The Federal Budget 2026-27, delivered on 12 May 2026, introduces two of the most consequential reforms to Australia’s property investment tax framework in decades. The first is the replacement of the 50% capital gains tax discount with a cost base indexation model, effective from 1 July 2027. The second is the quarantining of rental losses on established residential properties purchased after 7:30 PM AEST on 12 May 2026, effective from 1 July 2027.
These two changes do not operate in isolation. Together they alter the tax profile of residential property investment from acquisition through to disposal. Every property investor in Australia, whether currently holding assets or considering new purchases, needs to understand exactly what has changed, what transitional protections apply, and what decisions need to be made before 1 July 2027.
This blog covers every measure in the budget that directly affects property investors and capital asset holders, drawing directly from the budget announcements. Worked examples are included to illustrate the real dollar impact.
Two critical dates: The negative gearing quarantine applies to established residential properties acquired after 7:30 PM AEST on 12 May 2026. The new CGT rules apply to gains accruing on or after 1 July 2027. Both are already in effect or imminent.
Part 1: Replacing the 50% CGT Discount with Cost Base Indexation
What Is the 50% CGT Discount and Why Is It Changing?
Since 1999, Australians who hold an asset for more than 12 months have been entitled to reduce the capital gain on sale by 50% before including it in their assessable income. This has been one of the most significant tax concessions in the Australian system, benefiting individuals, trusts, and partnerships who invest in shares, property, and other assets over the long term.
From 1 July 2027, the government is replacing this 50% discount with a cost base indexation system and introducing a 30% minimum tax on net capital gains. These changes apply to all assets, including pre-CGT assets, held by individuals, trusts, and partnerships.
How the New Indexation System Works
Under cost base indexation, the original cost of an asset is adjusted upward in line with inflation over the holding period. Only the real gain (the amount by which the sale price exceeds the inflation-adjusted cost base) is assessable as a capital gain. The 30% minimum tax then applies to that net capital gain.
This approach is designed to tax only genuine economic gains rather than gains that simply reflect inflation. For assets held over long periods in high-inflation environments, indexation can reduce the taxable gain significantly compared to taxing the full nominal gain.
Worked Example: Comparing the Two Systems
The table below compares outcomes under the current 50% discount and the new indexation system for a property investor in the 37% tax bracket, selling a property held for approximately 10 years:
| Current Rule: 50% CGT Discount | New Rule from 1 July 2027: Indexation + 30% Minimum Tax | |
| Original Purchase Price | $500,000 | $500,000 |
| Indexed Cost Base (15% CPI over hold period) | Not applicable | $575,000 |
| Sale Price | $850,000 | $850,000 |
| Gross Capital Gain | $350,000 | $350,000 |
| Discount or Indexed Gain Applied | 50% discount = $175,000 assessable | Indexed real gain = $275,000 assessable |
| Tax at 37% Marginal Rate | $64,750 | $101,750 at 37% = but 30% minimum applies |
| 30% Minimum Tax Check | No minimum tax applies | 30% x $275,000 = $82,500 minimum |
| Final Tax Payable (approximate) | $64,750 | $101,750 (37% exceeds 30% minimum) |
Source: Federal Budget 2026-27, Budget Paper No. 2, Statement 4: Tax Reform | ATO: Tax Reform – CGT and Negative Gearing | Budget CGT and Negative Gearing Factsheet (PDF) Note: Dollar figures are illustrative examples based on the announced rules. The 15% CPI uplift is assumed for the indexation example and does not represent a forecast. Actual indexed cost base will use ATO official CPI index figures at the time of sale. Individual outcomes vary based on marginal tax rate, holding period, and actual inflation. These figures do not constitute tax advice.
In this example, a taxpayer in the 37% bracket pays more tax under the new system because 37% of the indexed gain ($101,750) exceeds the 30% minimum ($82,500). However, for taxpayers in the 45% bracket with assets held over very long high-inflation periods, indexation may sometimes produce a better outcome than the 50% discount did. Individual modelling is essential.
Transitional Arrangements: Protecting Existing Gains
The government has confirmed that the new rules will only apply to capital gains accruing on or after 1 July 2027. This transitional protection is significant for anyone who already holds investments with embedded gains.
