A guide to negative gearing and capital gains tax (CGT) ahead of the 2026–27 Budget

 What is negative gearing? 

Negative gearing occurs when it costs more to ‘hold’ an income-producing asset (like an investment property) than the income it generates. 

Gearing refers to the practice of borrowing money to invest in something, and the ‘holding costs’ or cost to ‘hold’ an asset come from the interest on that loan. It is called negative gearing because on paper, holding onto that asset is a net-negative, or generating a loss.

The loss can be applied against other sources of assessable income to reduce overall taxable income. This only works because Australia groups all types of income together when determining personal income tax.

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 How does negative gearing work? 

Contrary to popular belief, negative gearing is not actually a specific tax concession. It is a common way to describe a long-standing practice that uses general tax law principles.

In simple terms, when an investment is negatively geared, some of the holding costs will be tax deductible. Unlike many other jurisdictions, Australia’s income tax laws do not quarantine these losses from other sources of assessable income. Instead, personal income tax is based on your total net income.

For example, income from an investment gets added to income from your salary. If the income from an investment is negative, it gets deducted from the total income instead. And so, because a negatively geared asset is a net loss, it lowers your taxable income. 

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 Why is negative gearing unpopular? 

Negative gearing is unpopular because it predominantly benefits higher-income earners. However, this is a structural effect: the benefit of any income tax deductions corresponds to a taxpayer’s marginal tax rate.

Unsurprisingly, the Parliamentary Budget Office estimates 60% of negative gearing deductions are enjoyed by the top 20% of earners

Negative gearing is also grouped with wider issues of inter-generational equity. It is a practice that disproportionately benefits older or wealthier generations, and many believe it makes it more difficult for younger generations to compete for property or accumulate wealth. The concern is that the perceived benefits of negative gearing incentivises capital investment into existing property rather than productive assets, increasing demand on housing supply and driving up prices.

There is also a significant fiscal cost in terms of tax revenue, which is projected to be $7.7bn this FY.

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 What does it mean to ‘ring-fence’ negative gearing? 

In basic terms, ‘ring-fencing’ negative gearing would prevent people using investment losses to reduce taxable income from other sources such as salary or wages.

Investment income is ‘fenced-off’ from other types of income. Any losses from an investment gets carried forward and can only be used to offset taxes on future investment income.

This approach has been used in New Zealand for residential rental properties since 2019.

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 What does ‘grandfathering’ mean? 

‘Grandfathering’ is a transitional mechanism that prevents a new law from applying to arrangements already in place before the law came into effect. Itis intended to mitigate the unfairness and economic disruption of applying a law retrospectively.

Not grandfathering legislation can have a cliff-edge effect that results in significant economic disruption. We may see this play out in real-time if Treasury moves forward with its proposal to retrospectively ‘clarify’ the definition of ‘real property’ for the purposes of non-resident CGT.

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 What would it mean to restrict negative gearing to new builds? 

This would mean that if you are borrowing to invest in a newly-constructed dwelling, you could negatively gear that investment as normal. Presumably, other investments would be ring-fenced, so anyone investing in established housing would not be able to offset any net losses against their taxable income.

The intention is to redirect investor demand and capital allocation from existing properties to new builds which would theoretically increase housing supply.

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 What is Capital Gains Tax? (CGT) 

Introduced to Australia’s tax law in 1985, CGT is a tax on profits — gains — made from a capital asset. This most commonly relates to selling or disposing  a capital asset, such as property or shares.

Many people think of CGT as a specific tax that you have to pay when you sell an asset, but the tax is actually just personal income tax. Because the ‘capital gain’ gets added to your total personal income for that financial year, your personal income tax will be higher.

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How much is capital gains tax? 

Australian tax law differs from other jurisdictions such as the United States in its treatment of CGT. 

Because CGT isn’t a discrete tax, it doesn’t actually have a separate CGT rate. Net capital gains are added to a taxpayers’ total income for the year and taxed at the applicable tax rate.

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 What are the current CGT concessions? 

The most significant CGT concession is the 50% CGT discount. This discount is for individuals and trusts, is only available to Australian residents and only applies if you have owned the asset for at least 12 months. There is also a 10% uplift for ‘affordable housing,’ which brings the maximum discount to 60%

There is also a main residence exemption, which essentially means you don’t need to pay CGT if the asset you sold was the home you lived in. 

Beyond that, there are a myriad of CGT concessions available to small businesses who meet certain eligibility criteria. These conditions include a maximum of $6m in net assets or $2m in aggregated turnover. 

There are also a range of specific carve-outs, exemptions, and rollovers that can provide further relief from CGT.

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 What is the indexation method for CGT discount? 

The indexation method exists as an alternative to the CGT discount and is currently available for assets acquired between 20 September 1985 and 21 September 1999. Rather than discounting a capital gain, you would increase the asset’s cost base by inflation. The indexation factor is the rate you would apply to the cost base and is determined by the consumer price index (CPI). Removal of the CGT discount and reversion to indexation has been floated in the lead up to the 2026-27 Budget. This would effectively reduce the discount available for high-growth assets, where growth has outpaced inflation. 

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Why is CGT a hot issue for the 2026-27 Federal Budget? 

Housing affordability is at political crisis levels, and there are significant fiscal consolidation pressures from structural spending issues. The political risk calculus has shifted markedly since 2019, positioning the Government to introduce potentially significant tax reform. Treasurer Jim Chalmers has indicated that reforms to negative gearing, CGT and trusts are likely to be introduced in the upcoming Federal Budget. 

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 Can tax reform make housing more affordable for first-home buyers? 

Tax reform is likely to have only a modest effect on house prices. ANU modelling indicates a 1.5% reduction in house prices, with rents broadly unchanged. 

Although 1.5% may be considered significant to some, it is not enough to meaningfully change the current affordability gap.  

The difference between the median dwelling price (around $1.2m for combined capital cities) and median household income (just shy of $3k per week for dual-income households) is too wide for an approximate $18,000 (the 1.5% drop) to make a dint. 

There are various structural drivers such as supply constraints, demand drivers, credit conditions, etc., that are arguably far more significant. The modelled higher rents are also unlikely to help.

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