Budget Changes to Negative Gearing and CGT Discount What does this mean for you?

The Federal Budget just changed the rules on negative gearing and capital gains tax, and the clock is ticking. If you own an investment property or are thinking about buying one, these changes could have a significant impact on your tax position. Here is what every property investor needs to understand before 1 July 2027.

So, what do the Budget changes to negative gearing mean to you if you own a residential investment property?

Well, the first thing to note is that the negative gearing changes are “grandfathered”

ie. they do not apply to properties that are already owned at the time of the Budget (12 May 2026) – and such properties can be continued to be negatively geared as long as you own them.

Furthermore, if you buy a property between Budget day and 1 July 2027, you can still negatively gear it up to 1 July 2027. But for any property bought from 1 July 2027, you will not be able to negatively gear it.

However, under the changes your denied negatively geared deductions will not be lost for ever.

They can be carried forward and offset again positive rental income from the property in future years. In other words, the losses are “quarantined” (as per the Keating model from the 1980s) .

And to the extent this is offsetting is not possible, well the current law still allows those denied deductions to reduce any capital gain you make on sale of the property.

So, it is all not bad news.

Also, if you do buy a rental property between now and 1 July 2027, there are legitimate ways to maximise the deductions you can claim before the new rules against negative gearing apply.

However, it is important to emphasise two things:

Firstly, this proposed negative gearing restriction does not apply to any other investment assets that you may borrow money to buy (eg. commercial property, shares in a company or units in a unit trust).

Secondly, the negative gearing restrictions do not apply to SMSFs (and nor do the proposed changes to the CGT discount). Suffice to say, the devil will be in the legislative detail after many months of consultations and submissions. And there is already clamouring for changes to be made to these proposals. So, it is a good idea to come and speak with us about what may be best to do if you already own such a property and are looking to sell it or if you are considering buying an investment property in the future.

So, what do the Budget changes to the CGT discount mean to you?

And what these changes will do is to allow any capital gain that accrues up to1 July 2027 to continue to be entitled to the 50% discount -but thereafter the assessable gain will be worked out under an inflation base indexation rule and gain itself will be subject to a minimum 30% tax rate. But firstly, here are the specific rules regarding the proposed changes In a nutshell:

Firstly, if you buy and sell an asset after 30 June 2027, the new rules apply (ie your gain will be calculated by reference to inflation-based indexation only and a minimum 30% tax rate will apply to the gain).

Secondly, if you buy and sell an asset before 1 July 2027, the existing 50% discount rules will continue to apply and there is no minimum tax rate.

Thirdly, if you buy an asset before 1 July 2027 but sell it after that date (ie your ownership of the assets straddles this key date), then you will get the discount up to the asset’s market value on 1 July 2027 and thereafter the gain is calculated under indexation and a minimum 30% tax rate will apply to the gain.

Importantly, the new rules apply to all assets (eg. shares) - and not just real estate.

A fundamental feature of this rule as it applies to the straddling situation, is the need to determine the asset’s market value on 1 July 2027. This will be easy in some cases (eg publicly listed shares on the ASX). But harder in other cases – including real estate.

But here it is worth noting that the ATO currently takes the view that you do not have to get a professional valuer where the CGT rules requires a market value – and that a “comparative valuation” will do instead eg comparative sales of similar houses in the neighbour (and perhaps supported by a real estate agent’s letter).

However, if the Commissioner challenges your market valuation the onus will be on you to show that your valuation is better than the Commissioner’s valuation! Another key thing to bear in mind is whether the new indexation system will give you better advantage than the discount – which is possible especially if you have owned the asset for a long time. Also, if shares you have owned on the share-market have only risen in line with inflation, indexation may also give a better result. The timing of sale is also important because it is better to realise a capital gain in an income year in which your other income is low (or you have capital losses or a tax loss) - so that you therefore pay less tax on the gain. And with the minimum tax rate of 30% applying from 1 July 2027, this is an important matter – especially if you are considering retiring in the near future.

Suffice to say, these CGT discount matters are ones on which important planning decisions can be made. So, make an appointment to see us to discuss how they apply to your assets.

Need support or advice?

The team at POINTAX are here to help you. Our expert professionals are available and are keeping up to date with the latest announcements. Contact us by calling us at 03 8386 7410 or visiting our website contact page www.pointax.com.au/contact.

Disclaimer

While every care has been taken to ensure the accuracy of the material above, POINTAX, its employees, or any of its representatives will not bear any responsibility or liability for action taken by any person based on the information contained in this blog. The content is for information purposes only. It is recommended that no person make an investment decision until their needs, desires and risk profile have been assessed by a qualified professional.