The specific transitional rules are:
- The 50% CGT discount will continue to apply to gains that accrued before 1 July 2027. Only the post-1 July 2027 portion of a gain is subject to the new rules.
- Capital gains on pre-CGT assets (assets acquired before 20 September 1985) that accrued before 1 July 2027 will remain exempt from CGT.
- Assets that are sold prior to 1 July 2027 will continue to be subject to the existing rules in their entirety.
New Residential Properties: A Choice Between Systems
Investors who purchase new residential properties will have the flexibility to choose between the two systems when they eventually sell. They can elect either:
- The 50% CGT discount under the existing rules, or
- Cost base indexation combined with the 30% minimum tax.
This choice is a meaningful planning opportunity for new residential property investors. The better option will depend on the inflation rate experienced during the holding period, the investor’s marginal tax rate at the time of sale, and the size of the gain. Our team at JMB Consultants can help model both scenarios.
Income Support and Age Pension Recipients Are Exempt
Income support payment recipients, including Age Pension recipients, will be exempt from the 30% minimum tax on net capital gains. This exemption protects lower-income Australians and retirees who may realise capital gains from the sale of investments but who are not in a position to absorb a 30% minimum tax on those gains.
Assets Sold Before 1 July 2027: No Change
Assets that are sold prior to 1 July 2027 will continue to be subject to the existing CGT rules in full. If you are considering the timing of a disposal, selling before that date means the old rules apply without any transitional splitting. This is not necessarily the right decision for every investor, but it is a factor that deserves consideration as part of a broader review.
Key planning question: For any asset with a large embedded gain, it is worth modelling three scenarios: sell before 1 July 2027 under existing rules; sell after 1 July 2027 with a split treatment; and continue to hold long-term under the new system. Contact JMB Consultants to model your specific position.
Part 2: Foreign Resident CGT Concession for Renewables
Separate from the reforms to the main CGT discount, the government has introduced a time-limited, targeted concession within the foreign resident CGT regime for investment in Australia’s renewables sector.
The concession applies to foreign investors who dispose of certain renewable energy infrastructure assets. The transitional arrangement runs from the first day of the next quarter after Royal Assent of the relevant legislation until 30 June 2030. This measure is designed to encourage foreign capital into the renewable energy transition by reducing the CGT friction on exits from eligible infrastructure investments during the transition period.
Part 3: Reforming Negative Gearing for Established Residential Properties
How Negative Gearing Currently Works
Negative gearing is the situation where the deductible costs of holding an investment property (mortgage interest, property management fees, council rates, insurance, repairs, and depreciation) exceed the rental income the property generates. Under current tax law, that net rental loss can be offset against any other income, including salary and wages, which reduces the investor’s total taxable income and therefore their overall tax liability for the year.
This has been a widely used strategy among Australian property investors, particularly in periods of high mortgage rates when interest costs push more properties into a net loss position.
What the Budget Changes from 1 July 2027
From 1 July 2027, losses from established residential properties will only be deductible against:
- Rental income from residential properties, or
- Capital gains derived from residential properties.
Excess losses that cannot be absorbed against residential property income in a given year will be carried forward and can be offset against residential property income in future years. The losses do not disappear, but they are quarantined from salary income, business income, and non-property capital gains.
Worked Example: The Real Tax Impact
The following table compares a negatively geared investor holding a pre-budget property against one who purchased an established property after 12 May 2026:
| Pre-Budget Property (Contract before 7:30 PM 12 May 2026) | Post-Budget Established Property (Acquired after 7:30 PM 12 May 2026) | |
| Annual Rental Income | $24,000 | $24,000 |
| Annual Expenses (interest, rates, management fees) | $40,000 | $40,000 |
| Net Rental Loss | $16,000 | $16,000 |
| Offset Against Salary Income? | Yes, deductible in full against all income (existing rules apply until disposal) | No. Loss is quarantined. Carried forward to offset future residential property income only. |
| Salary Income | $120,000 | $120,000 |
| Taxable Income in Year 1 | $104,000 ($120,000 less $16,000 loss) | $120,000 (no offset available) |
| Approximate Tax Saving (at 30% bracket) | $4,800 tax reduction | $0 tax reduction in year 1 |
Source: Federal Budget 2026-27, Budget Paper No. 2, Statement 4: Tax Reform | ATO: Tax Reform – Negative Gearing and CGT (not yet law) | Budget CGT and Negative Gearing Factsheet (PDF) | ATO: Tax Rates for Individuals Note: Dollar figures are illustrative only. Tax saving calculated at the 30% marginal rate applicable on income from $45,001 to $135,000. Actual tax outcomes depend on the full income position, applicable offsets, Medicare Levy, and other deductions. This example does not constitute personal tax advice.
