2026–27 Federal Budget Measures

The 2026–27 Federal Budget introduced major reforms to Australia’s negative gearing and capital gains tax (CGT) rules as part of the Government’s strategy to help improve housing affordability, reduce pressure on the Budget, and address intergenerational inequality.

The reforms primarily target investors in existing residential property and will apply from 1 July 2027.

Negative Gearing Reform

Negative gearing occurs where the expenses associated with an investment property exceed the rental income earned from it. Under the current rules, these losses may generally be offset against other income, such as salary and wages.

From 1 July 2027, losses relating to established residential properties purchased after 7:30pm (AEST) on 12 May 2026 will no longer be deductible against non-property income. Instead, those losses may only be offset against future residential property income or capital gains.

The reforms are intended to reduce investor demand for existing housing and encourage investment in new housing supply.

Grandfathering and Exemptions

Existing residential properties acquired before the announcement date will be fully grandfathered, allowing investors to continue applying the current negative gearing rules until the property is sold.

The reforms will not apply to:

• newly constructed residential properties;
• superannuation funds, including SMSFs;
• widely held trusts and managed investment trusts; and
• eligible build-to-rent and government-supported housing programs.

Properties purchased between 12 May 2026 and 30 June 2027 may continue to access negative gearing until 1 July 2027, after which the new restrictions will apply.

Capital Gains Tax Reform

Australia’s current CGT regime generally allows individuals and trusts to reduce capital gains by 50% where assets have been held for at least 12 months.

From 1 July 2027, the Government will replace the 50% CGT discount with:

• an inflation-based cost base indexation method; and
• a minimum 30% tax rate on real capital gains.

The reforms will apply broadly to individuals, trusts, and partnerships.

To encourage housing construction, investors in newly built residential properties may choose between:

• the existing 50% CGT discount; or
• the new indexation and minimum tax regime.

Recipients of certain government support payments, including the Age Pension and JobSeeker, will be exempt from the minimum tax rules.

Transitional Rules

The Government has announced transitional arrangements for assets acquired before 1 July 2027.

• Assets acquired and sold before 1 July 2027 will remain subject to the current CGT rules.
• Assets acquired after 1 July 2027 will be fully subject to the new regime.
• Assets acquired before 1 July 2027 but sold afterwards will receive hybrid treatment.

Under the hybrid approach, gains accrued before 1 July 2027 will continue to receive the existing 50% CGT discount, while gains accrued after that date will be calculated using the new indexed cost base rules.

Example

The Budget materials provide an example involving an investor named Michael who purchased a negatively geared investment property before 12 May 2026.

Because the property was acquired before the announcement date, Michael continues to qualify for negative gearing under the grandfathering provisions.

Michael later sells the property after the reforms commence. The portion of the gain accrued before 1 July 2027 receives the existing 50% CGT discount, while the post-1 July 2027 gain is taxed under the new indexation rules.

The example demonstrates that investors may pay more tax under the new regime compared with the current 50% discount method, although no tax liability arises until the property is sold.

Conclusion

By restricting negative gearing for established residential properties and replacing the 50% CGT discount with an indexation-based system, the Government aims to reduce speculative investment demand and encourage investment in newly constructed housing.

While existing property owners are largely protected through grandfathering provisions, future investors in established residential housing are likely to face significantly reduced tax benefits.

The reforms may influence investment behaviour, property prices, and housing supply over the coming years, and they are expected to remain a significant topic of debate within Australia’s tax and housing policy landscape.