Tax grabs dressed up as housing policy: what investors need to know 

Last Friday, both Houses passed the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026. At the time of writing, the Bill has not yet received Royal Assent, so technically it is not law. However, Royal Assent is generally regarded as a mere formality. 

Importantly, the practical application of the new rules still depends on several key ministerial decisions that have not yet been made. I will flag those gaps below because they matter. 

In broad terms, the Bill does four major things that affect investors. It quarantines negative gearing losses on established residential property, replaces the capital gains tax discount with indexation and a minimum 30% tax on gains, changes how trust capital gains flow through to beneficiaries, and prevents SMSF’s from borrowing to buy residential property. 

Negative gearing survives for existing investors, but not for new established property purchases 

Rental losses on established residential property purchased after 7.30pm AEST on 12 May 2026 will be quarantined from 1 July 2027. Properties held before Budget night are grandfathered, so the previous rules continue to apply. 

From 1 July 2027, if deductions on an affected residential property exceed its rent, the excess loss can no longer be offset against salary or other income. Instead, it is carried forward and can only be used against net rental income from other non-quarantined residential properties, or against a capital gain when a residential property is sold. The loss is not lost, but its usefulness is deferred. 

That matters because of the time value of money. For someone earning between $135,000 and $190,000 (second highest marginal tax rate of 39%), each $1 of negative gearing claimed immediately is worth 39 cents. If that deduction is delayed for 10 years, its present value falls by about 46%, to around 21 cents in the dollar. If it is delayed for 15 years, which may be more realistic, it is worth only about 15 cents. 

There are some exceptions. New sub-divided residential dwellings are excluded, so a genuine new build can still be negatively geared in the usual way. Vacant land owned before Budget night is also grandfathered, as is land where construction had already started or was contracted. Building on that land should not trigger the quarantine rules. 

Investors need to be careful with anything that resets the acquisition date. For this purpose, the Bill treats joint tenants as tenants in common. If one joint owner comes off title after Budget night, for example because of death or relationship breakdown, the remaining owner is treated as acquiring a new interest in that share. That new interest is not grandfathered. 

The biggest unresolved issue is what qualifies as a new residential dwelling. The Bill does not define it. That definition will be set by the Treasurer in a legislative instrument, and the Treasurer must be satisfied the definition genuinely add to housing supply. Until that instrument is released, no one can say with certainty what qualifies.  

Will quarantining negative gearing make housing more affordable? 

The government says these negative gearing changes are designed to help more Australians buy a home and address generational inequality. But there is no credible evidence they will achieve either objective.  

Treasury’s own modelling suggests property prices may fall by only around 2%, which is broadly consistent with other economists’ work. That is, tax settings impact housing prices at the margins. 

We have seen this before. Australia quarantined negative gearing between 1985 and 1987 (see what happened here), with no material improvement in housing affordability or home ownership. New Zealand quarantined it between 2021 and 2025, with the same result. The UK phased out full interest deductibility from 2018, with the changes fully in place by 2021, and again, home ownership rates in the UK have not materially improved. 

Therefore, we should be honest about what this is. These changes are a tax revenue measure. Nothing else.  

The 50% CGT discount is ending, and indexation is not as generous  

From 1 July 2027, the 50% CGT discount will be repealed for individuals and trusts and replaced with cost base indexation. Indexation uplifts the cost base for inflation, so tax is paid on the real gain, not the inflationary component. Companies are unaffected because they never had access to the discount. 

The transition works through a deemed sale. Assets held just before 1 July 2027 are treated as sold at market value and immediately reacquired at that value. Any gain up to that point is frozen and deferred and still qualifies for the 50% discount when the asset is eventually sold.  

Any gain from 1 July 2027 onwards is calculated separately under the new indexed cost base rules. Therefore, an asset bought before 2027 and sold later will produce two gains: an old-rules discounted gain, and a new-rules indexed gain. 

I’d like to highlight four important points. 

First, indexation only starts from 1 July 2027 for assets already held. It does not apply retrospectively. For existing assets, the 1 July 2027 market value becomes the indexed cost base. Assets will need to be valued at 1 July 2027. 

Second, indexation can reduce a gain to nil, but it cannot create a capital loss. A capital loss only arises where the nominal/actual net sale proceeds are less than the original acquisition cost base. In that sense, indexation is asymmetrical which is unfair.  

Third, for taxable Australian property, you must be an Australian tax resident for the whole testing period, from the later of 1 July 2027 or the acquisition date, through to sale. If you become a non-resident for even one day, you lose indexation on the post-2027 gain. This only affects property, not shares, because non-residents are generally not taxed on Australian share gains. 

Finally, pre-CGT assets, being assets bought before 20 September 1985, are now brought into the CGT regime. Gains before 1 July 2027 remain exempt, but gains after that date are taxed like any other asset. 

The discount does not disappear entirely for all assets. It remains available for new residential dwellings and affordable housing. For those assets, investors can choose between the discount and the new indexation-plus-minimum-tax regime. 

There is also a new minimum tax. From 1 July 2027, capital gains made by resident individuals are subject to a minimum tax rate of 30%. If your non-CGT taxable income is already above $45,000, you are already in the 30% tax bracket, so you are unaffected. But if your ordinary taxable income is below $45,000, the minimum rate will hurt. Certain government income support recipients, such as the age pensioners, are exempt from this minimum rate of tax.  