Which Properties and Investors Are Caught by the New Rules?
The quarantining measure applies to established residential properties acquired from 7:30 PM AEST on 12 May 2026. The following table sets out which properties are inside and outside the new rules:
Properties subject to the new quarantining rules (acquired after 7:30 PM AEST 12 May 2026):
- Established residential properties (existing houses, apartments, units, townhouses) purchased after the budget time cut-off.
Properties exempt from the new rules (existing rules continue):
- Properties acquired prior to 7:30 PM AEST on 12 May 2026, including properties under binding contracts that had not yet settled as at that time. The existing negative gearing rules apply to these properties until they are eventually sold.
- Eligible new build properties. Newly constructed residential properties are fully exempt from the quarantining changes.
- Properties held in superannuation funds, including self-managed superannuation funds.
- Properties held in widely held trusts.
- Build-to-rent developments.
- Properties owned by private investors who are supporting government housing programs.
Investors with Multiple Rental Properties
For investors holding more than one residential property, the quarantined losses from a negatively geared property can be offset against the positive rental income from other residential properties in the same pool. Only the net loss that cannot be absorbed within the residential property income pool is carried forward. This gives multi-property investors more flexibility to manage their quarantined losses than investors holding a single property.
The New Build Exemption: A Significant Distinction
Because eligible new build properties are fully exempt from the quarantining rules, purchasing a new residential property after 12 May 2026 continues to provide full negative gearing deductibility against all income, in the same way as established properties did before the budget. This is a deliberate policy choice by the government to direct investor activity toward housing supply rather than competition for existing stock.
New build investors will also have the option to choose between the 50% CGT discount or indexation treatment when they eventually sell, as noted in Part 1 of this blog.
Contract holders: If you entered a binding contract to purchase an established residential property before 7:30 PM AEST on 12 May 2026 and settlement has not yet occurred, you are protected. The existing negative gearing rules apply to your property until you sell it.
How the CGT Changes and Negative Gearing Changes Work Together
For an investor who purchases an established residential property after 12 May 2026, both reforms will apply simultaneously. During the holding period, net rental losses will be quarantined and cannot reduce other income. When the property is eventually sold after 1 July 2027, the accumulated quarantined losses can be applied against the capital gain, but that capital gain will itself be assessed under the new indexation and 30% minimum tax framework rather than the 50% CGT discount.
This dual effect means the tax profile of post-budget established property investment is materially different from what Australian investors have experienced for the past 25 years. A holistic review that models both annual cash flow and the eventual exit tax position is now an essential step for any investor considering a purchase.
Part 4: Extended Ban on Foreign Purchases of Established Residential Dwellings
The government will extend the temporary ban on foreign purchases of established residential dwellings by two years and three months, until 30 June 2029. The ban was originally implemented for two years from 1 April 2025.
For Australian resident investors, this extension reduces competitive pressure from foreign buyers on established residential property stock. It is most relevant to capital city markets and high-demand suburban areas that have historically attracted foreign buyer interest. While this does not directly affect the tax obligations of Australian residents, it is a material factor in the supply and demand dynamics of the residential property market over the medium term.
Part 5: Strengthened ATO Compliance and Fraud Prevention Powers
The government will provide $86.3 million over four years from 1 July 2026, and $9.7 million per year on an ongoing basis from 2030-31, to deliver Phase 2 of the Counter Fraud Strategy. This investment significantly expands the ATO’s capacity to detect and prevent fraud in real time and has direct relevance for property investors and their advisers.
