On 2 July 2024, the Parliamentary Budget Office released their analysis on the foregone revenue resulting from negative gearing and capital gains tax discounts on residential investment properties.
The report estimates the tax revenue foregone over the last ten years and provides projections for the tax revenue forgone up until the 2034-35 financial year. The analysis includes residential properties owned by individuals, trusts, and partnerships.
Key takeaways from the report
In the 2023-24 financial year, the estimated foregone tax revenue was $10.92bn, with $5.7bn relating to negative gearing deductions and $5.22bn relating to the capital gains tax discount. Interestingly, in the 2021-2022 financial year, the foregone revenue relating to the capital gains tax discount was significantly higher at $9.24bn, indicating many investors sold their investment properties at a profit during this time.
The estimate of $10.92bn over the last financial year contrasts with an estimate $6.75bn foregone in the 2014-15 financial year, and a projected $22.85bn foregone in the 2034-35 financial year.
Another interesting takeaway is that the revenue foregone due to negative gearing deductions and capital gains tax discounts has been fairly equivalent in the past. For example, the amounts foregone for negative gearing deductions and capital gains tax deduction were $3.6bn and $3.15bn respectively in the 2014-15 financial year, compared with $5.7bn and $5.22bn respectively in the 2023-24 financial year. However, the projections estimate that negative gearing deductions will cost $14.5bn, compared with $8.35bn for the capital gains tax discount in the 2034-35 financial year. Clearly, the Parliamentary Budget Office expects the cost of negative gearing deductions will outpace the cost of the capital gains tax discount from this point onwards.
Finally, the difference in who benefits from the negative gearing deductions versus the capital gains tax discount varies significantly based on income. The top 10% of income earners are expected to represent $4.31bn out of the $5.4bn in foregone revenue resulting from the capital gains tax discount in the 2024-25 financial year. The top 10% of income earners are expected to represent $2.94bn out of the $6.9bn in foregone revenue resulting from negative gearing throughout the 2024-25 financial year. This shows that the benefit of negative gearing is spread much more evenly throughout different levels of income.
The Parliamentary Budget Office report is available here.
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