Research Highlights Tax-Driven Borrowing
New research by the e61 Institute reveals that the capital gains tax (CGT) discount is incentivising over-borrowing, making otherwise loss-making property investments profitable. The study analysed 900,000 property investments held between 2008 and 2025 and found significant impacts of the CGT discount on investment decisions.
According to the research, 46,000 investments had before-tax returns below mortgage rates but turned profitable after-tax due to the 50% CGT discount. This represents 5.1% of all investment properties and 13% of those making a loss before tax.
Dr. Nick Garvin, e61 Research Manager, stated, “The capital gains discount allows strategic tax minimisation where an investor can deduct their losses at 45% while only paying a tax rate of 22.5% on their gain.” This tax system rewards investors who borrow more, as shown by the effective tax rate differences.
Impact of Tax System on Borrowing
Typically, investors in the highest tax bracket with no mortgage pay an effective tax rate of 31%. However, with a 90% mortgage, this rate drops to just 19%. As a result, the tax structure encourages higher borrowing and less diversified investment portfolios.
The study suggests that when leverage lowers tax rates and can transform pre-tax losses into gains, individuals are driven to expand their holdings of capital gains-generating assets. The tax system likely escalates asset prices like housing and leads to more highly leveraged portfolios.
Reform proposals suggest reducing the CGT discount and introducing ringfencing to limit negative gearing. While these measures could partially reduce the incentive to over-borrow, they would not completely eliminate it.
“Instead of a fixed discount, capital gains should be adjusted for inflation so every investor pays tax on all of, and no more than, their real gain,” said Dr. Matt Nolan from e61. “This would remove the tax incentive for investors to borrow excessively while treating capital income consistently both between assets and with other forms of income.”
The findings underline the necessity for policy reform to mitigate the risks linked with current tax incentives. Without changes, the market may continue to favour excessive borrowing and riskier investment strategies.
Contact Dr. Nick Garvin or Dr. Matt Nolan at the e61 Institute for more insights on how tax policies impact investment strategies and potential reforms.
For further information, reach out to Anil Lambert at 0416 426 722 or via email at [email protected]
Last updated: 4 April 2026, 8:03 pm
