At 7:30pm AEST on 12 May 2026, the Government confirmed two major changes to property investment taxation as part of the Budget 2026-27. The 50% capital gains tax discount that has been in place since 1999 will be replaced. And negative gearing on established residential properties will be restricted from 1 July 2027.
These are real, legislated changes. Not election proposals, not speculation. The factsheet is published on budget.gov.au. I've read every page of it and I'm going to walk through what it actually says, what it means in dollar terms, and what the structural implications are for investors building a portfolio.
This is not financial advice. The specifics of how these changes affect your situation depend on your income, your structure, and your existing holdings. Talk to your accountant. What I can do is give you the clearest possible picture of the mechanics so that conversation is productive.
The three changes in plain language
There are three moving parts to understand.
1. Negative gearing on established residential properties is restricted from 1 July 2027. Under the current rules, if your investment property runs at a loss, that loss reduces your taxable income from wages and salary. From 1 July 2027, losses on established properties purchased after the announcement can only be offset against income from other residential properties, including rental income and capital gains from property. Losses that exceed your property income in a given year can be carried forward and used against future property income.
2. The 50% CGT discount is replaced with cost base indexation. Instead of halving your nominal capital gain, you adjust your cost base upward by CPI inflation over the holding period. Only the real gain above inflation is taxable. A 30% minimum tax rate applies to that real gain.
3. New builds are largely exempt from both changes. Investors who buy properties that genuinely add to housing supply can continue to negatively gear against all income and can choose either the 50% discount or indexation when they sell. More on that below.
Who is protected and who is not
The grandfathering rules are important and worth understanding precisely.
Properties held before 7:30pm AEST on 12 May 2026 are fully protected from the negative gearing changes. If you already own an investment property, you can continue to offset rental losses against your salary and wages for as long as you hold that property. Nothing changes.
For CGT, existing properties are split at 1 July 2027. Gains that accrued before that date are still subject to the old 50% discount. Only gains accruing after 1 July 2027 fall under the new indexation rules. You don't pay any additional tax until you actually sell.
Properties purchased between the announcement and 30 June 2027 can be negatively geared during that window, but the restriction applies from 1 July 2027 onward.
Properties purchased from 1 July 2027 are fully subject to the new rules from day one.
How cost base indexation actually works
This is the part most coverage gets wrong, so I want to be precise.
Under the old system, you took your nominal gain (sale price minus purchase price) and halved it. The 50% discount was a crude approximation of inflation, and it either over- or under-compensated depending on how long you held and how fast the market moved.
Under indexation, you adjust your cost base upward by the Consumer Price Index over the holding period. The standard method, which was used when indexation last applied in Australia between 1985 and 1999, is to multiply your purchase price by the ratio of the CPI at sale to the CPI at purchase. Only the gain above that indexed figure is taxable. If inflation eats all of your nominal gain, there is no taxable gain at all.
This is how CGT worked in Australia between 1985 and 1999, before the Howard Government introduced the 50% discount. The Government is reverting to that original intent: taxing real gains, not inflationary ones.
The factsheet states that indexation will be calculated "in a similar manner to arrangements previously in place between 1985 and 1999" and that the ATO will provide tools and calculators to work out the indexed cost base. The exact methodology, including how CPI quarters are applied, will be confirmed in that ATO guidance. The worked examples in this post use annual compound CPI growth as an approximation, consistent with the Government's own cameo examples in the factsheet, but your actual indexed cost base should be calculated using the ATO's tools when they are available. For assets purchased before 1 July 2027, taxpayers can either get an independent valuation as at that date or use an ATO apportionment formula to estimate the value.
Worked example: $500,000 purchase, $600,000 sale
Let's run the numbers on a property bought for $500,000 and sold for $600,000, assuming 2.5% annual CPI inflation throughout the holding period.
Five-year hold:
Indexed cost base: $500,000 x (1.025)^5 = $565,705
Real (taxable) gain under indexation: $600,000 - $565,705 = $34,295
| Rate (incl. Medicare) | Old rules (50% discount) | New rules (indexation) | Difference |
|---|---|---|---|
| 47% (45% + 2%) | $23,500 | $16,119 | $7,381 less |
| 39% (37% + 2%) | $19,500 | $13,375 | $6,125 less |
For a 5-year hold on a modest-growth property, the new rules are better. Inflation absorbs a significant portion of the gain, leaving a smaller taxable amount than the 50% discount would have produced.
Ten-year hold:
Indexed cost base: $500,000 x (1.025)^10 = $640,000
Real gain: $600,000 - $640,000 = negative. No taxable gain.
| Rate (incl. Medicare) | Old rules (50% discount) | New rules (indexation) | Difference |
|---|---|---|---|
| 47% (45% + 2%) | $23,500 | $0 | $23,500 less |
| 39% (37% + 2%) | $19,500 | $0 | $19,500 less |
A property that grew from $500,000 to $600,000 over ten years has grown at roughly 1.8% per year, well below the assumed 2.5% inflation rate. Under the new rules, there is no real gain and therefore no CGT. Under the old rules, you would have paid tax on $50,000 of nominal gain regardless of whether that gain had any purchasing power.
