Treasurer Jim Chalmers handed down his fifth Federal Budget last night, describing it as “the most important and ambitious Budget in decades.” For property investors and borrowers, that’s not just rhetoric – the changes to negative gearing and capital gains tax are the most significant in a generation.

Here’s our plain-English breakdown of what’s in the Budget relating specifically to property investors, what it means for you, and how to think about your position from here.

An Important Caveat: None of This Is Law Yet

The information below is based on Budget announcements and current media reporting as at 13 May 2026. Draft legislation has not yet been released and the final measures may differ materially.

While the 2026 Federal Budget sets out the Government’s intentions for negative gearing and capital gains tax reform, it’s critical to understand that these measures are proposals only – not yet legislation.

Budget announcements must pass both Houses of Parliament before they have any legal force, and that process can take months, be amended, or in some cases fail to pass altogether.  Senate dynamics, stakeholder pressure, and the complexity of transitional arrangements all mean the final legislated form of these measures could differ from what was announced.

Until the relevant bills receive Royal Assent, the existing negative gearing and CGT rules remain in place. We recommend against making major investment decisions based solely on Budget night announcements, and will be updating clients as the legislation progresses through Parliament.

The Macro Backdrop

The Budget was handed down against a challenging economic backdrop. Escalating tensions around the Strait of Hormuz have added significant uncertainty to global energy markets.

With inflationary pressure expected to remain elevated through 2026, the possibility of further RBA rate rises remains on the table. Treasury assumes oil prices start declining from mid-2026, which would help bring inflation back to target by mid-2027 – but that assumption is optimistic given current geopolitical conditions.

Key Takeaway

Borrowers should ensure they have sufficient buffers in case interest rates remain elevated or rise further.

The broader economic environment means lending conditions will remain tight, and loan serviceability will be somewhat reduced.

Negative Gearing

This is the headline measure for property investors.  If legislation is passed, from 1 July 2027, negative gearing on residential property will be restricted to new builds only.

What the new rules mean in practice

  • If you buy an established residential investment property after 7.30pm on Budget night 2026, the proposed changes would apply from 1 July 2027.  You can still deduct rental losses – but only against rental income from investment properties, not your wages or other income.
  • Unused losses are carried forward to future tax years, where they offset future rental income or potentially be applied against future taxable investment income, subject to the final legislation.
  • If you buy a new build, full negative gearing remains available – losses can still be offset against all income.
  • Properties you already own as at 12 May 2026 are expected to be grandfathered under the Government’s announced transitional arrangements.
  • Properties supporting affordable housing programs are also exempt.
The Practical Impact

For high-income borrowers – particularly those in the top tax bracket – the cash flow benefit of negative gearing on established property essentially disappears for new purchases. Instead of a tax saving in the current year against your wages, you’re waiting years until the property cash-flows positively or you sell. This materially increases the after-tax cost of holding.

Capital Gains Tax – The New Model

If legislation is passed, the second major reform replaces the flat 50% CGT discount with a return to the pre-1999 inflation indexation model. Under this approach, only your real gain – growth above inflation – is taxable.

How it works

Instead of halving your capital gain and paying tax on that, your cost base is indexed to CPI each year. You then pay tax at your marginal rate on whatever gain remains above the indexed cost base. If your property grew broadly in line with inflation, you pay little or no tax. If it substantially outperformed inflation, you pay more.

Key protections

  • Only applies to gains arising after 1 July 2027 – pre-existing gains are protected
  • Existing unrealised gains accrued before 1 July 2027 are expected to be protected under transitional arrangements
  • Based on current announcements, investors in qualifying new housing may be able to choose between the existing 50% discount and the new indexation method at the time of sale
  • The CGT discount inside superannuation is unchanged
  • Small business CGT concessions are maintained in full

The Government has also announced a proposed 30% minimum tax rate on certain capital gains from 1 July 2027. While details remain limited, the measure appears designed to reduce the ability to defer asset sales into lower-income years. Further detail is expected in draft legislation.

Case Study

To make this tangible, here are three hypothetical scenarios comparing the old 50% discount versus the new CPI indexation model.

Assumptions:

  • Purchase price $800,000 after Budget night
  • Marginal tax rate 47%
  • CPI 3% per annum
Key takeaway

The longer you hold and the more your property outperforms inflation, the greater the potential tax payable under the indexation model relative to the current 50% discount.

For long term investors in high-growth markets like Sydney and Melbourne – where property has historically grown at 6-8% annually, well above CPI – the difference at sale is material.

One Silver Lining

If your property’s growth barely beats CPI over the hold period, the indexation model could actually produce a lower tax bill than the old 50% discount.  The new rules aren’t uniformly worse – however they’re worse specifically for investors with strong above-inflation capital growth.

What This Means for Your Strategy

If legislation is passed, the reforms are substantial but targeted.  If you already own investment property, the announced negative gearing changes do not affect your existing holdings. For CGT, gains accrued before 1 July 2027 are expected to be protected, with future gains subject to the final transitional rules.

The question is what you do from here. The structural shift in tax treatment for established residential property means new builds may receive more favourable tax treatment than established residential property under the announced model. Some investors may also reassess the relative attractiveness of alternative asset classes such as shares and ETFs, as the CGT concessions inside super remain unchanged and the investment return profile doesn’t rely on the same debt-financed model that’s now been disincentivised.

As always, these are structural signals, not reasons to act hastily. The grandfathering provisions and the 1 July 2027 start date give investors time to plan properly.

Want to understand how these changes affect your specific situation?

Our team at First Point Group works with borrowers across Australia to structure lending and investment strategies around exactly these kinds of legislative shifts.

Get in touch if you’d like to discuss your position.

General Information Only. This article is for informational purposes and does not constitute financial, tax, or legal advice. The case studies presented use hypothetical figures for illustrative purposes only. You should seek independent advice from a qualified adviser before making any financial decisions. Tax law is subject to change and individual circumstances vary.

 

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