Federal Budget 2026: Negative Gearing & CGT Overhaul — What Changed and What NZ and Canada Tell Us

At 7:30pm AEST on Tuesday 12 May 2026, Treasurer Jim Chalmers handed down the most consequential property tax reform in a generation. Negative gearing on existing residential property — a fixture of Australian investor strategy since the late 1980s — will be abolished from 1 July 2027 for new purchases. The 50% capital gains tax discount, in place since Peter Costello introduced it in September 1999, will be replaced by cost-base indexation plus a 30% minimum tax on real gains.

Existing investors have been grandfathered. The reforms apply to properties purchased after 7:30pm on Budget night and to capital gains that accrue after 1 July 2027. Treasury modelling forecasts house prices growing about 2 percentage points slower over the next couple of years, 75,000 additional owner-occupiers entering the market over the decade, and rents rising by less than $2 per week above their baseline trajectory.

Whether those numbers hold up in practice is the real question — and one we can partly answer by looking at what happened in New Zealand (which removed interest deductibility in 2021, then reversed itself in 2024–25) and Canada (which raised its CGT inclusion rate in 2024, then cancelled the increase in March 2025). This article unpacks what was announced, who is exempt under the proposed framework, the likely market impact, and how Australia's design differs from the international precedents that didn't end well politically.

What Actually Changed: The Five Core Reforms

1. Negative Gearing Limited to New Builds

Under the current rules, an investor whose rental expenses exceed rental income can deduct that loss against other taxable income — wages, business income, dividends. About 1.2 million properties were negatively geared in 2022–23 (roughly half of all investment properties), with around 230,000 individuals acquiring negatively geared properties that year.

From 1 July 2027, losses from established residential properties purchased after 7:30pm 12 May 2026 will only be deductible against income from other residential property — including rent and residential capital gains. Excess losses can be carried forward indefinitely to offset future residential property income.

Three transitional layers apply:

• Properties held before 7:30pm 12 May 2026 (including those under exchanged but unsettled contract): unchanged — negative gearing continues as today until sold.
• Properties bought between 12 May 2026 and 30 June 2027: can be negatively geared during that 13-month window only. From 1 July 2027, losses are quarantined.
• Properties bought from 1 July 2027 onwards: no negative gearing unless it's a qualifying new build.

The changes apply to individuals, partnerships, companies and most trusts. Budget papers indicate widely held trusts (most managed investment trusts) and superannuation funds, including SMSFs, are excluded from the negative gearing changes.

2. CGT 50% Discount Replaced by Indexation

The 50% discount was introduced by Peter Costello in September 1999 in response to the Ralph Review. Before that, capital gains were taxed using cost-base indexation — the purchase price was uplifted by CPI so that only the real (inflation-adjusted) gain was taxed at the investor's marginal rate.

From 1 July 2027, indexation returns. The cost base of any CGT asset held for at least 12 months — property, shares, managed funds, business assets — will be indexed to CPI. The taxpayer pays their marginal rate on the real gain only.

Whether this is a tax increase or decrease depends entirely on the gap between nominal returns and inflation:

• High real returns (e.g. 7.5% pa nominal with 2.5% inflation): pay more tax than under the 50% discount.
• Moderate returns (5% pa): pay slightly more.
• Low real returns (2.5% pa or less): pay less — potentially nothing if returns don't exceed inflation.

Treasury's own modelling, based on the past 20 years, shows the effective discount under indexation would have ranged from 35% to 60% across houses, units and ASX 200 shares — not far off the existing 50% discount on average.

3. The 30% Minimum Tax on Capital Gains

This is the reform that surprised many tax practitioners on Budget night. From 1 July 2027, a minimum 30% effective tax rate applies to real capital gains, regardless of the taxpayer's marginal rate in the year of sale.

Two important nuances:

• The 30% is a floor, not a flat rate. Anyone whose marginal rate on the gain is already 30% or higher pays their marginal rate.
• Recipients of means-tested income support — Age Pension, JobSeeker, Disability Support Pension — are indicated as exempt if they received any payment during the financial year in which the gain is realised. Final eligibility settings pending legislation.

The Government's stated rationale: stop high-income earners deferring gains into low-income years (e.g. retirement) to access the tax-free threshold and lower marginal rates.

