In brief
The 50% capital gains tax (CGT) discount will be replaced with indexation and a 30% minimum tax for all assets, and negative gearing residential property will be restricted from 1 July 2027.
Key takeaways
As widely anticipated, the Government has announced significant changes to the CGT regime, alongside measures restricting negative gearing on residential properties. These measures were initially framed as improving housing affordability for first homebuyers and young Australians; however, they are broader in scope — most notably because the removal of the CGT discount applies across all CGT assets (not just housing).
- From 1 July 2027, the 50% CGT discount will be replaced with cost base indexation and a 30% minimum tax on net capital gains for assets held more than 12 months. The changes are not limited to residential property but apply to all CGT assets held by individuals, trusts and partnerships, including pre-1985 CGT assets.
- Transitional arrangements limit changes to gains arising on or after 1 July 2027, while prior gains remain subject to the current CGT discount and pre-1985 assets remain exempt before that time. Investors in new residential property may choose between the existing CGT discount or the new regime on disposal.
- The changes will not affect the main residence exemption and income support recipients will be exempt from the minimum tax. At this stage it is not expected that the CGT discount for superannuation funds will be changed.
- The changes also seek to limit negative gearing on established residential properties acquired after 7.30 pm (AEST) on 12 May 2026 (being contract date) by removing the ability to deduct net rental losses against income that is not rental income or gains from rental property.
- However, excess rental losses may be carried forward to future years. Eligible new builds and certain types of investors are excluded from these proposed new measures.
In more detail
Removal of the CGT discount and return of indexation of capital gains
The 2026-27 Budget removes the current 50% CGT discount which will be replaced with cost base indexation and a 30% minimum tax on net capital gains from 1 July 2027.
Under the revised framework, cost base indexation will apply to CGT assets held for more than 12 months. The changes will apply broadly across all CGT assets, including pre-1985 assets, where those assets are held by individuals, trusts and partnerships. In this context, the introduction of a minimum tax establishes a minimum level of tax payable on capital gains, after indexation is applied.
The Budget provides for transitional arrangements aimed at limiting the impact on existing investments. The new regime will apply only to gains arising on or after 1 July 2027, with the existing 50% CGT discount continuing to apply to gains realised before that date.
For assets held prior to 1 July 2027 but sold thereafter, the 50% CGT discount will apply to gains accrued up to that date, while cost base indexation and the minimum tax will apply to gains accruing from 1 July 2027, with the asset’s value at that date forming its cost base.
In addition, capital gains derived from pre-1985 assets prior to 1 July 2027 will remain outside the CGT regime.
Specific treatment is provided for investors in new residential property. These investors will be permitted to choose, on disposal, between applying the current 50% CGT discount or adopting the new indexation and minimum tax regime. The Budget indicates that this approach is intended to maintain incentives for investment in new housing.
There is no change to the main residence CGT exemption. At this stage, there is also not expected to be any change to the CGT discount for superannuation funds. Income support recipients, including Age Pension recipients, will be exempt from the application of the minimum tax.
Negative gearing on residential properties is largely restricted to new builds
Negative gearing arises when the costs of owning a rental property are higher than the income it produces, and as a result a net rental loss arises. Under the current rules, the benefit of negative gearing lies in the ability to deduct that net rental loss against other sources of income, such as salary and wages.
Under the proposed measures, from 1 July 2027, losses from established residential properties acquired from 7.30 pm (AEST) on 12 May 2026, will only be deductible against rental income or the capital gains from residential properties. If rental losses cannot be fully used in a particular year, they may be carried forward and applied against future residential property income or gains (this ensures that investors are not disincentivised from investing into maintenance and capital improvements).
Importantly, if an investment property was acquired prior to 7.30 pm (AEST) on 12 May 2026 it remains subject to the current rules and is not affected by these changes until it is sold. This applies to contracts entered into to acquire a property prior to that date even if settlement has not yet occurred.
The changes apply only to net rental losses from established residential property, but eligible new builds are exempt from this limitation. Similarly, widely held trusts and superannuation funds are excluded, along with build to rent developments and private investors supporting government housing programs. This ensures that negative gearing continues to support investment that adds to overall housing supply.
Commercial property and other asset classes, such as shares, will continue to be taxed under the existing arrangements and are not affected by these negative gearing changes.
A copy of the Federal Budget papers can be found here.
Lena Nguyen, Associate, Chloe Collins, Graduate at Law, Jeremy Hyman, Head of Communications, and Sky Friend, Business Development Consultant, have contributed to this legal update.