, with tax reform and intergenerational fairness front and centre ahead of the federal budget.
The Broader Trade-Off
Strip away the political noise and the fundamentals show a system designed for one era operating in another. The economic logic for negative gearing in the Depression — to attract private capital into rental housing when banks would not lend — has little connection to its modern function as a wealth management tool concentrated among higher-income earners. The 50 per cent CGT discount, introduced by the Howard government in 1999 to simplify an unwieldy indexation regime, has been criticised by the Grattan Institute as having overcompensated property investors over the past 25 years, during which house prices grew at an annual average of 6.4 per cent while inflation averaged only 2.9 per cent.
At the same time, the counter-argument has genuine weight. Private landlords provide the overwhelming share of Australia's rental housing stock. Any reform that exits investors from the market without a compensating increase in social and public housing — both perennially underfunded — risks worsening the very shortage it aims to fix. AMP chief economist Shane Oliver has suggested a more measured path: modestly winding back the CGT discount while simultaneously lowering income tax rates, framing the change as genuine reform rather than a simple revenue grab.
Reasonable people can land in different places on that trade-off. But the current settings — a Depression-era tax concession, a stamp duty regime that penalises mobility, and a housing supply gap that widens every year — are not serving most Australians well. The question ahead of May's budget is not whether the system needs rethinking. It plainly does. The question is whether the government has the political will to do it carefully and honestly, or whether it will again defer the hard choices to a later parliament.