4. The New-Build Exemption

To prevent the reforms from crushing housing supply, the Government has carved out genuinely new dwellings:

• Investors in new builds can continue to negatively gear post-2027.
• At sale, they choose between the 50% CGT discount OR indexation + 30% minimum tax — whichever produces the lower tax bill.

What counts as a new build:

Critically, subsequent purchasers do not inherit the exemption. If an investor buys a new build, sells it five years later, the next buyer gets the standard post-2027 treatment — no negative gearing, indexation method only. This is analogous to how new-build stamp duty exemptions work in several states.

5. The 30% Minimum Tax on Discretionary Trusts

A separate but related reform: from 1 July 2028, a 30% minimum tax rate applies to discretionary trust distributions. The Government's reasoning is that high-income beneficiaries currently use trusts to stream income to low-income family members (often adult children) to access lower marginal rates.

Excluded: fixed trusts, widely held trusts, superannuation, special disability trusts, deceased estates, and charitable trusts. Three years of rollover relief is available from 1 July 2027. Projected revenue: ~$4.5 billion in 2029–30 alone.

This matters for property investors because many use family trusts to hold investment properties. Combined with the negative gearing and CGT changes, the trust structure becomes less tax-efficient — and the case for holding investment property in your personal name (or via an SMSF, which is exempt from all three changes) strengthens.

Who's Protected and Who Isn't

Indicated as grandfathered or exempt from negative gearing changes (per Budget papers):

• Properties owned (or under exchanged contract) before 7:30pm AEST 12 May 2026
• New builds (ongoing)
• Commercial property
• Superannuation funds, including SMSFs
• Widely held managed investment trusts
• Build-to-rent developments and government-supported affordable housing

Exempt from CGT changes (continue under old rules):

• Main residence (unchanged — full CGT exemption)
• Four small business CGT concessions
• 60% CGT discount for qualifying affordable housing
• Pre-1985 assets, for gains accrued before 1 July 2027
• Tech and start-up sector — currently under consultation

Specifically targeted (no shelter):

• Established residential property bought after 7:30pm 12 May 2026
• Direct share portfolios (CGT side only — indexation and 30% minimum tax)
• Investment property held in companies and most trusts

The SMSF treatment is particularly noteworthy — though it deserves a careful read. Budget papers indicate complying superannuation funds, including SMSFs, are excluded from the negative gearing reforms. An SMSF with 1–4 members buying an investment property after July 2027 should still be able to apply rental losses against the fund's other income under existing rules. The super CGT regime (15% accumulation, with a 33⅓% discount on assets held >12 months, falling to 0% in pension phase) continues to apply for now.

If your fund is large enough to acquire property, our SMSF property vs personal name comparison walks through the trade-offs, and our SMSF eligibility and setup guide covers structuring, contribution caps and borrowing rules.

What Treasury Thinks Will Happen

Treasury modelling, released with the Budget, projects four headline effects over the decade to 2036–37:

The Grattan Institute and several private bank economists have published similar estimates of 1–4% lower prices than the no-policy-change counterfactual. UBS expects modest investor capital rotation into ASX-listed equities — particularly income stocks paying franked dividends — although the CGT changes also apply to shares.

The risk that economists flag most loudly: short-term overshooting. Treasury's model is built on long-term cashflows, but in the 14 months between announcement and the 1 July 2027 start, behaviour is unpredictable. If a meaningful number of post-May-12 buyers try to exit before quarantining kicks in, the bulge in listings could push prices down by more than the Treasury number — temporarily. For existing investors who are grandfathered, that creates an interesting strategic question we cover in our Federal Budget 2026 action plan.

The New Zealand Case Study: An Instructive Cautionary Tale

In March 2021, NZ Labour announced two reforms tightly analogous to what Australia has just done:

1. Removal of interest deductibility for residential investors. New purchases from 27 March 2021 lost the deduction entirely; pre-existing properties were phased down (75% deductible in 2021–22, falling to 0% by 31 March 2025).
2. Bright-line test extended from 5 to 10 years. New builds kept the 5-year window.

The key design difference from Australia's reform: NZ did NOT grandfather existing investors. Owners with portfolios built up over decades had their deductions phased out regardless of when they purchased. And the bright-line extension applied to capital gains on sale — a structural CGT tightening NZ had never had before.

What happened:

• The REINZ House Price Index peaked in November 2021 and fell 17.8% to a trough in May 2023. Wellington fell 25.9%, Auckland 21.8%.
• Rental inflation ran at 4.2–4.8% annually through 2023–24, becoming the largest single contributor to NZ CPI. Average national rent reached ~NZ$600/week.
• Investor share of purchases fell from above 25% to a trough of ~22% in 2022–24. First-home buyer share rose, but mostly because investors withdrew, not because affordability improved.

