Proposed Changes to Negative Gearing and CGT laws – what does it all mean?

The Albanese Labor government has put forward proposed changes to the negative gearing and CGT framework in Australia. If successfully enacted, these changes would come into effect on 1 July 2027. Below is a summary of what the current framework provides, what the proposed changes would mean, and the potential impact that these new changes would have on both property investors and the market generally.

What is Negative Gearing? – The Current Framework

Negative gearing is an investment strategy where you buy an asset (e.g. a home), incur costs and expenses on that asset which are greater than the income it generates (e.g. rent). The difference between the costs/expenses and the income generated results in a loss to the owner of the asset, which they can use to decrease their taxable income (that is, the amount of income the government looks at when determining your tax liability each financial year).

Negative Gearing – Proposed Changes

The key takeaways to the proposed changes to negative gearing are that:

1. Negative gearing will no longer be able to be used on existing residential properties, and any loss from those properties cannot reduce the taxable income of the asset-owner. Effectively, this would direct investors towards newly built properties.
2. The new restrictions on negative gearing will not apply to new residential builds, nor to existing properties owned before 12 May 2026 (i.e. Budget Night 2026), which are generally considered “grandfathered”.

 “Grandfathered” in this instance simply means that the existing properties being negatively geared will still fall under the existing framework for negative gearing and will not be affected by the new changes proposed by the Albanese government.

What is Capital Gains Tax?  – A summary of first principles

Capital Gains Tax (CGT) is a complex topic. Simply put, “capital” consists of items which can vary in value because of market conditions, the economy, the general nature of the item, or any other factors. The typical examples of capital items are property, shares, collectible cars and luxury exclusive items (such as certain watches), which may increase or decrease in value after you have purchased it.

A “capital gain” is where there has been an increase to the value of a capital item, meaning that the owner of the capital item has increased their wealth by virtue of their asset’s value increasing.

Likewise, owners of capital items can suffer a “capital loss” if they sell their item for less than the cost base (being the price they paid for the item and any associated fees). Capital losses may sometimes be carried forward to offset any tax in future years. However, a detailed discussion on capital loss and the tax concessions goes beyond the scope of this article.

Capital gains are taxable (hence CGT), and the tax liability typically occurs when the asset is disposed of. However, in 1999, the government introduced a framework which allowed the owner of the asset to reduce their gain (which is taxable) by 50% if they hold the asset for more than 12 months, effectively lowering their tax liability. This is commonly referred to as the “CGT discount”.

Capital Gains Tax – Proposed Changes

The proposed changes to CGT will revamp the 27-year-old existing law. Essentially, for gains that accrue from 1 July 2027: 

1. The 50% CGT discount will be replaced by an inflation-indexed cost base method, through the Consumer Price Index.
   1. This change will apply to all capital items subject to CGT which are held for at least 12 months.
2. A minimum 30% effective tax rate on gains will apply to any real capital gains – acting as a minimum for the tax any individual must pay on any capital disposed of, and gain obtained.
   1. The government argues that this minimum rate corresponds to the tax rate paid by most workers in Australia.

What is the impact on investors?

The impact of these changes for investors is that they will need to shift toward new builds in order to take advantage of:

1. any negative gearing opportunities; and
2. the opportunity to elect between the existing 50% CGT discount and the new index cost base (for eligible new builds).   

Investors will need to consider how they can best manage their portfolio in order to obtain the benefit of the revised system, including making new considerations on how long to hold their assets, when to dispose of them (thereby, becoming subject to CGT liability), and where they are to shift their focus to increase their equity.

What is the impact on the property market?

There are several articles that have been published regarding the impact that these changes may have on the economy and the Australian property market. We will not detail these here, as that is a matter for economists to debate and theorise on. However, what appears to be the common theme is that the new changes will impact how long investors will hold onto their assets to reap the benefit of the (potentially) newly implemented framework – which could have flow on effects for the housing market for future owners and tenants.

The outcome of these changes on increasing or decreasing rents also remains to be seen, with experts arguing that on both sides that these proposed changes could swing rent variations one way or the other.

The extent of these changes, unfortunately, will not be fully known until the government introduces the proposed amendments to the current tax laws.

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.