Key features of the enhanced compliance framework relevant to property investors and individual taxpayers include:
- Enhanced real-time fraud detection and prevention capabilities across the tax and superannuation systems.
- Additional fraud protections for individual taxpayers.
- Expanded live monitoring of fraudulent account access, applying to tax agents, businesses, and high-risk superannuation changes.
- New ATO powers to pause the recovery of tax debts from taxpayers who are genuine victims of fraud by a tax agent or other tax intermediary, and to waive those debts in appropriate circumstances.
- New powers to recover paused and waived debts directly from the tax intermediaries responsible for the fraud.
- Expansion of existing garnishee powers to include jointly held assets in circumstances where those arrangements are being used to frustrate debt recovery.
- Further targeted exceptions to tax secrecy provisions, and enhancements to tax regulators’ information-gathering powers to support compliance and effective tax administration.
- Additional targeted compliance activities over two years from 2026-27, including specifically in relation to R&D tax incentive claims.
For property investors who have historically relied on their tax agent for lodgements and compliance, the new protections for taxpayers who are victims of intermediary fraud provide greater recourse in cases where an agent has acted incorrectly. At the same time, the expansion of ATO’s real-time data-matching and compliance activity means that errors, omissions, and incorrect claims are more likely to be identified and queried.
Frequently Asked Questions
Q: I bought my rental property in 2019. Does the 50% CGT discount still apply when I sell?
A: Yes, but only for the portion of the gain that accrued before 1 July 2027. For the gain accruing after that date, the new indexation and 30% minimum tax rules will apply. Assets sold prior to 1 July 2027 continue to be subject to the existing rules in their entirety.
Q: I have a contract to purchase an established property now. Does the negative gearing quarantine apply to me?
A: If you entered into a binding contract before 7:30 PM AEST on 12 May 2026, you are exempt from the quarantining rules until you eventually sell that property, even if settlement has not yet occurred. If your contract was entered after that cut-off, the new rules will apply from 1 July 2027.
Q: Does negative gearing disappear completely under the new rules?
A: No. Net rental losses on affected established properties are not eliminated. They are quarantined, meaning they can only be offset against rental income or capital gains from residential properties. Excess losses carry forward indefinitely. They cannot reduce your salary or other non-property income in the year the loss arises.
Q: My SMSF holds a residential investment property. Does the negative gearing change apply?
A: No. Properties held within superannuation funds, including self-managed superannuation funds, are excluded from the negative gearing quarantining rules.
Q: I want to buy a new apartment off the plan. Will the new rules affect me?
A: Eligible new build properties are exempt from the negative gearing quarantining rules regardless of when they are purchased. You retain full negative gearing deductibility against all income. When you sell, you will also have a choice between the 50% CGT discount and cost base indexation. Confirm with your adviser whether the specific property qualifies as an eligible new build under the ATO’s criteria.
Q: I receive the Age Pension. Does the 30% minimum CGT tax apply to me?
A: No. Income support payment recipients, including Age Pension recipients, are specifically exempt from the 30% minimum tax on net capital gains.
Q: Should I sell my investment property before 1 July 2027?
A: This depends entirely on your individual circumstances: the size and age of the embedded gain, your marginal tax rate, your income in the year of sale, your future investment plans, and the ongoing performance of the asset. It is not a one-size-fits-all decision. JMB Consultants can help model the comparison between selling before and after 1 July 2027 for your specific property.
Q: How is the pre-1 July 2027 portion of a gain separated from the post-1 July 2027 portion?
A: The ATO is expected to issue guidance on the methodology for apportioning gains between the two periods. The most likely approach is an annual straight-line or market value based apportionment. We will update clients as this detail is confirmed through the legislative process.
How JMB Consultants Can Help
The Federal Budget 2026-27 has fundamentally changed the tax framework for property investors. If you hold investment properties, are considering a purchase, or have assets with significant embedded capital gains, these reforms require you to reassess your strategy before 1 July 2027.
At JMB Consultants, our principal Neeraj is a CPA Australia member with over 15 years of accounting and tax advisory experience including deep expertise in property investment tax planning, capital gains structuring, trust taxation, and SMSF compliance. We help clients across Melbourne, Glen Waverley, and throughout Australia to turn complex tax changes into clear, personalised action plans.