The critical confound: the RBNZ took the Official Cash Rate from 0.25% to 5.5% over the same period. Independent analysis — including from the RBNZ's own November 2024 Financial Stability Report — concluded that most of the price fall was rate-driven, not tax-driven. The tax changes contributed but were not the prime mover.

The reversal. The Luxon National-led coalition campaigned on undoing both measures and won the October 2023 election. Interest deductibility phased back at 80% from 1 April 2024 and 100% from 1 April 2025. The bright-line test was cut back to 2 years from 1 July 2024. Budget cost: a NZ$2.9 billion landlord tax break across the forward estimates. By 2025–26, the NZ investor share had recovered to 24.6%.

The verdict. NZ's experience suggests tax changes can amplify price weakness and rental pressure during a tightening cycle — though interest-rate increases were the dominant driver of the price fall, and political backlash subsequently reversed the policy within three years. Australia's design avoids some of NZ's sharper edges (grandfathering of existing investors, a permanent new-build carve-out), but the rate and migration environment is also materially different.

The Canada Case Study: Even Gentler Interventions Get Reversed

Canada has run four separate housing-tax interventions in the last five years. Almost all have been quietly walked back.

Foreign Buyer Ban (Prohibition on the Purchase of Residential Property by Non-Canadians Act). In effect from 1 January 2023 for two years, extended in February 2024 to 1 January 2027. Royal LePage assessed the policy as having "virtually no impact" on prices — foreign ownership was already only 1–3% of the market. The Carney government is now reviewing the ban and reportedly considering an Australian-style permission-for-new-builds model.

Capital Gains Inclusion Rate increase (Budget 2024). Trudeau's government proposed raising the CGT inclusion rate from 50% to 66.67% for individuals on gains above CA$250,000, effective 25 June 2024. Implementation was deferred in January 2025, then fully cancelled by PM Mark Carney on 21 March 2025 as one of his first acts in office.

Underused Housing Tax (UHT). A 1% federal annual tax on vacant or underused residential property held by non-resident, non-Canadian owners. Projected revenue: ~CA$700 million over five years. Actual: CRA collected only ~CA$30 million while waiving ~CA$2.5 billion in interest and penalties because the compliance regime proved unworkable. Eliminated by Bill C-15 (Royal Assent 26 March 2026).

BC Speculation and Vacancy Tax. The provincial standout. Introduced 2018 at 0.5–2% depending on owner type. Has raised CA$550 million cumulatively, and the BC government claims it has added 20,000+ units to the long-term rental market in Metro Vancouver. Independent assessments are more cautious (Kelowna estimated only a 0.7% supply uplift), but vacancy rates are at multi-decade highs and rents are now falling in SVT-covered areas.

The Canadian lesson: demand-side instruments at the federal level — bans, inclusion-rate hikes, vacancy taxes — were either ineffective or politically reversible. The provincial speculation tax, which targeted an actual identified problem (chronic vacancy in Vancouver), produced the only measurable result. Our bull-run sustainability analysis discussed similar lessons before the Budget.

Will Australia Follow the Same Path?

Three structural differences make a direct replay of either case unlikely.

First, the magnitude of Australia's rate cycle is much milder than NZ's was. The RBA hiked to 4.35% on 5 May 2026 — the third hike of 2026, fully reversing the 2025 cuts. Big Four bank economists now call 4.35% as terminal, with Westpac the lone outlier expecting another move to 4.85%. By contrast, NZ's price falls happened during a brutal 525bp tightening cycle that took the OCR from 0.25% to 5.5%. Australia's cumulative hiking in 2026 is ~75bp from cycle lows — meaningful but nowhere near the magnitude that swamped NZ's tax effect. See our RBA 4.35% action plan for the full rate impact analysis.

Second, Australia's structural supply shortage is deeper. Housing Australia targets imply Australia needs around 240,000 dwelling completions per year to meet the National Housing Accord. Recent completions have been running closer to 170,000. The 35,000 fewer dwellings Treasury projects over 10 years is small relative to the existing shortfall, especially when offset by the new $2 billion enabling-infrastructure fund.

