What the 2026-27 Federal Budget means for property borrowers
The Budget handed down on 12 May 2026 includes the most significant changes to property investment rules in over 25 years. Negative gearing on established residential properties is being restricted from 1 July 2027. The 50% capital gains tax discount is being abolished and replaced with an inflation-adjusted indexation model. Discretionary trust distributions face a new minimum tax from 1 July 2028. All of this is landing in an economy where inflation is forecast to hit 5% by mid-year, the RBA has raised rates for the third consecutive time in May, and borrowing conditions are tighter than they have been in years.
These measures have been announced but not yet legislated. They will need to pass through Parliament and may be modified before they take effect. The tax implications are a conversation for your accountant or financial planner. What follows covers what has been announced, what it means for property and borrowing, and what has not changed.
The economic backdrop
Treasury forecasts inflation peaking at 5% by mid-2026, driven by the Middle East conflict pushing up energy costs. The RBA has raised rates three times in a row and flagged further increases may still be needed. Economic growth is expected to slow to around 1.75% next financial year and unemployment is expected to drift up from its current low. Treasury has also modelled a scenario where oil peaks at US$200 per barrel and takes three years to fall, which would push unemployment to pre-pandemic levels and inflation above 7%.
What this means for borrowers is that assessed serviceability remains tight. Lenders apply a buffer above the actual interest rate when calculating whether you can service a loan. With rates having moved three times since the beginning of the year, borrowing capacity for many households has shifted compared to twelve months ago. If you have not revisited your pre-approval position recently, it is worth doing so before you start looking at property.
The government has introduced some cost of living measures flowing through over the next two years. Workers receive a tax cut from 1 July 2026 as the personal income tax rate for the $18,201 to $45,000 bracket drops from 16% to 15%, with a further reduction to 14% from 1 July 2027. A $1,000 instant tax deduction for work-related expenses applies from the 2026-27 income year without needing receipts. A $250 Working Australians Tax Offset applies from 1 July 2027, increasing the effective tax-free threshold by around $1,800 to $19,985.
Negative gearing on established property
From 1 July 2027, negative gearing will be limited to newly constructed dwellings. An established residential property purchased after 7:30pm AEST on 12 May 2026 will no longer allow losses to be offset against other income such as wages or business income. Losses will instead only be deductible against rental income or capital gains from other residential properties, with any excess carried forward to future years.
Properties already owned at 7:30pm AEST on 12 May 2026 are fully protected under the current rules until they are sold. Contracts exchanged before that time are also protected even where settlement has not yet occurred. Build-to-rent investment and investment in affordable housing programs are also exempt, alongside properties in widely held trusts and superannuation funds.
It is worth understanding how negative gearing works across different structures. Offsetting rental losses against personal wages or other personal income has always applied to individuals only. It has never worked that way inside an SMSF, a company, or a broadly held trust. In an SMSF, rental losses can offset other income within the fund but members cannot use those losses against income outside the fund. The Budget changes for established property are most directly felt by individuals holding property in their own name.
The Budget papers do not explicitly state whether commercial property and shares are exempt from the negative gearing changes. The restrictions as written apply only to established residential property, so commercial property and shares appear to remain outside the scope based on the current announcement. Confirm your specific position with your accountant once the legislation is released.
For anyone considering an established investment property purchase, the relevant date is contract exchange, not settlement. Finance approval, valuations, and the time needed to find the right property all sit between where you are now and 1 July 2027. Getting pre-approval in place in the second half of 2026 gives you a workable runway. Leaving it until early 2027 likely does not.
Properties purchased after Budget night but before 30 June 2027 can still be negatively geared during that 13-month window. From 1 July 2027 those losses become quarantined to residential property income only. That is a detail worth understanding before committing to a purchase.
The incentive to buy land and build
Investors in newly built residential properties retain full negative gearing access and also get to choose between the existing 50% CGT discount or the new indexation method when they eventually sell. That option is not available to investors in established property purchased after Budget night.
