Impact of Proposed Changes to Negative Gearing and CGT in the 2026 Federal Budget

The Federal Budget handed down on 12 May 2026 has introduced proposed reforms to Australia’s long-standing negative gearing and capital gains tax (CGT) regime.

If enacted, these measures would represent one of the most significant changes to property investment taxation since the introduction of the 50% CGT discount in 1999.

Importantly, at the time of writing:

• the legislation has not yet been enacted;

• significant technical detail is still pending; and

• the proposals remain subject to parliamentary approval and potential amendment.

Proposed changes to property investment tax rules

1. Proposed Negative Gearing Changes

The Government has announced that negative gearing for residential property investments will generally be limited to newly constructed residential properties from 1 July 2027.

Broadly, under the proposal:

• existing investment properties held before Budget night will continue under the current rules (grandfathered);

• newly constructed residential properties will continue to qualify for negative gearing;

• established residential properties acquired after Budget night will no longer allow unrestricted offset of rental losses against salary and unrelated income.

The acquisition cut-off is proposed to apply from:

• 7:30pm (AEST) on 12 May 2026.

2. Grandfathering of Existing Properties

The Government has indicated that properties already owned prior to Budget night will continue to retain access to the current negative gearing regime.

This means:

• existing investors are expected to remain protected under transitional grandfathering provisions;

• the reforms are intended to primarily affect future acquisitions of established residential property.

3. Treatment of Established Residential Properties

For established residential properties acquired after Budget night:. From 1 July 2027,

• rental losses will no longer be deductible against salary, wages or unrelated income;

• losses will instead be quarantined.

  
  

The quarantined losses are proposed to:

• carry forward indefinitely; and

• only be offset against:

  • future residential rental income; or

  • future taxable capital gains from residential property investments.

This materially changes the economics of highly leveraged residential property investment strategies.

The proposed reforms are expected to particularly impact:

• high-income earners,

• investors relying on tax refunds to support cash flow,

• interest-only lending strategies,

• and growth-focused portfolios with low rental yield.

4. New Build Exception

Importantly, the Government has confirmed that newly constructed residential properties will continue to qualify for negative gearing benefits.

This appears to include:

• newly constructed dwellings,

• off-the-plan purchases,

• newly completed developments.

The policy objective is clearly to:

• redirect investor demand toward increasing housing supply rather than competing for established dwellings.

5. Transition Period

Although the reforms are proposed to commence from:

• 1 July 2027,

the acquisition cut-off applies from:

• 12 May 2026 (Budget night).

This creates a transitional period between:

• Budget night; and

• the commencement date.

Current Treasury commentary suggests that properties acquired during this transition period may temporarily continue to access negative gearing until 1 July 2027.

However, further legislative clarification will be required.

Increase in new housing supply due to policy changes

6. Proposed Changes to Capital Gains Tax (CGT)

The Government has also announced a proposed replacement of the current 50% CGT discount regime with an inflation-indexation methodology.

The proposed commencement date is:

• 1 July 2027.

Under the proposal:

• the cost base of an asset would instead be indexed for inflation;

• tax would then apply to the “real” gain above inflation.

This broadly resembles the pre-1999 CGT framework.

7. Transitional CGT Rules

At this stage, the detailed transitional CGT provisions have not yet been released by Treasury.

Current Government commentary suggests that transitional rules may be introduced in connection with the proposed commencement date of:

• 1 July 2027.

Based on current public commentary, it is possible that:

• gains accrued prior to 1 July 2027 may continue to receive existing CGT discount treatment; and

• the new inflation indexation methodology may apply prospectively from the commencement date.

However, the precise legislative operation remains uncertain pending:

• exposure draft legislation,

• Treasury consultation papers,

• and explanatory memorandum material.

Accordingly, significant technical uncertainty currently remains regarding:

• valuation methodologies at transition date;

• apportionment calculations;

• record keeping requirements;

• and interaction with existing CGT provisions.

  
  

Clients should therefore be cautious about making major transaction decisions based solely on preliminary Budget commentary until the detailed legislation is formally released.

8. New Build CGT Concession

The Government has also indicated that newly constructed residential properties may retain access to:

• the current 50% CGT discount regime.

Current Treasury commentary suggests investors in qualifying new builds may potentially have access to:

• either the existing CGT discount methodology; or

• the new inflation indexation method.

Again, this demonstrates a clear policy intention to:

• encourage investment into new housing supply.

The final eligibility criteria and technical operation remain subject to legislation.

9. ASF Preliminary View

At this stage:

• substantial technical uncertainty remains;

• draft legislation has not yet been released;

• and further Treasury consultation is expected.

However, based on the current announcements, several policy directions appear reasonably clear:

• Existing investors are expected to remain largely protected through grandfathering.

• Future tax concessions are being redirected toward new housing supply.

• Property investment strategies may increasingly shift toward:

  • stronger rental yield,

  • sustainable cash flow,

  • development exposure,

  • and lower leverage strategies.

The proposed reforms may materially impact:

• acquisition strategies,

• borrowing capacity modelling,

• long-term tax planning,

• succession planning,

• and after-tax investment returns.

Need Assistance?

Given the potential impact of these proposed reforms, clients who are:

• considering acquiring investment property;

• restructuring existing portfolios;

• or undertaking long-term succession planning

should seek advice before implementing any major transaction decisions.

If you would like to discuss how these proposed changes may impact your specific circumstances, please contact or email Arnold Stevens Finlay and our team would be happy to assist.