The rules that have shaped residential investment for 25 years were signalled to change on Tuesday. Here’s what happened, who it affects, and what to do about it.
Scott Chapman | Managing Director Aus-NZ
Tuesday's Federal Budget was not a minor update. It was the most significant restructure of Australian property taxation since capital gains tax was introduced in 1985 and reformed in 1999. Two things that investors have relied on for the better part of three decades were flagged for change: negative gearing and the 50% CGT discount.
So let's cut to what matters: what changed, who it affects, and what you need to do before 1 July 2027.
The short version
For properties not grandfathered (purchased after 7:30pm AEST, 12 May 2026), from 1st July 2027, rental losses on established residential investment properties can no longer be used to offset salary or wages (referred to as negative gearing). They can only offset residential rental income or capital gains from property.
At the same time, the 50% CGT discount that has applied to assets held for more than 12 months will be replaced with cost base indexation and a 30% minimum tax on real capital gains. Some say the indexation approach is in some ways fairer: you only pay tax on gains above inflation. However, the 30% minimum tax means you cannot reduce your effective rate by selling in a low-income year, which was a common investor strategy.
Both changes take effect on 1 July 2027. That date matters for many reasons.
Important
New builds are fully exempt from both changes. The negative gearing ring-fence applies only to established residential property not grandfathered. Investors purchasing new construction can still offset rental losses against all income and can choose which CGT regime applies when they sell. Commercial property is also unaffected by the negative gearing change.
Who is and isn't grandfathered
The most crucial question for anyone with an existing investment property is whether the old rules still apply to them. The answer depends on one specific date and time.
If you owned or were under a signed contract to purchase a property at 7:30pm AEST on 12 May 2026, that property is grandfathered for negative gearing. The old rules apply for the life of that investment. This includes properties where exchange has occurred, but settlement hasn't happened yet. The cut-off is the exchange of contracts, not settlement date.
If you purchased after that point, the new negative gearing rules will apply from 1 July 2027. That gives you roughly 13 months at current rates before the ring-fence takes effect.
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ONE THING TO DO TODAY If you are in the middle of a purchase or recently exchanged aged contracts, confirm the exact exchange time with your solicitor and get a timestamped copy of the contract. Then check this with your accountant in writing. The grandfathering protection is valuable and worth confirming. |
The date that matters most: 1 July 2027
Here is the part of the Budget that will affect every investor who sells a property after 1 July 2027, whether they are grandfathered or not.
When you sell, your total capital gain will be split on 1 July 2027. The portion of the gain that accrued before that date is taxed under the old rules and still receives the 50% discount. The portion that accrues from 1 July 2027 until your sale date is taxed under the new regime: cost base indexation and the 30% minimum tax.
To split your gain at the right point, you need to establish what your property was worth on 1 July 2027. According to the Government, you can do these two ways. The first is the ATO's apportionment formula, which estimates the split-date value based on your average annual growth rate over the full holding period. The second is an independent market valuation as at 1 July 2027.
The formula sounds simpler. Yet it assumes your property grew at a constant annual rate from the day you bought it, which is rarely how markets work. If you purchased during a flat period and the property grew strongly in recent years, the formula may significantly understate your actual 1 July 2027 value. A lower split-date value means more of your gain is attributed to the post-date period and taxed under the new, less favourable rules.
For most investors who have held property for couple years or more, an independent valuation at 1 July 2027 will produce a more accurate and, in some cases, more favourable result. The cost of that valuation is typically small relative to the difference in tax treatment it creates. The right approach will depend on your individual circumstances and should be confirmed with your adviser.
What the numbers say about the market
Treasury modelling in Budget Paper No. 1 projects that prices will grow by approximately 2% less over the next two years compared to what would have happened without the reforms. On an Australian median-priced home, that is roughly $19,000 saved for a buyer entering the market during that period.
That figure is an estimate only and the national average and will vary greatly across Australia. Markets with high investor concentration of established residential property, particularly inner and middle-ring units in Sydney and Melbourne, may see more adjustment than markets dominated by owner-occupiers or new construction. The reform seems to target a specific type of investor behaviour in a specific part of the market.
On rents, the Budget modelling puts the expected increase at less than $2 per week for a median renter. That is a national estimate based on reduced investment supply, partially offset by increased housing construction over time. We believe the increase could be much steeper. With the Budget tipped to move investment away from established rental-grade housing, many experts are forecasting an eventual shortage of rental supply, which would result in a rise in residential rents.