To book a consultation, visit jmbtax.au or contact us through our website.
Official Sources and Further Reading
The content in this blog is sourced directly from official Australian Government and ATO publications. All measures described are based on budget announcements made on 12 May 2026. Note that measures described as proposed or announced are not yet law unless stated otherwise. Always refer to the most current ATO and Treasury guidance before making any tax decisions.
Federal Budget 2026-27: Official Government Sources
- Federal Budget 2026-27: Main Page | https://budget.gov.au/ The official Australian Federal Budget website for 2026-27, including all budget papers, factsheets, and overview documents delivered on 12 May 2026.
- Federal Budget 2026-27: Tax Reform Page | https://budget.gov.au/content/04-tax-reform.htm The official budget page covering all tax reform measures including CGT changes, negative gearing reform, discretionary trust minimum tax, electric car FBT, and the Working Australians Tax Offset.
- Federal Budget 2026-27: CGT and Negative Gearing Tax Explainer (PDF) | https://budget.gov.au/content/factsheets/download/tax-explainers-negative-gearing-capital-gains-tax.pdf The official Treasury factsheet with detailed worked examples on the CGT and negative gearing reforms, including transitional arrangements and the impact on different investor profiles.
- Federal Budget 2026-27: Budget Documents and Budget Papers | https://budget.gov.au/content/documents.htm Full set of Budget Papers including Budget Paper No. 2 which contains the detailed descriptions of all revenue and expenditure measures.
- Federal Budget 2026-27: Cost of Living Measures | https://budget.gov.au/content/02-cost-of-living.htm Official budget page covering the income tax cuts, $1,000 instant tax deduction, and other cost-of-living measures announced in the 2026-27 Budget.
Australian Taxation Office: New Legislation
ATO: Tax Reform – Negative Gearing and CGT Reform | https://www.ato.gov.au/about-ato/new-legislation/in-detail/individuals/tax-reform-boosting-home-ownership-reforming-negative-gearing-and-capital-gains-tax The ATO’s official page on the announced CGT and negative gearing changes. Notes that these measures are not yet law and will be updated as legislation progresses.
Australian Taxation Office: Capital Gains Tax
- ATO: Capital Gains Tax – General Guidance | https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax The ATO’s main CGT guidance page covering how CGT currently works, including the discount rules, cost base, and asset types. This page reflects current law and will be updated as the announced reforms are legislated.
- ATO: CGT Discount for Individuals | https://www.ato.gov.au/individuals-and-families/investments-and-assets/capital-gains-tax/capital-gains-tax-discount The ATO’s guidance on the current 50% CGT discount for individuals holding assets for more than 12 months. This reflects the current rules, not the proposed changes.
Australian Taxation Office: Negative Gearing and Rental Properties
- ATO: Rental Properties and Deductions | https://www.ato.gov.au/individuals-and-families/investments-and-assets/residential-rental-properties The ATO’s main page on residential rental properties, including what deductions are currently available and how rental income and losses are treated. This page reflects current law.
- ATO: Rental Expenses You Can Claim | https://www.ato.gov.au/individuals-and-families/investments-and-assets/residential-rental-properties/rental-expenses-you-can-claim Detailed ATO guidance on allowable rental property deductions including interest, repairs, depreciation, and management fees under the current rules.
Other Official Sources
- Prime Minister of Australia: Tax Reform Statement | https://www.pm.gov.au/media/tax-reform-workers-businesses-and-future-generations The Prime Minister’s official statement on the tax reform package announced in the 2026-27 Budget, including CGT and negative gearing reforms.
- Treasury: Budget Paper No. 2 – Budget Measures | https://budget.gov.au/content/bp2/index.htm The official Budget Paper No. 2 which contains the full technical description of all budget measures including the CGT reforms, negative gearing changes, and foreign buyer ban extension.
Note on legal status: Measures described in this blog are based on budget announcements made on 12 May 2026. Unless explicitly stated as law, these are announced measures subject to Parliamentary legislation and may change before enactment. Always verify the current status of any measure with the ATO at ato.gov.au or through a registered tax agent before making decisions.