High-growth scenario: 7% annual growth
At 7% annual growth, roughly in line with long-run Sydney and Melbourne averages, the picture is very different. The same $500,000 property grows to approximately $701,000 over five years and $984,000 over ten. CPI indexation shelters the inflationary component, but because real growth is strong, the taxable real gain is large, and the new rules cost significantly more than the old 50% discount.
Five-year hold:
Sale price: $701,276
Indexed cost base: $500,000 × (1.025)^5 = $565,705
Real (taxable) gain: $701,276 − $565,705 = $135,571
| Rate (incl. Medicare) | Old rules (50% discount) | New rules (indexation) | Difference |
|---|---|---|---|
| 47% (45% + 2%) | $47,300 | $63,718 | $16,418 more |
| 39% (37% + 2%) | $39,249 | $52,873 | $13,624 more |
Ten-year hold:
Sale price: $983,576
Indexed cost base: $500,000 × (1.025)^10 = $640,042
Real (taxable) gain: $983,576 − $640,042 = $343,534
| Rate (incl. Medicare) | Old rules (50% discount) | New rules (indexation) | Difference |
|---|---|---|---|
| 47% (45% + 2%) | $113,640 | $161,461 | $47,821 more |
| 39% (37% + 2%) | $94,297 | $133,978 | $39,681 more |
At strong capital growth rates, a top-rate investor selling after a 10-year hold at 7% annual growth pays nearly $48,000 more in CGT compared to the old rules. The logic is straightforward: the faster your property grows, the larger the real gain above inflation, and the less the CPI adjustment shelters you relative to the old 50% cut. Indexation rewards slow or moderate growth; it penalises strong growth relative to what investors were used to.
When indexation helps you and when it hurts
The answer depends entirely on how fast your property grows relative to inflation. There is a breakeven point, and it matters.
For a 5-year hold on a $500,000 property at 2.5% CPI, the break-even sale price where indexation and the 50% discount produce the same tax bill is approximately $631,000. That represents total growth of about 26%, or roughly 4.8% per year.
For a 10-year hold, the break-even is approximately $780,000. That's 56% total growth, or about 4.5% per year.
The implication is clear. If your property grows at less than around 4.5% to 4.8% per year, indexation is better than the old discount. If it grows faster, the old rules would have been more favourable.
The Government's own Budget modelling (using average returns over the past 20 years) shows this dynamic directly:
Most Australian capital city markets have historically grown at 5 to 7% per year over long hold periods. At those rates, the new rules cost high-income investors more at the point of sale. The trade-off is that slow-growth periods or periods of high inflation can produce little to no CGT under indexation.
The 30% minimum tax
A 30% minimum tax rate applies to the real capital gain. This affects investors who would otherwise pay less than 30% on their capital gain, typically because they sell in a year when their other income is low, such as early retirement, career break, or a low-income year.
Under the old rules, investors sometimes timed their sales strategically to land capital gains in low-income years, reducing their effective tax rate considerably. The 30% minimum closes that planning window.
If your marginal rate on the real gain is already at or above 30%, the minimum tax does not apply. For most working professionals in the 39% or 47% bracket (including Medicare levy) selling an investment property, this adds nothing additional. It primarily affects retirees or lower-income earners who would have benefited from selling in a low-income year.
There is an exemption: if you receive a means-tested income support payment such as the Age Pension or JobSeeker in the year you sell, the 30% minimum tax does not apply.
How company and trust structures are affected
This is where the structural implications are most interesting, and where a conversation with an accountant becomes genuinely important.
Companies never had access to the 50% CGT discount. Importantly, the factsheet states that the new indexation arrangements apply to assets held by "individuals, partnerships and trusts." Companies are not included. This means a company's CGT treatment does not change: it continues to pay 30% on the full nominal gain, as it does today.
What does change is the individual investor's position. Under the old rules, an individual at 47% paid less CGT than a company on the same transaction, because the 50% discount more than offset the lower company rate. Under the new rules, the individual pays more. That shifts the comparison.
Using the same example, $500,000 purchase, $700,000 sale after 5 years (2.5% CPI):
| Structure | Old rules | New rules |
|---|---|---|
| Individual (47%) | $47,000 | $63,118 |
| Company (30%) | $60,000 | $60,000 (unchanged) |
Under the old rules, the individual paid less CGT than the company on the same property. Under the new rules, the company pays less. The structural trade-off has shifted. Not because the company's tax bill went down, but because the individual's went up past it. For high-income investors buying new properties from 1 July 2027, the company structure becomes relatively more competitive on CGT grounds than it has been since 1999.
