The treasurer, Jim Chalmers, says Tuesday’s federal budget includes “the most significant tax reform package in more than a quarter of a century”.
With changes to negative gearing, the capital gains tax discount (CGT) and tax treatment for trusts, Labor says the plan will rebalance the system, away from taxing incomes and more towards taxing assets.
“We’re delivering a fairer tax system for workers, first home buyers and future generations … [to] help rebalance a system where house prices have decoupled from incomes,” Chalmers said in his budget-night speech.
Treasury estimates the impact on property prices from the tax changes will be limited to values growing by about $19,000 or 2% less for a couple of years.
But combined with the expected drop in investor demand for housing, the reforms will help an extra 75,000 Australians into home ownership over the coming decade.
The Coalition and property lobby groups have said scaling back these tax breaks will smash supply and have a perverse effect on affordability and, especially, on renters.
And Treasury modelling in the budget does indeed show 35,000 fewer homes will be built over the next 10 years as investors put their money elsewhere. The impact on rents, however, is estimated to be minimal: an extra $2 a week for a household paying the median rent.
So what’s actually changing with negative gearing?
Negative gearing is a strategy that allows property investors to reduce their taxable income by deducting losses when their rental income is less than their expenses.
The favourable settings have helped pit investors against prospective owner-occupiers – an issue that has worsened as house prices have risen across the country.
Investment properties purchased after 7.30pm on budget night 2026 will no longer be able to use this strategy from 1 July 2027. There are only a few exceptions, including new builds and some government housing programs open to investors.
Investment properties purchased before budget night are not affected, and they can continue to be negatively geared.
The Treasury expects the benefits of negative gearing for existing investors to wash out after about a decade. About half of negatively geared properties are typically sold or generate income within four to five years, and more than 75% are sold within 10 years.
What about capital gains tax?
CGT is paid when an asset is sold, with the gain being the increase in value since the purchase. Since 1985, capital gains were adjusted for inflation, so that only the real component of gains was taxed. In 1999, the Howard government introduced a 50% discount, effectively overcompensating owners to encourage investment in the sharemarket.
Under the changes, from 1 July 2027, the 50% CGT discount will be replaced by a system known as cost-base indexation, covering assets held for more than 12 months.
This approach means you will only pay tax on the profit that is above the rate of inflation since you bought the property.
The new arrangements will apply to gains after 1 July 2027, marking a return to the pre-1999 CGT model used in Australia.
While it’s possible that investors receive a CGT discount exceeding 50% during times of high inflation, the discount will usually be lower using the indexation model.
The government is also adding a minimum 30% tax on capital gains starting from 1 July 2027, which is designed to discourage people from waiting to sell a property until their other income, like a salary, decreases, which they might do to lower their tax bill.
To continue to incentivise construction of new housing, investors building new residential properties will be able to choose either the 50% CGT discount or the new cost-base indexation and the minimum tax.
The changes to negative gearing and CGT are expected to raise about $3.6bn over the four-year forward estimates period.
Changes to trusts
A new 30% minimum tax on discretionary trusts will be introduced from 1 July 2028.
The new tax won’t apply to fixed trusts and other mechanisms, including superannuation funds, special disability trusts, deceased estates and charitable trusts. Some income, including from farming, will also be excluded.
The changes are expected to add $4.5bn to the budget over five years.
Why is the government bringing in these changes?
House prices have risen more than 400% since 1999, according to budget data, more than twice the pace of wages growth, creating an affordability crunch in Australia.
This primarily weighs on prospective first home buyers given home ownership rates have been declining.
While the government acknowledges the primary cause of unaffordability is a lack of housing supply, tax settings have also played a role.
Labor says the generous tax incentives have added to demand for property and contributed to higher housing prices over time.
“This has come at the expense of owner-occupiers, making it harder for more Australians to own their own home,” Labor says.
Since 2020, investors have increased their share of new home loans from less than 30% to more than 40%, according to Australian Bureau of Statistics data, while owner-occupier levels have fallen.
The favourable tax arrangements have allowed investors to overpay for properties in the knowledge they’ll use negative gearing to their advantage, before profiting upon sale, backed by a generous CGT discount.
Will the changes help first home buyers?
At this weekend’s auctions, an investor bidding against a prospective first home owner will need to weigh up whether it’s still a good investment without the future benefit of negative gearing and 50% CGT discount.
This could mean the investor is not willing to pay as much for the property as they might have before the change in tax settings, which the government describes as having a “distorting” effect on purchases.
Labor says the tax changes should help an additional 75,000 first home buyers get into the market over the next decade.
Are the changes equitable?
Labor has largely left existing property investors alone by allowing them to retain their ability to negatively gear, and use the more generous CGT discount methodology for gains made up until next year.
The government decided against limiting the number of properties that could use negative gearing, which was a possible route for it to go down.
Some observers will argue that Labor’s approach was the most feasible path for it to follow, enabling a shift away from Australia’s unfair system without suffering severe political backlash from large cohorts of older voters.
But the changes mean that those who already have investment properties, namely wealthier, older cohorts, have now locked in their advantage.