Australia's 2026 federal budget, presented by Treasurer Jim Chalmers, includes what he describes as the most significant tax reform package in more than a quarter of a century. The changes target negative gearing, the capital gains tax (CGT) discount, and tax treatment for trusts, with the goal of rebalancing the tax system away from taxing incomes and toward taxing assets.
Key Tax Reforms
The government aims to create a fairer tax system for workers, first home buyers, and future generations, addressing a system where house prices have decoupled from incomes. Treasury estimates that the tax changes will limit property price growth by about $19,000 or 2% less for a couple of years. Combined with reduced investor demand, the reforms are expected to help an additional 75,000 Australians achieve home ownership over the next decade.
Negative Gearing Changes
Negative gearing allows property investors to deduct losses when rental income is less than expenses. Under the new rules, investment properties purchased after 7:30 PM on budget night (May 2026) will no longer be eligible for negative gearing from July 1, 2027, with exceptions for new builds and certain government housing programs. Existing investment properties are unaffected, and the benefits of negative gearing for current investors are expected to phase out over about a decade, as most negatively geared properties are sold within 10 years.
Capital Gains Tax Reform
From July 1, 2027, the 50% CGT discount will be replaced by cost-base indexation for assets held over 12 months. This means tax is paid only on profit above inflation, returning to the pre-1999 model. A minimum 30% tax on capital gains will also apply from July 1, 2027, to discourage investors from delaying sales to lower tax bills. Investors building new residential properties can choose between the 50% discount or the new indexation system. These changes are expected to raise $3.6 billion over four years.
Trust Tax Changes
A new 30% minimum tax on discretionary trusts will be introduced from July 1, 2028, excluding fixed trusts, superannuation funds, special disability trusts, deceased estates, and charitable trusts. Farming income is also exempt. This measure is projected to add $4.5 billion to the budget over five years.
Rationale Behind the Reforms
House prices have risen over 400% since 1999, more than double wage growth, creating an affordability crisis. While the government acknowledges that the primary cause is a lack of housing supply, tax settings have also contributed. Generous tax incentives have boosted investor demand, making it harder for owner-occupiers to buy homes. Since 2020, investors' share of new home loans has risen from under 30% to over 40%, while owner-occupier levels have fallen. The reforms aim to reduce the distorting effect of tax breaks on the property market.
Impact on First Home Buyers and Equity
At auctions, investors will now weigh the loss of negative gearing and the reduced CGT discount, potentially lowering their bids and giving first home buyers a better chance. The government estimates 75,000 additional first home buyers will enter the market over the next decade. However, the Coalition and property groups argue the changes will reduce supply and hurt renters. Treasury modelling shows 35,000 fewer homes will be built over 10 years as investors redirect funds, but the impact on rents is minimal—an extra $2 per week for median renters.
Labor has largely protected existing investors by allowing them to retain negative gearing and the more generous CGT discount for gains until next year. Some critics note that this locks in advantages for wealthier, older cohorts, but the government argues this approach avoids severe political backlash while shifting toward a fairer system.