Treasury forecasts the changes will limit house price growth by 2% and deliver a saving of $19,000 on the purchase of a median-priced home, and anticipates the reforms will enable 75,000 Australians to achieve home ownership over the next decade. Separately, the government's $2 billion housing infrastructure investment is expected to support the construction of up to 65,000 new homes. The Budget also includes funding toward housing construction, social and affordable housing projects, planning process reforms, and infrastructure to enable increased residential building activity.
The construction industry is already running at capacity, with labour shortages, construction costs, and permit delays among the biggest barriers to new development. Tax incentives drive demand but physical supply takes time to respond.
House and land packages, off-the-plan apartments, knock-down rebuilds, and newly completed townhouses all sit within the new build carve-out. Construction loan finance works differently to a standard investment purchase. The loan draws down in stages as the build progresses rather than as a lump sum at settlement, which affects interest costs and cash flow during the build period. Understanding how that structure works before signing a building contract matters because the contract commits you to a timeline the finance needs to support.
Capital gains tax
From 1 July 2027, the 50% CGT discount on assets held for more than twelve months will be abolished for individuals, trusts, and partnerships. In its place, gains will be taxed using an inflation-adjusted indexation method with a minimum 30% tax applying to net capital gains. This is a return to the approach that applied before 1999 when the current 50% discount was introduced.
The CGT changes apply to all CGT assets held by individuals, trusts, and partnerships, not just investment property. Shares, ETFs, managed funds, and business assets are all within scope. Speak to your accountant about what the changes mean for your position across all asset classes.
Transitional arrangements limit the impact on existing investments. Gains accruing before 1 July 2027 retain the 50% discount. For assets held before 1 July 2027 and sold after that date, the 50% discount applies to the difference between the original cost base and the asset's value at 1 July 2027. Indexation then applies to gains from 1 July 2027 onwards, using the asset's value at that date as the starting point. Having a clear record of what your assets were worth at 1 July 2027 will matter. The ATO is expected to provide guidance on how valuations can be determined, including formula-based methods where a formal valuation is not obtained. Speak to your accountant about this well before you plan to sell.
One aspect that has received less attention is the treatment of assets acquired before 20 September 1985. Pre-1985 assets have historically been exempt from CGT entirely. Under the proposed changes, that exemption ends for disposals occurring on or after 1 July 2027. Gains on pre-1985 assets sold before that date remain fully exempt. For anyone holding property or other assets acquired before 1985, the timing of any disposal relative to 1 July 2027 is worth discussing with your accountant well in advance.
The relevant date for CGT purposes is generally the contract date, not settlement. Investors in new builds retain the option to choose either the 50% discount or the new indexation arrangement when they sell. Income support recipients, including Age Pension recipients, are exempt from the minimum 30% tax.
The debate around these changes
Not everyone agrees these reforms represent good policy. There is a genuine public debate about whether the changes are meaningful tax reform or primarily a revenue measure that increases the burden on ordinary investors, small business owners, and younger Australians trying to build wealth. One concern raised publicly is that the increased complexity of the system may benefit those with access to professional advice and the capacity to restructure, while those without that access simply pay more.
The Treasurer's stated position is that the changes are designed to rebalance a system that has been more generous to assets than to labour, and to give younger Australians a better chance at home ownership at a time when house prices have risen more than 400% since 1999, twice as fast as incomes.
The policy outcome will be determined through Parliament. Legislation has not yet been introduced.
Different ownership structures
Different structures are affected differently. The following covers how the announced measures apply to each entity type based on the Budget papers. Any structural decisions should be made with your accountant and financial planner based on your individual circumstances.
Individuals holding investment property in their own name are directly affected by both the negative gearing changes and the CGT discount removal for established property purchased after Budget night.
Discretionary trusts are affected on two fronts. They lose the 50% CGT discount from 1 July 2027 alongside individuals and partnerships, and from 1 July 2028 they face a new minimum 30% tax on trust distributions. Discretionary trusts include family trusts but also discretionary trading trusts and other structures where the trustee has discretion over how income is distributed to beneficiaries. There are currently approaching one million discretionary trusts in Australia and many holding investment property or trading assets will need to review their structure. Exclusions from the trust distribution tax apply to primary production income, income relating to vulnerable minors, non-resident withholding amounts, and income from discretionary testamentary trusts existing at the time of announcement. The government has announced rollover relief for three years from 1 July 2027 for those wanting to restructure out of discretionary trusts into companies or fixed trusts. Anyone with a discretionary trust should also consider reviewing their Will and estate plan in light of these changes, particularly around whether a testamentary trust remains appropriate given the new distribution tax settings. That is a conversation for your solicitor and financial planner.