Third, net migration remains structurally elevated. Australia ran net overseas migration of ~340,000 in 2024–25 — well above NZ's per-capita equivalent. That underpins demand for housing of both tenure types and limits the scope for either prices or rents to fall materially.

Australia's design also borrows the smart features from both cautionary tales:

The reversibility risk is real. Both NZ Labour and Canadian Liberal reforms were overturned by incoming centre-right governments within three years. Australia's next federal election is due by September 2028 — roughly 14 months after the 1 July 2027 start date. A future Coalition government could plausibly reverse, soften, or amend the changes before any meaningful behavioural data exists.

For investors, that means structuring decisions taken now should be resilient to partial reversal — not built around the assumption that the 2027 settings are permanent.

What Investors Should Be Considering

If you already own investment property (purchased or under contract before 7:30pm 12 May 2026): you are fully grandfathered for negative gearing. Gains accrued up to 1 July 2027 retain the 50% discount. There is no immediate trigger to sell. The strategic question is whether to expand the portfolio inside the grace period (before 1 July 2027), expand via new builds afterwards, or hold and wait.

If you bought between 12 May 2026 and 30 June 2027: your property can be negatively geared during this grace window only. From 1 July 2027, losses are quarantined to other residential property income. Run the numbers on whether the property is cashflow-viable on a quarantined basis — and if it isn't, whether you'd be in a position to either sell or refinance to positively geared territory.

If you're considering buying post-July 2027: the rational entry point is now an off-the-plan or freshly completed new build. You retain negative gearing and the choice between the 50% discount and indexation at sale. Expect competition for genuinely new product to intensify, with developer margins benefiting in the short term.

If you have an SMSF with sufficient member balance: the relative case for holding property inside super has likely strengthened. Budget papers indicate SMSFs are excluded from the negative gearing reforms, and the existing super CGT regime (15% accumulation rate with 33⅓% discount; 0% in pension phase) continues. The 30% minimum CGT tax interaction with super remains technically unsettled pending legislation — treat the SMSF advantage as directional rather than confirmed across every scenario.

Worked Example: Same Property, Three Tax Regimes

Consider a $700,000 investment property purchased 1 July 2027, held 10 years, sold for $1,253,580 (6% annual growth). Assume 2.5% annual inflation and a top marginal rate of 47%.

Under the new personal-name regime, the top-rate investor pays roughly $38,000 more at sale than under the old 50% discount. The same property held inside an SMSF, applying the existing super CGT regime, would pay around $55,358 in accumulation phase or nothing in pension phase. Important: the negative gearing exclusion for super funds is confirmed in Budget papers; the application of the proposed 30% minimum CGT tax to super entities is not yet clearly settled (see caveat box earlier in this article).

For most investors with adequate super balances, the relative case for an SMSF property strategy versus personal-name ownership has strengthened significantly post-Budget. For those without sufficient super, the simpler levers are new-build investment (which retains both negative gearing and the choice between discount methods) or maximising the grace period before 30 June 2027.

If you use a family trust to hold property: model the impact of the 30% minimum trust tax from 1 July 2028. For high-earning trustees streaming to low-earning beneficiaries, the case for the trust structure has weakened. For asset protection and estate planning, it remains intact — talk to a registered tax adviser, and our trust vs personal name comparison covers the structural trade-offs.

Across the board: avoid panic-driven decisions based on a policy that takes effect in 14 months and could be amended, deferred, or partially reversed by the next government. The Treasury impact estimates are small in absolute terms — about 2 percentage points of price growth — and the largest behavioural decision (whether to be in residential property at all) usually swamps the tax decision.

What We're Watching From Here

The Government has until mid-2027 to legislate this package, and historical precedent suggests the detail will shift. Three things to watch:

1. Legislation detail, particularly the definition of a "new build", the apportionment formula for valuing assets at 1 July 2027, and how the 30% minimum tax interacts with the Medicare levy and HELP repayments.
2. Senate negotiations. The Government needs Greens or Coalition support to pass. The Greens want CGT abolished entirely and may push for tighter settings. The Coalition has historically defended the 50% discount.
3. The election cycle. The next federal election is due by September 2028. If the package is on track to take effect and the Coalition has campaigned on reversal, expect another political pivot well before settled investor behaviour emerges.

We'll cover each shift as it arrives. In the meantime, if you'd like our weekly read on what these reforms mean for buying decisions on the ground — including suburb-level data, RBA commentary and changes to lending policy — subscribe below.

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