Tax Updates: Federal Budget 2026 – Legislated Changes

Marco Saccotelli

Special CounselAitken PartnersView Profile

Several changes announced in the Budget have now been clarified through subsequent legislation, providing greater certainty around how the measures will operate in practice.

Treasury Laws Amendment (Tax Reform No.1) Act 2026 received Royal Assent on 26 June 2026 and was followed by Treasury Laws Amendment (Tax Reform No.2) Act 2026 which received Royal Assent on 26 August 2026.

The legislation reflects the originally announced changes to negative gearing in relation to residential real property as well as amendments made due to strong pressure surrounding the ‘divorce tax’ and ‘widow’s tax’. The legislation also covers the changes to the 50% CGT discount and indexation of cost base and the minimum 30% tax on capital gains of individuals.

The purpose of this article is to explain the tax changes relating to negative gearing as well as the amendments to proposed changes, due to pressure from political parties and media in Australia.

Negative Gearing - the Key Changes

Negative gearing is simply where a revenue tax loss is made on holding a CGT asset (e.g. rental income is exceeded by loan interest payments, land tax, depreciation, insurance, owners corporation fees, agent’s management fees, etc). That tax loss can then be used to reduce tax payable on other income such as high individual salaries or if held in a trust or company, can reduce the net tax payable on other income derived in the entity.

What stays the same?

It is important to note that it is only negative gearing on existing residential properties that is affected. It will still be possible to negatively gear a share portfolio or other CGT assets such as industrial or commercial real property. Negative gearing will also remain available for purchases of ‘new residential premises’, to encourage investment in new supply of housing.

Existing residential properties which are being negatively geared, (provided they had been purchased under a contract signed prior to 7.30pm AEST on 12 May 2026), will continue to be able to be negatively geared (i.e. ‘grandfathering’). Grandfathering will also apply to a private house that was owned before Budget night which then is rented out such that the mortgage interest becomes tax deductible. Any rental loss in that scenario will not be quarantined and can be applied to reduce tax on taxable income arising from salary or other income.

Also, existing suburban houses acquired for use as a medical clinic or any other business service will not be subject to the negative gearing changes as the use of the property is not ‘residential’. ‘Residential’ takes its meaning from the existing main residence CGT exemption rules with a modification that it does not include a caravan, tiny home, mobile home or marine vessels.

Also, ‘commercial residential premises’ such as hotels, motels, boarding houses and hostels are not subject to loss quarantining and nor is student accommodation. An existing private dwelling used for short stays such as on an online platform such as Stayz or Airbnb will be subject to loss quarantining as they are not ‘commercial residential’ property.

New rules for existing residential premises acquired after Budget Night

For established residential properties acquired after the Budget date of 12 May 2026 – from 1 July 2027 onwards, losses will be quarantined and only be deductible against:

• assessable income from quarantined existing residential premises;
• net income from new residential premises and
• revenue or capital gains on residential dwellings (new or used)

Importantly, ‘new residential premises’ will not apply to an existing house that is extended, refurbished and improved or to a knockdown and new build because it has not added to housing supply. The new property must be a new house built on vacant land, new apartment complex developments, a builder’s house that is less than 12 months old or a new apartment/flat or an apartment/flat that has been occupied for less than 12 months.

A knock down of a house and construction of two townhouses will constitute new premises because it adds to housing supply. Properties held in widely held unit trusts, complying superannuation funds, certain build-to-rent developments and government supported housing developments will not be subject to this change and so existing residential premises acquired in these entities can still enjoy negative gearing tax treatment.

Complexity in tax compliance will arise where a home has dual purposes – rental to a third party and main residence of the owner. In these cases, the percentage of a rental loss that relates to a time percentage when the property was used for rental will need to be calculated so as to quarantine that calculated amount.

The rules work through new tax provisions which contain new method statements for quarantining, matching and carrying forward quarantined amounts. Essentially non quarantined losses are backed out, then quarantined losses are brought in from prior years and offset against any current year residential income or gains and any excess is carried forward but still quarantined. There is no quarantining where, in the same income year there is assessable income from a new residential property and a rental loss on an existing residential property – they will be set off in that same income year.

Further rules will allow a ‘look through’ approach where a trust distributes net income from a residential property to a beneficiary. If that beneficiary has other quarantined personal tax losses from rental properties, then the loss can be offset against the net trust income received.

The rules interact with the CGT discount and indexation changes (which will be the subject of our next article), such that from 1 July 2027 there will be loss ordering rules and quarantining of negative gearing rules relating to the following types of capital gains:

1. deferred non-residential (CGT assets owned before 1 July 2027 such that a deemed disposal and reacquisition on 30 June 2027 is deemed to occur for the purposes of removal of the 50% CGT discount on the post-1 July 2027 capital growth);
2. deferred residential (as per 1 except residential property);
3. non-residential (non-residential CGT assets acquired after 1 July 2027)
4. residential capital gains (residential CGT assets acquired after 1 July 2027)

The existing method statement for calculating net capital gains in s.102-5, ITAA 97 is amended to be a 7-step method statement. This introduces mandatory loss application ordering, whereby losses must be offset first against deferred gains in the 1-4 order above. This will likely lead to higher overall tax being payable as compared to the previous law where the order of loss application and source of a loss was at the discretion of a taxpayer.

What amendments were extracted by political groups and Media

The main changes extracted through pressure on the Government are as follows:

• the extensive Ministerial discretions that were contained in the original Bill around determining additional types of ‘new’ residential premises or residential premises that could apply the 50% discount were removed.

• a non-resident will be able to apply indexation to a CGT asset based on a proportion of the period of ownership during which they were a tax resident of Australia;
  
• limited recourse borrowing by self-managed superannuation funds will be limited to ‘business real property’ from 10 August 2026 (a property used in a business whether that is an associate of the SMSF or a third party);

The ‘divorce tax’ and ‘widow’s tax’ changes:

• ensure that where due to inheritance (death) or relationship breakdown (divorce or breakdown of a de facto relationship), a person acquires a co-ownership interest or a full interest in a residential dwelling from their spouse or former spouse and that interest was capable of being negatively geared – the recipient is entitled to continue the same tax treatment;

• ensure that where a person acquires an ownership interest in a new residential dwelling in death and divorce scenarios, that person can choose between applying the 50% CGT discount OR cost base indexation and the minimum 30% tax on capital gains derived by individuals; and

• maintain exceptions from the general loss quarantining rules for main residences that were acquired before Budget night OR that are new residential dwellings where that main residence is later used to produce assessable income through rental activities

It seems that the complexity and compliance costs caused by these changes could have been avoided through more direct and simpler changes. For example, to move investors away from existing residential premises in older suburbs, the CGT discount could have been dropped from 50% to 20%.

At any rate, it is certain that these changes along with the exposure drafts and consultation surrounding the minimum 30% on discretionary trusts (coming up in a future article) have certainly made one of the world’s most complicated tax systems even more complicated.

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Written by Macro Saccotelli. BOOK A CONSULT. If you would like to discuss tax matters, please reach out to Marco on +61 3 8600 6098 or via email on msaccotelli@aitken.com.au