SMSFs are in a different position. The existing CGT settings for superannuation are unchanged. SMSFs in accumulation phase retain their one-third CGT discount and pay tax at 15% on investment income. SMSFs in full pension phase pay no CGT at all. SMSFs are also excluded from the negative gearing restrictions. Rental losses within an SMSF can only offset income inside the fund. Members cannot use SMSF property losses against personal income outside the fund. Some technical uncertainty remains around how the proposed 30% minimum CGT tax interacts with superannuation entities, which has not been fully settled pending draft legislation. Confirm your specific position with your accountant once that legislation is available.
Companies have never been entitled to the CGT discount and the Budget does not change that. A company pays tax on the full capital gain at the company tax rate. Tax paid at the company level generates franking credits, which can attach to dividends paid to shareholders and be used to offset their personal tax liability.
What has not changed
The main residence exemption is untouched. Your home is not affected by any of these changes.
The six-year rule, which allows a former primary residence to be treated as your main residence for CGT purposes for up to six years after you move out and begin renting it, is also unchanged. An owner-occupier who converts their home to an investment property and sells within that six-year window can still access the full main residence exemption.
Negative gearing on commercial property and shares appears to remain outside the scope of the announced changes based on the current Budget papers, subject to confirmation once legislation is released.
Serviceability assessment, deposit requirements, and lender policy have not changed as a result of this Budget. Interest deductibility on investment loans remains intact for new builds and for established properties owned before Budget night. Offset accounts, redraw facilities, and the choice between principal and interest or interest-only repayments all work the same way.
First home buyers
The Budget includes support for first home buyers, adjustments to rent assistance, and targeted housing programs operating across metropolitan and regional areas. How these interact with existing state-based stamp duty concessions and federal first home buyer schemes depends on individual circumstances and is worth working through before you start looking.
What the market is likely to do
Treasury forecasts the reforms will limit house price growth by 2% and deliver a saving of $19,000 on the purchase of a median-priced home. The near-term effect is likely to be modest given that existing holdings are grandfathered and the interest rate environment will remain the more immediate influence on prices in the short term.
Rental vacancy rates are already very low across most capital cities. Upward pressure on rents is likely to continue as investors reassess their positions following the Budget announcements.
For business borrowers
The $20,000 instant asset write-off for small businesses with turnover up to $10 million has been permanently extended from 1 July 2026, allowing eligible businesses to deduct the cost of selected asset purchases up to $20,000 in the year of acquisition. Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation pool.
The loss carry-back regime has been reintroduced from 1 July 2026, allowing companies with turnover of up to $1 billion to carry back tax losses against taxes paid over the previous two years. From 1 July 2028, new small businesses with turnover under $10 million that incur tax losses in their first two years will be able to convert those losses into a refundable tax offset, capped against fringe benefits tax and PAYG withholding paid in the loss year.
Where to from here
The most practical question for borrowers over the next twelve months is whether to act on an established investment property before the deadline, move toward new construction, hold existing property for longer given the CGT transitional arrangements, or revisit how property is held.
Each path has a different loan structure and a different timeline. For established investment property, pre-approval needs to be in place before you start looking seriously. For new construction, the finance needs to be structured around the build timeline. For investors reviewing existing portfolios in light of the CGT changes, the holding period and loan structure are connected decisions.
T&T Financial Group works with property investors, first home buyers, owner-occupiers, and businesses across Melbourne and Australia. Call one of our team or book an appointment at tntfinancial.com.au.
This article is general information only and does not constitute financial, tax, legal, or credit advice. The Budget measures discussed have been announced but not yet legislated and may change before they take effect. Source: Commonwealth of Australia, Budget 2026-27, budget.gov.au. Speak to your accountant or financial planner for advice specific to your situation.
