This report models several potential transitional arrangements that may ease the distribution pressures arising from reforms to negative gearing and capital gains tax (CGT), and lays out a politically acceptable reform pathway.

Despite reviews of the tax system, reform of negative gearing and CGT provisions face political opposition. A complete abolition of negative gearing has often been criticised by policy makers for its potentially adverse impacts on the financial wellbeing of ‘mum and dad’ investors.

The research modelled two proposed changes to negative gearing and CGT provisions:

• Capping rental deductions model- which puts a cap on the total value of rental deductions a landlord may claim. If a $40,000 cap is imposed, the average tax saving for a negative-geared rental investor is reduced by only $25. If a $5,000 cap is imposed, the average tax saving for a negative-geared rental investor is reduced by $921.
• Progressive rental deduction model – which allows ‘mum and dad’ investors in the bottom half of either the income or property value distributions continue to enjoy all rental deductions, and therefore experience no reduction in tax savings. At the other extreme, those in the top 25 per cent are subject to a full quarantine of negative gearing and therefore receive zero rental deductions, resulting in a complete loss of their tax savings from negative gearing.