That said, a company structure carries its own considerations: corporate tax on rental income, implications for accessing equity, the cost of distributions, and the loss of the main residence exemption if you ever wanted to use the asset differently. Whether a company structure makes sense for you depends on far more than CGT alone. This is a conversation for a tax adviser who understands your full picture.
Discretionary trusts that distribute to beneficiaries on high marginal rates are in the same position as individuals: they lose the 50% discount and receive indexation instead. The trust structure does not create a CGT advantage under the new rules unless the trustee can distribute gains to beneficiaries on lower marginal rates. That planning option still exists but is subject to the 30% minimum tax floor.
SMSFs are excluded from the negative gearing changes entirely. Their CGT treatment under the new indexation regime is an area where the published factsheet is less specific, and this is something to clarify with your SMSF adviser before making decisions.
Widely held trusts, including most managed investment trusts, are also excluded from the negative gearing changes.
The new build exemption
New builds that genuinely add to housing supply are carved out from both changes. Investors buying eligible new builds can:
- Continue to negatively gear against all income including wages and salary
- Choose either the 50% CGT discount or indexation when they sell
An eligible new build means a dwelling constructed on vacant land, or an existing property demolished and replaced with a greater number of dwellings. A duplex on a knock-down-rebuild site qualifies. A single house replacing a single house does not. A granny flat on an established property does not. An off-the-plan apartment that genuinely adds a new dwelling to supply does qualify.
The ability to choose between the 50% discount and indexation at the point of sale is meaningful. If your new build grows strongly, you choose the discount. If inflation has eaten a significant portion of the gain, you choose indexation. You run the numbers at the time of sale and take whichever produces the lower tax bill.
One important caveat: only the first buyer gets these concessions. Subsequent purchasers of a property that was originally a new build cannot access the 50% discount or negative gearing for that property.
What this means for negative gearing on new purchases
For investors buying established properties after 1 July 2027, the practical effect of the negative gearing change depends on the size of the loss and how much other property income you have.
If your portfolio runs at a net rental profit across all properties, carried-forward losses from new purchases will reduce that profit and therefore your tax. The timing is different, but the deduction is not permanently lost. It waits until property income exists to absorb it.
The immediate cash flow impact is real. Under the old rules, a $15,000 annual rental loss at a 47% marginal rate produces a $7,050 tax refund at the end of the year. Under the new rules, that same loss is carried forward. The refund disappears until property income materialises. This affects borrowing capacity calculations and the holding cost of negatively geared positions.
For investors who already hold multiple properties, the carried-forward losses from new purchases can often be absorbed relatively quickly against the rental income from the existing portfolio. For first-time investors buying a single property with no other property income, the cash flow impact is more significant.
What to do if you already own property
If you bought before 7:30pm on 12 May 2026, your negative gearing treatment is grandfathered for as long as you hold. Nothing changes on that front.
For CGT, the transition date is 1 July 2027. You do not need to do anything before that date. When you eventually sell, you will need to establish the value of your property as at 1 July 2027 (either through a formal valuation or the ATO's apportionment formula), and the gain will be split: 50% discount on pre-July 2027 growth, indexation on post-July 2027 growth.
If you are considering selling before 1 July 2027, your entire gain falls under the old 50% discount. For high-growth properties held since well before the announcement, that may produce a better outcome than the transitional split. Run the numbers with your accountant. The decision depends on your individual growth rate, holding period, and marginal tax rate.
My read on the strategy implications
The changes do not make property investment unviable. What they do is change the relative attractiveness of different types of purchases and holding structures.
New builds, which were already commanding increasing attention for supply-side reasons, now have a meaningful tax advantage over established properties for investors buying after the announcement. The combination of unrestricted negative gearing and the choice of CGT treatment at sale is a genuine structural benefit.
For established property, the fundamental investment case still rests on what it always has: buying in the right market, at the right price, with strong underlying demand drivers. A property growing at 6 to 7% per year in a well-selected market remains a compelling investment even with a higher effective CGT rate at disposal. The tax treatment matters at the point of sale, not during the hold period when compounding is doing its work.
The structural question around companies becomes more relevant for investors at the top marginal rate buying new properties. I wouldn't restructure existing holdings without careful advice on the full implications. But for new acquisitions, the conversation is worth having.
The most important thing right now: if you were already considering buying, the announcement should not stop you. Properties held before the announcement are grandfathered on negative gearing. And the indexation changes only apply to gains accruing after July 2027, meaning buyers who purchase in the next 12 months lock in a year of growth under the old CGT regime before the split applies.
Disclaimer: This article is general information only and not financial, tax or investment advice. The information is based on the Budget 2026-27 factsheet published by the Australian Government on 12 May 2026. Legislative detail is subject to the passage of legislation. Speak to a qualified accountant and financial adviser about how these changes apply to your specific situation.
