Author: Wilson Phan (Tax Consultant)
The Federal Budget 2026 – 2027 has proposed some of the most significant tax reforms in recent decades, which are expected to attract significant attention from investors, business owners and family groups over the coming years. These proposed reforms affect a broad range of tax areas, including Capital Gains Tax (CGT), Negative Gearing, and Trust Distributions. Below is a summary of several key proposed tax reforms announced in the Federal Budget 2026 – 2027.
Capital Gain Tax (CGT) Reform
One of the most significant proposed reforms is the replacement of the current 50% CGT discount and the introduction of a minimum 30% tax rate on net capital gains. Historically, Australia’s CGT system operated under an indexation method from the introduction of CGT in 1985 until 1999, before the current 50% CGT discount regime was introduced for eligible assets held for more than 12 months.
Under current rules, eligible Australian taxpayers, including individuals, partnerships and trusts, may reduce capital gains by 50% if CGT assets have been held for more than 12 months. The current regime has become a key part of long-term investment planning, particularly for investment properties, family trusts and inter-generational wealth structures.
Historically, the 50% CGT discount was introduced by the Government in 1999 to encourage investment in shares, particularly in innovative, high-growth companies. However, according to the ‘Henry Tax review’ and many other tax policy critics’ debates, the 50% CGT discount instead delivered benefits to real estate investors and encouraged new investors to direct their savings to real estate investments rather than to the share market. Upon selling their real estate assets held for more than 12 months, investors are eligible for the 50% CGT discount, which is considered a ‘windfall gain’ from the tax system. The introduction of the CGT discount has been a significant departure from the original policy objectives and has sparked ongoing debate and reform proposals.
From 1 July 2027, cost base indexation may replace the 50% CGT discount, and a minimum 30% tax rate on realised capital gains will be introduced. The changes may affect individuals, trusts, and partnerships holding long-term investment assets, particularly where significant unrealised capital gains have accumulated over time.
The reforms may also impact inter-generational wealth structures involving long-term property holdings and family trust arrangements, including certain long-term assets and pre-CGT structures historically used for succession and wealth preservation.
Transitional arrangements will limit the impact on existing investments by ensuring that the changes apply only to gains arising on or after 1 July 2027. The 50 per cent CGT discount will continue to apply to gains arising before 1 July 2027. Capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT reform.
To maintain incentives for new housing supply, investors in ‘new residential properties’ will be able to choose either the 50 per cent CGT discount or cost base indexation and the minimum tax.
How is a new build determined?
New builds are residential properties which genuinely add to supply (see Table 1). This will include:
- dwellings constructed on vacant land, or
- where existing properties are demolished and replaced with a greater number of dwellings
Knock-down rebuilds or substantial renovations that do not increase supply will not be eligible. A new build cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months.
Table 1: New builds comparison table
| Eligible new build | Not an eligible new build |
| A newly constructed apartment bought off-the-plan. | An established property that has recently been extended to add additional bedrooms. |
| A duplex constructed through a knock-down rebuild replacing a single, free-standing house. | A free-standing house constructed through a knock-down rebuild replacing an older, smaller free-standing house |
| Any residential construction on previously vacant land. | A granny flat built adjacent to an established property that is not eligible for negative gearing. |
| A newly built property which is occupied for less than 12 months before being first sold. | A newly built property which is occupied for more than 12 months before being sold to a subsequent investor. |
Source: Budget 2026-27 Tax Explainer Paper
Income support payment recipients, including Age Pension recipients, will be exempt from the minimum tax.
Negative Gearing
Negative gearing remains a major topic in Australia’s ongoing tax reform discussions, particularly regarding residential property investment.
ATO data shows that for tax year 2022, about 959,000 taxpayers (6.2% of all taxpayers) were negatively geared.
What is negative gearing?
Negative gearing is the practice of borrowing against an asset – usually property – and running it at a loss, so that expenses (i.e. interest repayments and other costs) are greater than the income received (i.e. rent). Under the current tax law, any loss can be offset against other income sources. For example, if you earn a $100,000 salary a year and make a $20,000 loss through negative gearing, you would be taxed on just $80,000.
The history of negative gearing began in 1936, when it was introduced to encourage investment in housing and increase supply during the Great Depression. At that time, getting a mortgage was much more difficult than today. Negative gearing was viewed by the then Government as an incentive for wealthier Australians to invest in housing and help stabilise rents.
After the 1985 Tax Summit, the then Prime Minister, Paul Keating, took the view that negative gearing did little to encourage investment in new housing but instead artificially inflated the prices of current properties. His Government abolished negative gearing for all future rental properties. Because the abolition of negative gearing coincided with a housing shortage and rising rents, it was reinstated in September 1987 and remains in place.
New rules for Negative Gearing
From 1 July 2027, negative gearing concessions for established residential properties may be restricted under the proposed reforms. While negative gearing is not expected to be removed entirely, the concessions may become limited to ‘newly constructed residential properties’ acquired after 7:30 PM (AEST) on 12 May 2026.
Properties exchanged before 7:30 PM on 12 May 2026 are expected to be grandfathered under the proposed transitional arrangements into the existing negative gearing treatment.
Would changes with CGT and Negative Gearing increase housing supply?
In the short term, changes to CGT and negative gearing alone may not affect all property markets equally, particularly those experiencing strong capital growth, such as central metropolitan areas, where supply and demand dynamics are likely to outweigh tax considerations. In some cases, property prices and rents in these areas could even rise, as investors seek to offset the reduced tax benefits by increasing sale prices and rental charges.
To meaningfully expand housing supply on a broader scale, the Government would need to implement the proposed reforms alongside complementary measures, including greater investment in public facilities and infrastructure outside central metropolitan areas, as well as a review of current lending policies adopted by financial institutions to better support the development of new housing projects.
