Australia's Proposed Property Tax Reform: What Is the Impact on Australia's Banking Sector

Australia’s banking sector is dominated by the “Big Four” banks: Commonwealth Bank of Australia (CBA), Westpac Banking Corporation (WBC), National Australia Bank (NAB), and Australia and New Zealand Banking Group (ANZ). As of 19 May 2026, they collectively hold around 70% of market share, with combined assets exceeding AUD $4.1 trillion, out of a total AUD $5.8 trillion in the national banking system, as shown in Table 1.

Table 1: Market Cap and Loan Portfolio in Australia

Summary of Australia’s 2026–27 Federal Budget Proposal Property Tax Reform

On 12 May 2026, Australia’s 2026–27 Federal Budget proposed major reforms to property investment taxation, including restrictions on negative gearing for established residential properties in Table 2 and changes to the capital gains tax (CGT) framework effective from 1 July 2027 in Table 3. It should be noted that these measures have not yet been enacted into law; the Liberal Party has signalled opposition to the reforms, and their passage through Parliament remains subjected to legislative approval.

Negative gearing allows property investors to offset net rental losses from residential investment properties against their taxable income. When rental expenses—such as loan interest, maintenance costs, and deductible expenses exceed rental income, the resulting net rental loss can be used to reduce the investor’s overall taxable income and, in turn, reduce their total tax payable. This tax treatment has historically encouraged leveraged property investment, particularly when combined with the 50% CGT discount, which enhances after-tax returns on capital gains.

Under the proposed property tax reforms, negative gearing benefits would be limited to new residential builds and also existing property bought before 12 May 2026, while the existing 50% CGT discount would transition towards a cost-base indexation regime alongside a minimum 30% tax rate on real capital gains. These measures aim to moderate property price increases, thereby improving affordability and assisting first-home buyers in entering the market.

Capital gains tax (CGT): A tax imposed on the profit earned when a property is sold for a price higher than its original purchase cost.

Cost-base indexation: A tax method that adjusts the original purchase price of an asset for inflation before calculating the taxable capital gain, reducing tax on gains driven purely by inflation.

Table 2: Summary Key Property Tax Reform Proposals — Negative Gearing

Image 1: Example Tax Calculation Under Negative Gearing Reform Proposals

Source: Generated using AI (Gemini). Calculations and illustrative examples are based on assumptions and are provided for reference purposes only

Table 3: Summary Key property tax reform proposals — Capital gains tax (CGT) framework

Image 2: Example Tax Calculation Under Property Capital Gain Tax Reform Proposals

Source: Generated using AI (Gemini). Calculations and illustrative examples are based on assumptions and are provided for reference purposes only

Proposed Property Tax Reforms High Impact of Higher Income Earners

According to the 2025–26 Tax Expenditures and Insights Statement (TEIS), tax benefits from property-related concessions are highly concentrated among higher-income earners (Table 4). In 2022–23, taxpayers within the top taxable income decile received approximately 83% of the benefits from the capital gains tax (CGT) discount, while the top 1% of tax filers accounted for 54% of all capital gains income. This highlights the significant concentration of CGT benefits among the highest-income households.

Negative gearing benefits are also skewed toward higher-income earners. Approximately 78% of rental loss deductions were claimed by above-median income earners, indicating that lower-income households received only a relatively small share of the total benefits from these tax concessions.

Overall, while both measures disproportionately benefit higher-income investors, the CGT discount is significantly more concentrated among top-income earners compared with negative gearing benefits. As a result, the direct financial impact of the proposed reforms is expected to be more pronounced for higher-income and leveraged property investors, while the impact on below-median income groups is likely to remain relatively contained.

Table 4: Key Summary Australia Distribution of Tax Benefits from Negative Gearing and CGT Discount

Australian Housing Tax Reforms Driving a Shift Toward New Build Lending and More Sustainable Credit Growth

As shown in Chart 1, investor lending constitutes a significant portion of the Australian mortgage market, accounting for 34% of the value of new loan commitments as of March 2026. The proposed Federal Budget reforms—specifically the restriction of negative gearing on established dwellings and the restructuring of the Capital Gains Tax (CGT) discount—are expected to moderate investor demand in the established residential segment. Over the medium term, this shift may decelerate overall housing credit growth, potentially presenting a localized earnings headwind for the Australian banking sector given its sizeable structural exposure to investor mortgages.

Conversely, the broader market remains relatively resilient, with owner-occupiers and first-home buyers comprising the dominant 66% share of new loan commitments. Any near-term downside pressure on the banking sector’s existing loan books is expected to be well contained, supported by grandfathering provisions that protect properties acquired before 12 May 2026. In addition, ongoing tax incentives for new residential construction are likely to shift investor preference toward new builds, which may help partially offset softer lending demand in the established housing segment.

Chart 1: Housing finance Value of New loan Commitments for Dwellings (a), Seasonally Adjusted, Australia

Australian Big Four Banks Maintain Strong Mortgage Credit Fundamentals Amid Property Market Price Decline

For the credit perspective Big Four Australian banks of CBA, WBC, NAB, and ANZ’s mortgages make up a significant portion of their domestic loan books, ranging from 49% to 71%, which underscores the banks’ reliance on housing credit as a core asset. Despite this concentration, borrowers maintain substantial equity, with current Loan-to-Value Ratios (LTVs) between 37% and 48%, slightly below their 5-year averages of 39%–49%. This strong collateralization provides a buffer against potential property market price decline.

Credit quality remains robust, as reflected in low mortgage non-performing loans (NPLs) of 1.0% to 1.5%, broadly in line with historical averages. Even NAB and ANZ, which show a modest increase in NPLs relative to their 5-year averages, remain within manageable levels. These metrics indicate that, although the banks are highly exposed to housing, their mortgage portfolios are well-protected by prudent underwriting and borrower equity.

Table 5: Mortgage Market Share and Portfolio Risk Metrics of Australia’s Big Four Banks

Our View

Australia’s proposed 2026–27 property tax reforms are expected to moderate investor demand in the established housing market, particularly among higher-income and leveraged property investors who benefit most from negative gearing and CGT concessions. This may slow housing credit growth and create a mild earnings headwind for the Australia banking sector over the medium term.

However, the overall impact on the Australian banking sector is expected to remain manageable. Grandfathering provisions, continued demand from owner-occupiers and first-home buyers, and tax incentives for new residential developments should help support overall housing activity and partially offset softer investor lending demand.

In addition, the Big Four banks continue to maintain strong mortgage credit fundamentals, supported by low mortgage NPLs, prudent underwriting standards, and healthy borrower equity positions.

Overall, the reforms are more likely to drive a gradual rebalancing and moderation in the housing market rather than trigger a severe downturn, with the Australian banking sector expected to remain fundamentally resilient.

Recommendation

The Reserve Bank of Australia (RBA) has raised interest rates three times in 2026 (February, March, and May), bringing the cash rate to 4.35%, with the possibility of one additional hike before year-end. As rates appear to be approaching the terminal level, the current environment may provide an attractive opportunity for investors to lock in relatively high yields.

For investors seeking higher returns and willing to accept moderately higher credit risk, AUD-denominated subordinated Tier 2 bonds issued by the Australian Big Four banks may offer attractive value opportunities, with yields currently above 6% (Table 6).

Table 6: Long Term AUD Tier 2 bonds