Budget May Curb Negative Gearing — What Investors Need to Know

Australia's top productivity adviser says any cuts to negative gearing or capital gains tax concessions should flow back as income tax relief for workers.

Australia's May 12 federal budget is widely expected to reshape the tax treatment of property investment — with the government anticipated to cut the capital gains tax (CGT) discount and reduce negative gearing concessions for investors. Now, Australia's top productivity adviser says those changes will only count as genuine economic reform if the revenue flows back to workers through income tax cuts.

Productivity Commission chair Danielle Wood told the ABC's Insiders: On Background program that linking any property tax changes to income tax relief is a necessary condition for the package to be considered "comprehensive."

The Case for Change — and the Condition

Ms Wood said the Commission sees a "case" for changing negative gearing and capital gains tax arrangements, because current settings have "distorted investment decisions somewhat."

"To the extent that you are shifting the incentives to invest and removing some of those distortions, that can be a good thing," she said.

But she was firm that reforming investor tax breaks in isolation falls short of real reform. Any revenue raised from winding back negative gearing or the CGT discount should, in the Commission's view, reduce pressure on income taxes over time.

"I'm sure that's a decision the government will grapple with, but we would certainly hope to see these types of changes reduce pressure on income tax over time," Ms Wood told [ABC News](https://www.abc.net.au/news/2026-05-01/labor-urged-to-put-income-tax-cuts-in-reform-mix/106633066).

On the much-debated question of housing supply, Ms Wood was measured. The Productivity Commission has not recently re-examined the supply impact of changing these settings, but she said the price effect was "pretty modest."

"It does somewhat shift the balance between new buyers, owner-occupiers and investors … so you wouldn't expect a huge impact on supply overall if the price effect is low," she said.

This is an important piece of framing for the political debate that will intensify as the May 12 budget approaches. Critics of negative gearing reform have long argued it will reduce the supply of rental properties and push rents higher. The Commission's position is that the overall impact is more contained — though Ms Wood acknowledges the evidence hasn't been revisited recently.

What It Could Mean for Property Investors

Negative gearing allows individual investors to deduct rental losses against other income, and the CGT discount means only half of any capital gain is taxed when an investment property held for at least 12 months is sold. Winding either back changes the after-tax return profile of residential investment property.

The critical question for investors currently holding property is whether any changes will apply to existing holdings or only to new purchases. If changes are grandfathered — as has been the case with some past reforms — the impact on current portfolios may be limited. But for anyone considering a new investment purchase, the tax picture may look different from July 2026 onwards.

For investors weighing options now versus post-budget, it's worth looking at your current loan structure as part of that assessment. [Investor home loan options](/home-loans/investor) vary considerably between lenders, and your interest deductibility strategy depends partly on how your loan is set up. Use a [borrowing power calculator](/calculators/borrowing-power) to understand what leverage looks like under current conditions.

What It Could Mean for First Home Buyers

Ms Wood's position is that any reduction in CGT and negative gearing concessions shifts "the balance between new buyers, owner-occupiers and investors" — nudging the market toward owner-occupiers at the margin. For first home buyers who have long competed against investors for the same properties, that could be welcome news.

However, the Commission's own assessment is that price impacts are "pretty modest." Don't expect a flood of affordable property to hit the market as a direct result of these changes. The bigger lever for first home buyers remains their own borrowing capacity and deposit. If you're in that position, [first home buyer loan options](/home-loans/first-home-buyer) and a [repayment calculator](/calculators/repayment) are practical tools to know your numbers before any policy changes take effect.

The Broader Budget Picture

The May 12 budget arrives under significant spending pressure. ABC News reports tens of billions in extra "unavoidable" costs already locked in: a new hospitals agreement with states adding $25 billion over five years from 2026-27, $14 billion for critical defence investments, $6 billion in new and amended Pharmaceutical Benefits Scheme listings, $4.4 billion for disability support pension, $3.2 billion for JobSeeker payments, and $1.5 billion for aged pension costs.

Treasurer Jim Chalmers has warned that the conflict in the Middle East "means higher borrowing costs on the debt that we inherited" and that "higher inflation will flow through to higher payment costs." Finance Minister Katy Gallagher has said the budget will focus on "responsible choices, supporting Australians now, while keeping the finances on a sustainable path."

Against that spending backdrop, finding revenue from property tax reform — structured carefully, as the Productivity Commission suggests — fits neatly into the frame. The May 12 budget is one to watch closely if you own investment property or are planning to buy.