Previously, deductions such as concessional super contributions could reduce the effective tax on a capital gain. Under the new rules, the only deduction that can still offset a post 1 July 2027 CGT gain is a charitable donation. 

When will indexation leave you worse off?  

Whether the old 50% CGT discount or the new indexation system produces a better outcome depends on two things: how long you hold the asset and how strongly it grows. 

The table below shows the breakeven points. For example, if you hold an asset for 10 years and its annual capital growth is below 5.4%, indexation likely produces a lower taxable gain. If growth exceeds 5.4%, it is likely you pay more tax under indexation. 

My modelling suggests that, for long-term investors whose assets grow at around 7% p.a., the effective tax rate rises from roughly 20 to 23%under the current discount system, to around 30 to 35% under the new rules. 

If your asset grows faster than this, indexation will cost you more (assuming inflation is 3% p.a.)
Holding period	Break even nominal gain
1 year	6.0%
5 years	5.7%
10 years	5.4%
20 years	4.9%
30 years	4.6%
Very long	Approaches 3.0% p.a.

Low-income taxpayers may need to realise gains before the rules change 

Because the minimum 30% tax rate does not begin until 1 July 2027, taxpayers with low taxable income, say below $45,000, should consider whether it makes sense to crystallise capital gains before then. If those gains are deferred until after 1 July 2027, they are much more likely to be taxed at a higher rate. 

Why business owners may be hit harder than investors  

Another problem with replacing the 50% CGT discount with indexation is the impact on small business owners. Many businesses have little or no cost base. Indexing a nil cost base still leaves you with nil, so when the business is eventually sold, most, if not all, of the proceeds could be taxable, often at the top marginal rate of 47%. 

The government’s response is to promise to increase the turnover threshold from $2 million to $10 million for the small business to access the 50% active asset reduction. But it is proposed there will be no changes to the 15-year exemption or retirement exemption. This proposed change in law is not yet before Parliament. 

These rules are complex, but the practical point is simple. This change may help some business owners avoid losing almost half their sale proceeds to tax, but only if they qualify for the small business CGT concessions. And the bigger point is that the change to indexation likely still adversely impacts business owners the most, which is not ideal, given small business is the lifeblood of the Australian economy. 

Why did housing tax reform end up targeting shares too?  

As noted above, the government’s rhetoric around these tax changes is that they improve housing affordability and intergenerational fairness. So, why do they impact all assets including shares? Well, the government has also argued that taxing capital gains at a minimum rate of 30% simply brings them more into line with how income is taxed.  

That argument is deeply flawed. Capital is far more mobile than labour. Governments can tax earned income more heavily without causing the same level of distortion, because few people will move countries purely because income tax rates are too high. Capital is different. If Australia makes its CGT regime less attractive, fewer Australians will invest, and Australia will attract less international capital.  

Again, this is not about housing affordability. It’s about raising tax revenue. 

$250 working Australians tax offset 

From the 2027-28 income year, working Australians will receive a new tax offset worth up to $250 per year. 

The offset is aimed at people who earn income from work, not investments. It is calculated as the lesser of $250 and the tax payable on your net labour income, being wages, business income, personal services income and similar income, less related deductions. Most employees earning a normal wage should receive the full $250. People with very low labour income will receive less. 

$1,000 instant deduction for workers  

From the 2026-27 income year, Australian residents who earn labour income can claim a standard deduction of up to $1,000 for work-related expenses, without receipts or substantiation. 

This is a genuine simplification, but it is not an extra deduction. It replaces work-related deductions up to that amount. For example, if you claim $400 of actual work-related expenses, your standard deduction falls to $600. If your actual work-related expenses exceed $1,000, you simply itemise and substantiate them as you do now, and the standard deduction falls to nil. 

The deduction is capped at your labour income. So, if you only earn $700 of labour income, the maximum standard deduction is $700. 

Importantly, it only applies to work-related expenses. Deductions such as income protection insurance premiums, union fees and professional association fees sit outside the standard deduction and can still be claimed separately. 

The existing small-claim shortcuts, being the $300 no-receipts threshold and the $150 laundry concession, will be repealed. 

SMSF borrowing for residential property is ending  

SMSFs will no longer be able to use a limited recourse borrowing arrangement to buy residential property. The new rule confines SMSF borrowing over real property to ‘business real property’, as defined in the superannuation law. Residential property does not meet that definition, so it is excluded. Commercial and other business real property can still be acquired using borrowing. 

The ban is prospective and includes grandfathering. It starts on the 45th day after Royal Assent, which, on current expectations, is around mid-August 2026. Borrowing arrangements entered into before commencement are protected, and refinancing an existing pre-commencement loan is specifically carved out.  

There is also protection where the borrowing relates to an asset acquired under an arrangement entered into before commencement, even if settlement occurs afterwards. 

Banning SMSF borrowing for residential property removes a wealth accumulation strategy that was previously available, which is not ideal. However, there is one positive. I was concerned that many property spruikers would use SMSFs to cajole investors into setting up a SMSF to buy average-quality residential property. At least that risk is now removed. 

Where to from here? 

Next week, I’ll discuss how these tax changes affect the case for borrowing to invest in established residential property, and whether alternatives such as commercial property or newly constructed property are likely to be suitable substitutes. 

The government has not yet released the legislation dealing with discretionary trust distributions. When it does, and once it passes Parliament, I’ll write about that separately.