On the supply side
The Government has paired the investor tax changes with housing supply investment: a $2 billion Local Infrastructure Fund aimed at unlocking up to 65,000 new homes, and $8 billion in zero-interest loans to states for the 100,000 Homes for First Home Buyers program. The 5% Deposit Scheme has also been expanded, with income caps removed and places uncapped since October 2025. Their intention is to reduce investor demand for established property and increase supply of new housing stock for owner-occupiers.
The winners here are clear: first home buyers likely get less competition at auction and broader access to deposit support. Investors face a structural shift toward new builds, where the tax settings are more favourable than established property. Lenders may need to revisit serviceability assessments under the new system.
The trust question
One element of the Budget that deserves attention alongside the main CGT and negative gearing changes is the treatment of discretionary trusts.
From 1 July 2028, trustees will be required to pay a 30% minimum tax on distributions from discretionary trusts. Beneficiaries will receive non-refundable credits for the tax paid. Fixed trusts, testamentary trusts, superannuation funds, and charitable trusts are exempt from this change.
The reform is aimed at the current strategy of distributing trust income to lower-income family members to reduce the overall tax burden. If that describes your structure, it is worth talking to your solicitor and accountant now about whether restructuring makes sense.
The reason to plan now, rather than waiting until July 2028, is the three-year rollover relief window that opens on 1 July 2027. During that window, eligible trusts can restructure into a company or fixed trust without triggering CGT on the transfer. That window closes on 30 June 2030. Given the complexity involved and the number of investors likely to be working through this at the same time, planning early is recommended
What to think about before July 2027
The reforms create a few distinct decision points, and the right call depends on your individual circumstances. These are the questions worth working through with your adviser team before 1 July 2027:
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Should you sell before July 2027? If you have a long-held property with a large, accumulated gain and were planning to sell in the next few years anyway, selling before the date means your entire gain receives the 50% discount under the old rules. For properties with substantial gains, this difference can be significant. It needs to be modelled against your specific tax position before it becomes a decision.
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Which valuation method suits your property? The ATO formula works effectively on averages. If your property's growth was front-loaded, or if it is in a market that significantly outperformed for a period, an independent valuation at 1 July 2027 maylikely produce a better outcome. This is worth discussing with a valuer.
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Does your trust structure still work? If you hold property in a discretionary trust and the current structure relies on income splitting, professional advice should be sought on the right way to proceed tailored to individual circumstances.
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Where should future property investment go? With new builds exempt from both the negative gearing ring-fence and the CGT changes (investors can choose their preferred CGT treatment at sale), the economics of new construction look different from established property. However inflation has impacted construction costs and research must be considered to ensure total costs do not exceed market value, so this does not mean new builds are automatically the right choice, yet it's a factor worth that must be considered in any new acquisition.
The ATO Formula Valuation Comparison
We are already receiving questions about how the ATO formula and an independent valuation compare in practice. The short version:
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ATO apportionment formula |
Independent Opteon valuation |
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No upfront cost
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Small upfront cost, potentially significant tax saving |
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Assumes constant annual growth rate |
Reflects actual market conditions at 1 July 2027 |
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May understate value if growth was front-loaded |
Captures the real market value at the specific date |
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May be adequate for recent purchases with steady growth |
Better for properties held 5+ years or in variable markets |
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Less defensible if the ATO queries your calculation |
ATO-defensible documentation from a registered valuer |
These considerations are general in nature and should be worked through with your tax accountant or financial adviser before taking action.
What we know from the Budget, and what we don't
The Budget Paper No. 1, released on 12 May 2026 included proposed policy changes, dates, exemptions, and the Treasury modelling figures. Now the mechanics are subject to consultation, including aspects of the trust reform implementation, and any other areas that are flagged for review.
What the Budget modelling doesn't tell you is what any of this means at a suburb level, for a specific property type, or for your individual portfolio. A Government forecast national 2% price growth slowdown is an average constructed across 100s of markets that vary differently segment to segment. The same reform that may soften demand in an inner-city investor-heavy apartment block may have limited impact on a coastal new build. That local picture is where our professional qualified valuers with real market data can help you understand the value of your property assets, supporting you and your current accountant or financial advisor to develop the best strategy.
Disclaimer: This information is general in nature and does not constitute investment, tax, accounting or financial advice. It has been prepared without taking into account your personal objectives, financial situation or needs. You should speak with your tax accountant, financial adviser or other qualified professional before making any investment or financial decisions.
Scott Chapman
Managing Director Aus-NZ
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DISCLAIMER
This article is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax or financial advice.
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