Our preliminary response to the 2026 Federal Budget

Part A: Our view of the tax changes in the budget

The main political rhetoric supporting this budget is intergenerational fairness and housing affordability.

However, Treasury’s own projections suggest the proposed changes to capital gains tax and negative gearing will have only a minimal impact on house prices and rents.

Housing affordability is far more likely to be improved by increasing supply, stronger wages growth, lower interest rates, lowering stamp duty and other taxes, and similar structural reforms.

Therefore, based on Treasury’s modelling and other independent analysis, the probability that these tax changes materially improve housing affordability appears very low. New Zealand provides a useful case study. It removed interest deductibility between 2020 and 2024. During that period, property prices fell slightly, rents increased slightly, and home ownership rates rose slightly. However, it is difficult to attribute those outcomes solely to the tax changes, particularly given the broader economic disruption during the Covid period. Interestingly, New Zealand has since reinstated interest deductibility.

What is clear is that, according to the forward estimates, tax revenue is expected to increase, but government spending is expected to increase by more. As a result, government debt also increases. In other words, this is less about genuine tax reform or prudent fiscal management, and more about increasing tax revenue to fund higher expenditure. I acknowledge that expenditure is projected to grow at a slower rate than it has previously.

In short, this budget is not really about tax reform, intergenerational fairness, or housing affordability. It is about tax revenue. The government still plans to increase spending beyond already record levels, albeit at a slower rate.

Part B: Likely impact of proposed tax changes

Negative gearing

• Investors are likely to redirect capital into other asset classes, including new builds, shares and commercial property.
• Developers will heavily promote new builds, which may include a “tax premium” in the purchase price because the first owner retains access to negative gearing and the original 50% CGT discount. The risk is that investors overpay for tax benefits for suboptimal assets.
• Investors typically represent around one-third of property buyers. If they avoid established property, buyer demand will fall, placing downward pressure on prices. Overall price movements are expected to be modest, but some locations may be more affected.
• If the supply of rental properties in established areas falls, and population growth remains strong, rents are likely to rise. However, forecast increases appear modest.
• Removal of negative gearing reduces borrowing capacity by circa 10-20% (more sensitive for higher income earners).

Increase in CGT

• Australians are likely to focus more on the family home and superannuation to avoid higher capital gains tax.
• Some investors will be attracted to new builds because of the tax incentives.
• Wealthy individuals may be discouraged from remaining Australian tax residents, causing more capital to move offshore.
• Investors will need higher pre-tax returns to offset the increased tax drag and preserve after-tax returns. We estimate that the effective rate of CGT increases from 20-22.5% to 30-35%, which is substantial.

Taxation of family trusts

• Most people will restructure where possible to minimise the impact of the flat 30% tax rate.
• Self-employment becomes less attractive. For example, a small business earning $200,000 of profit would pay $60,000 of tax. By contrast, if both spouses earned $100,000 each as PAYG employees, their combined tax would be only $45,000. That creates a clear disincentive to being self-employed.

Part C: Practical implications for investors

Negative gearing

• Our modelling estimates that the after-tax internal rate of return (IRR) from borrowing to invest in established residential property falls from circa 11% p.a. to 8.4% p.a., solely due to the proposed negative gearing and CGT changes. If both changes become law, established residential property may no longer compensate investors sufficiently for the risk relative to other investment options.
• Our modelling estimates the after-tax internal rate of return for newly built property is circa 8.5% p.a., assuming 4.5% p.a. capital growth. Given the likely locations of these properties, there is a risk that capital growth is lower. There is also a risk that prices are inflated because they include a tax premium.
• We currently have concerns about commercial property valuations, so direct commercial property is unlikely to be attractive at this stage – Stuart will be writing a blog about this soon.
• Therefore, if these changes become law, future direct property investment opportunities appear to be very limited.
• For owners of existing investment properties, we do not recommend any changes.
• For prospective (new) property investors, our advice is to pause any plans for now until the proposed changes become law and then review your options. If negative gearing is removed, the after-tax IRR may not be high enough to adequately compensate property investors for the time and risk involved.

Increase in CGT

• The minimum 30% tax rate on capital gains after 1 July 2027 limits tax planning opportunities but does not materially change investment strategy on its own. For example, if negative gearing remained unchanged, borrowing to invest in residential property would still be attractive.
• The livevesting strategy, which involves investing more in the family home, becomes more attractive.
• We have always focused on helping clients maximise superannuation by retirement, particularly to use as much of the transfer balance cap as possible. That cap increases to $2.1 million from 1 July 2026. These CGT changes reinforce the importance of maximising tax-free super.
• For owners of existing investment properties, whilst the CGT tax rate increase is not ideal, it only applies after 1 July 2027. We will get assets valued then. Overall, we do not think this higher rate of tax changes the investment fundamentals.

Taxation of family trusts

• For self-employed clients using a corporate beneficiary structure, we will likely use the restructure rollover concessions to insert a holding company that sits between the trading company and the family trust. This should still allow profits to be retained in an investment company and cap the tax rate at 30%.
• Previously, we generally distributed income to individuals only to the extent needed to fund living expenses and financial commitments. Otherwise, keeping taxable income at around $135,000 was usually optimal. Given the minimum 30% tax rate, we will likely distribute more income to individuals to match that minimum rate, targeting taxable income of around $200,000 per individual.
• For some family trusts that only hold investments, we may need to consider whether moving those investments into a company or personal names produces a better outcome, albeit with less flexibility. Alternatively, we can introduce gearing into the trust to minimise its income and distributions.

Conclusion

Our view is that, of the three proposed tax changes, the changes to family trusts are the least likely to become law in their current form. At a minimum, we expect carve-outs for small businesses. It is also possible that this family trust measure does not proceed at all.

The proposed changes to negative gearing and capital gains tax must still pass through Parliament. Labor does not control the Senate, so these measures may also be amended. For example, the minimum CGT rate could potentially be reduced to 25%.

The key point is that these are only proposals at this stage. There is no need to make any decisions now. We will continue to monitor developments closely and keep clients updated over the coming weeks and months.