Budget tax changes put all investors on notice

The CGT discount and negative gearing are set for reform. But the impact won't be limited to property, with shares, crypto and other investments in the firing line.

Residential property will be made less lucrative for investors as part of major reforms to the Capital Gains Tax (CGT) discount and negative gearing outlined in the 2026 federal budget.

Federal Treasurer Jim Chalmers argued in his budget speech that the changes - which are among part of a wider suite of tax reforms - are necessary to address inequality in the tax system and boost home ownership rates.

"This Budget includes the most significant tax reform package in more than a quarter of a century.

"We're delivering a fairer tax system for workers, for first home buyers and future generations. This will help rebalance a system which is more generous to assets than it is to labour."

So how will the existing Capital Gains Tax discount and negative gearing settings change? When will they change? And how will existing investments be affected? Here's what we know.

Capital Gains Tax discount

What are the existing rules?

Australian residents can currently reduce their capital gains by 50% when they sell an asset if they've owned it for at least 12 months.

This is what's known as the capital gains tax discount and it applies to a whole range of assets including property, shares, cryptocurrency, collectables and more.

What's changing?

Under the proposed reforms, the existing 50% discount will be replaced by inflation-based indexation and a 30% minimum tax on net capital gains.

The shift will mean that the effective tax rate paid by investors on capital gains will vary based on the nominal return, the inflation rate over the period that the assets have been held and the investors' marginal tax rate.

Who will be affected?

The new rules will apply to all asset classes eligible for CGT. However, Australians looking to invest in new residential property will be able to choose between having the 50% discount or the new indexation and minimum tax system applied.

As for timing, the changes will only apply to gains made from July 1, 2027. The existing 50% discount will still apply to any gains made on investments before that date.

What's the argument for reform?

The government argues that the CGT discount has overcompensated investors who have put their money into detached residential housing in recent decades, compared to those who have invested in other types of housing (like units) or assets like equities.

By reducing this incentive (along with negative gearing changes) the hope is that other investments will be made more attractive and investor interest in existing housing stock will be reduced, potentially benefiting those looking to get into the property market.

Negative gearing

What are the existing rules?

If the deductible costs associated with an investment (like interest on a loan) are greater than the income the asset produces, investors can offset their losses against their taxable income. This is negative gearing.

The strategy can be applied to numerous investments, but property is by far and away the most common, with Treasury suggesting that 98% of net losses from negative gearing come from property investments alone.

What's changing?

From July 1, 2027, losses made on residential property (except new builds) will only be deductible against rental income or the capital gains made from that property. Though excess losses will be able to be carried forward and offset against property income down the track.

In short, most new property investors won't be able to deduct losses against taxable income like their wages.

Who will be affected?

The changes only apply to residential properties acquired from 7:30pm tonight (May 12), meaning that existing property owners will continue to be able to make use of negative gearing until the property is sold.

New residential builds will be largely exempt, as will properties in superannuation funds and widely-held trusts. Commercial property and other assets like shares will also be unaffected.

What's the argument for change?

Behind the government's argument for reform is the idea that - together with the 50% CGT discount - negative gearing is giving some property investors unfairly generous tax breaks.

"For almost one in three properties sold in 2022-23 which were net negatively geared throughout the course of the investment, investors paid less income tax than they would have if they had not purchased the property at all - despite also turning a nominal profit," the budget papers note.

So, by removing the benefit of negative gearing on existing residential property going forward, the government hopes to redirect investor demand toward new housing to help increase supply.

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