Senate urged to soften negative gearing and CGT reforms

In a submission shared with Broker Daily, Westbridge Funds Management chairman and Momentum Wealth managing director Damian Collins called for a more gradual approach, including a 10-year transition period or a capped passive loss allowance modelled on the US system.

The first tranche of federal budget measures passed the House of Representatives on Thursday, including reforms to negative gearing and the capital gains tax (CGT) regime.

Collins said that bill’s changes to negative gearing and CGT discounts, if left as they are, would push rents up, undermine the economics of risk-taking, and push demand towards a construction sector that cannot absorb it.

“The proposed reforms to negative gearing and CGT are likely to have consequences for Australian real estate markets that will not achieve housing affordability, nor encourage productive investment,” Collins said.

Collins leads Momentum Wealth, a residential property investment advisory firm established in 2006, and chairs Westbridge Funds Management, which manages approximately $1.06 billion in unlisted property funds.

Negative gearing concerns

A major focus of Collins’ submission was the proposed restriction of negative gearing to newly built homes from 1 July 2027.

While the government’s objective is to redirect investor capital towards new housing supply, Collins said the policy risks reducing investor participation in the established housing market without delivering an immediate increase in construction activity.

“The proposed restriction will materially change that equation,” Collins said.

“Investors do not make decisions based on gross rents alone. They consider after-tax cash flow, borrowing costs, maintenance and holding costs, vacancy risk, land tax and other state-based charges, expected capital growth and the opportunity cost of investing elsewhere.”

Collins said many investors, particularly those with one or two properties, rely on the ability to offset rental losses against employment income during the early years of ownership.

“If rental losses from established dwellings can only be offset against residential rental income and carried forward, the cash flow burden increases immediately,” he said.

Broker Daily has reported on how the potential changes may affect investor behaviour – from a shift in lender or structure (such as SMSF) to broader moves towards commercial property or new builds.

However, Collins questioned the assumption that investors would simply redirect capital into new housing and whether Australia has the construction capacity required to rapidly absorb additional demand.

“Australia does not presently have an idle pool of builders, trades, materials and development-ready land waiting for investor demand,” he said.

Westpac economists have forecast that the budget changes will cause new investor activity to fall by 34 per cent in the short term but a lift in new-build investment and dwelling construction in the longer term.

Collins said that without sufficient new supply, the changes could place upward pressure on rents.

He noted that gross residential rental yields in Australia’s capital cities currently sit at around 3.57 per cent, according to Cotality, while net yields are closer to 2 per cent after costs. By comparison, he said commercial property yields typically range between 8 per cent and 9 per cent gross.

“Without the tax benefit of negative gearing, investors will gravitate to higher-yielding assets, meaning fewer residential rental properties available and ultimately higher rents,” Collins said.

CGT changes could alter investment behaviour

Collins also warned that replacing the 50 per cent CGT discount with indexation could have broader implications for investment decisions across the property sector.

While acknowledging the proposed changes would affect different asset classes in different ways, he said the reforms would disproportionately impact investors pursuing higher-risk, value-add opportunities.

“Investors require a premium for taking additional risk. If that premium is reduced after tax, rational investors will allocate less capital to higher-risk, higher-growth projects,” he said.

To illustrate, Collins modelled two hypothetical $1 million commercial property investments held for five years. One represented a lower-risk income-producing asset generating a 12 per cent annual return, while the second reflected a higher-risk value-add investment targeting a 15 per cent annual return.

According to the modelling, the higher-growth asset would experience an approximately 11 per cent decline in total after-tax returns under the proposed system, while the lower-risk income-focused investment would see after-tax returns improve by around 6 per cent.

The modelling also suggested the after-tax risk premium available to investors would fall by approximately 43 per cent – from around $235,000 to $135,000.

“This is a significant distortion,” Collins said.

“It encourages investors to favour assets where returns are delivered as income and inflation-linked growth, rather than assets requiring capital investment, risk taking and active improvement.”

Call for a more gradual approach

Rather than proceeding with an immediate restriction on negative gearing, Collins urged the committee to consider a more gradual transition.

One option he proposed was a 10-year phased reduction in deductions for newly acquired established residential properties, allowing investors, tenants, and lenders more time to adjust.

A second option would involve introducing a capped passive loss allowance, similar to arrangements used in the US.

Under the US model, investors could continue to offset a limited amount of rental losses against other income, potentially up to $25,000 per person annually.

“These types of models are more targeted than an abrupt restriction,” he said.

“A capped passive loss allowance would limit the tax benefit for large-scale loss-making portfolios while preserving access for ordinary investors with one or two properties.”

Collins also called for stronger incentives to remain in place for commercial redevelopment, refurbishment, and adaptive reuse projects, saying tax settings should continue to support investment that expands housing and commercial property supply.

“If changes are to be made, a more gradual and targeted approach would better balance fairness, housing affordability, rental supply and productive investment,” he added.

“The Committee should consider amendments that reduce short-term disruption and preserve incentives for investors to provide rental housing and commercial property, fund new supply and take the risks required to improve Australia’s residential and commercial property stock.”

[Related: Budget could reshape investor market, brokers warn]

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