BUDGET 2026! WHAT IT MEANS FOR PROPERTY INVESTORS!

Federal Budget 2026: Proposed Changes to Negative Gearing and Capital Gains Tax

The 2026 Federal Budget papers confirm the government’s proposal to introduce significant reforms to the taxation of residential property investments from 1 July 2027.

Under the proposed measures:

• Negative gearing for residential property investments will generally be limited to newly constructed dwellings.
• The current 50% capital gains tax (CGT) discount available to individuals, trusts and partnerships will be replaced with a system of cost base indexation.
• A minimum 30% tax rate on capital gains will apply, except for eligible new-build properties where investors may choose between the existing and proposed CGT methods.

Residential properties held before 7:30pm AEST on 12 May 2026 will be grandfathered and exempt from the negative gearing changes. The proposed CGT reforms will apply only to capital gains accruing after 1 July 2027.

The government has stated these reforms are intended to improve housing affordability, encourage new housing supply and support broader productivity measures within the economy.

---

Proposed Changes to Negative Gearing

Under the current tax system, if a residential investment property generates a net rental loss, that loss can generally be offset against other forms of income, including salary and wages. This reduces the investor’s taxable income and overall tax payable.

As a result, investors who are negatively geared often benefit from claiming all eligible deductions, including depreciation.

Example – Current Rules

In this example, the depreciation schedule increases the rental loss, which in turn reduces the investor’s taxable personal income and improves after-tax cash flow.

---

Proposed Treatment from 1 July 2027

For established residential properties acquired after 7:30pm AEST on 12 May 2026, the proposed rules would prevent rental losses from being offset against salary or other non-property income.

Instead, losses relating to these properties would only be deductible against:

• future residential rental income, and
• future residential property capital gains.

Unused losses would be carried forward for future use.

This proposal aligns with the government’s objective of directing investor demand toward new housing construction rather than established housing stock.

Example – Proposed Rules

Importantly, the deduction itself is not removed. The key difference is timing. Rather than immediately reducing personal taxable income, the loss may instead be deferred and applied against future residential income or capital gains.

---

Proposed Changes to Capital Gains Tax

The budget also proposes substantial reforms to the CGT regime.

Currently, individuals, trusts and partnerships that hold an asset for more than 12 months may generally apply the 50% CGT discount.

From 1 July 2027, the government proposes replacing this discount with a cost base indexation model. Under this approach, the property’s cost base would be indexed for inflation, and tax would apply only to the gain above inflation.

The budget also proposes introducing a minimum 30% tax rate on taxable capital gains accruing after 1 July 2027.

Importantly, this is not a 30% tax on the sale price. The minimum rate would apply only to the taxable capital gain after inflation adjustments.

---

Comparing the Existing and Proposed CGT Systems

Scenario 1 – Existing Rules

• Purchase price: $500,000
• Sale price: $1,000,000
• Nominal gain: $500,000
• 50% CGT discount applied
• Taxable gain: $250,000
• Tax payable at 47%: $117,500
• Effective tax rate: 23.5%

Scenario 2 – Proposed Rules

• Purchase price: $500,000
• Sale price: $1,000,000
• Indexed cost base: $657,770
• Taxable gain after indexation: $342,230
• Tax payable at 47%: $160,848
• Effective tax rate: 32.2%

Scenario 3 – Transitional Asset

For assets acquired before 1 July 2027 and sold afterwards, the gain would effectively be split into two periods:

• pre-reform gains eligible for the existing discount rules, and
• post-reform gains assessed under the indexation model.

Using the assumptions provided:

• Total taxable gain: $287,487
• Tax payable at 47%: $135,119
• Effective tax rate: 27.0%

---

The Long-Term Impact of Indexation

The broader issue is not simply whether investors pay more tax initially. The more significant change is that the proposed indexation model protects only against inflation, not against real capital growth.

For example, if:

• inflation averages 2.78% per annum, and
• property values grow at 7% per annum,

the gap between the indexed cost base and actual market value continues to widen over time.

As a result, a larger proportion of the capital gain becomes taxable the longer the property is held.

Under the existing 50% CGT discount system, investors effectively shared only half of the gain with the tax system. Under the proposed indexation model, strong long-term capital growth may result in a substantially greater proportion of the gain being exposed to tax.

 

Other Budget Measures

$1,000 instant tax deduction for workers from the 2026-27 financial year - 6.2 million workers benefit, with no receipts required.

Personal income tax cuts for all taxpayers, with further cuts in 2026 and 2027.

Medicare levy low-income threshold increased by 2.9% for over 1 million low-income individuals, families and pensioners.

Superannuation - additional tax on balances over $10 million confirmed, in addition to the previously announced 30% rate on balances over $3 million.

Discretionary trusts - a 30% minimum tax on trust income from 1 July 2028.

Underlying cash deficit of $28.3 billion for 2025-26, an $8.5 billion improvement on what was forecast in December.

(General information only - not personal financial, tax, or credit advice. Tax implications depend on your individual circumstances - speak to your accountant. Budget measures are subject to legislative passage.)