Economic Context and Budget Position

The 2026–27 Federal Budget was delivered against a backdrop of geopolitical tensions, rising oil prices following conflict in Iran, stubborn inflation, three consecutive RBA interest rate hikes, and a prolonged period of poor productivity growth.

In response, the Albanese Labor Government framed the Budget around “Resilience and Reform”, aiming to address long-standing structural challenges while managing near-term economic pressures.

The underlying budget position has improved notably: the FY2026–27 deficit is now forecast at $31.5 billion, $2.8 billion lower than previously expected, with the forward estimates improving by $44.9 billion overall.

The cumulative underlying deficit for 2025–26 and 2026–27 is projected at $59.8 billion, $11.2 billion less than the Mid-Year Economic and Fiscal Outlook.

This improvement stems primarily from a $32.3 billion upward revision in revenue, driven by higher commodity prices, stronger incomes and inflation – automatic stabilisers that help moderate economic overheating.

However, the headline budget deficit tells a different story. Including off-balance-sheet spending on the NBN, student loans, housing, infrastructure and clean energy, the headline deficit reaches $112 billion, widening from 0.9% of GDP in FY25 to an estimated 1.7% in FY26 and 2.0% in FY27.

This suggests the Budget is more stimulatory than underlying numbers indicate, particularly through infrastructure and housing investment.

Macroeconomic Outlook

The Budget forecasts slower growth and higher inflation in the near term:

 

Indicator	Forecast
Economic growth (2026–27)	1.75% (below trend)
Unemployment rate (mid-2027)	4.5%
CPI inflation peak (June quarter 2026)	5%
CPI inflation (mid-2027)	2.5%

 

The macroeconomic impact is assessed as neutral to modestly expansionary.

Automatic stabilisers exert a slight braking effect, while increased policy spending and cost overruns partly offset this by pressing on the accelerator.

More fiscal restraint is anticipated beyond FY27, with $36 billion in NDIS savings over four years and approximately $16 billion annually from FY30 onward.

Key Tax and Structural Reforms

 

Tax Reform Overview

The Budget introduces significant tax changes designed to improve intergenerational equity, support home ownership and fund new tax cuts for workers:

 

Reform	Expected Revenue Impact
Negative gearing changes	Part of $8.5 billion annual increase by FY30
Capital gains tax reforms	Part of $8.5 billion annual increase by FY30
Family trust changes	Part of $8.5 billion annual increase by FY30
Total tax increase	~$3.5 billion per year over time

These increases will partly offset tax cuts for workers, including a $1,000 instant tax deduction from FY27 and a $250 income tax credit from FY28, collectively costing around $5 billion annually over time.

 

Negative Gearing and CGT

Negative gearing will be restricted for established residential properties purchased after budget night, with losses carried forward rather than immediately offsetable against income. Negative gearing remains available for new builds and certain housing program investments. Existing investors are grandfathered, protecting current arrangements.

Capital gains tax sees the 50% discount replaced from 1 July 2027 with inflation indexation plus a 30% minimum tax rate for individuals, trusts, and partnerships. This reform applies broadly across all investment types, not just property.

Housing and NDIS Focus

The Budget targets housing affordability and NDIS cost containment as primary policy objectives:

 

Area	Expected Impact
First-time buyers	75,000 additional buyers over next decade (~6% increase)
Annual additional buyers	~7,500 per year
Investor market share	~3% reduction in investor-owned homes
House prices	Treasury estimates 2% decline relative to no-change scenario
Rents	$2 weekly increase estimated

 

However, critics note these impacts may be modest given investors account for approximately 25% of the market and existing properties are grandfathered.

There are also concerns that retaining tax benefits for new properties could increase new house prices given ongoing development constraints, and that a weakening economy combined with rising interest rates could trigger an investor exodus, exerting further downward pressure on prices and upward pressure on rents.

Productivity and Long-Term Growth

The Budget positions productivity reform as a major economic focus, with measures including:

✅ Tariff abolition

✅ Compliance reduction

✅ Faster approvals

✅ AI investment support

These aim to improve business efficiency and support long-term economic growth.

Risks and Unintended Consequences

Several concerns have been raised about the Budget’s design:

⒈ Limited near-term macroeconomic restraint: At a time of high inflation and tight product and labour markets, the Budget offers little significant restraint to ease interest rate pressures.

⒉ Overly broad CGT reforms: The capital gains tax changes apply to all investment types, potentially creating one of the highest CGT rates globally. This could effectively double the tax rate on entrepreneurial companies and employee share schemes – from 25% to nearly 50%, conflicting with productivity and competition goals.

⒊ Reduced investment incentives: Higher capital gains taxes could hinder younger investors’ ability to save for home deposits and diminish incentives to invest in existing properties for wealth accumulation.

⒋ Potential rent increases: Reduced investor incentives might lead to higher rents, making housing less affordable for renters, especially younger Australians.

Bottom Line

The May 2026 Budget represents a structural reform attempt addressing housing affordability, NDIS sustainability and tax equity, delivered amid challenging economic conditions.

While it improves the underlying fiscal position and introduces significant tax reforms, its macroeconomic impact remains neutral to modestly expansionary.

The reforms carry notable risks, particularly regarding productivity, entrepreneurial activity and potential unintended consequences for housing markets and investor behaviour.

Full implementation depends on Parliamentary passage and the actual economic effects will depend on how markets, investors and the RBA respond to the combined fiscal and monetary policy environment.

Just get to the point! 

Focusing on negative gearing and CGT in the federal budget announced by Treasurer Jim Chalmers:

The big shift is that negative gearing is being narrowed to new builds, while the 50% CGT discount is being replaced with an inflation-indexed method plus a 30% minimum tax rate from 1 July 2027.

Negative Gearing

From 1 July 2027, negative gearing will no longer apply to established residential properties bought after budget night; instead, losses on those properties will be quarantined and carried forward rather than immediately offset against wages or other income.

Negative gearing remains available for new builds and some housing-related investments supporting government housing programs are also exempt.

Existing investors are grandfathered, so if you already own an affected property, your current negative gearing treatment does not change.

That grandfathering matters because it avoids forcing current owners into unexpected tax changes, but it also means the reform mainly affects new buyers of established rentals rather than the whole market at once.

 

Who is Impacted:

🏡 New investors in established homes: they lose the immediate tax deduction for rental losses, which weakens the after-tax return on leveraged properties.

🏡 High-income, highly geared investors: they are hit hardest because they typically relied most on annual deductions to offset taxable income.

🏡 Existing landlords: mostly unaffected if they bought before budget night, because of grandfathering.

🏡 New-build investors: comparatively favoured, because negative gearing still applies and the policy is designed to push investment toward new supply.

 

What it Means in Practice

If an investor buys an established property after the change and it runs at a loss, they can no longer use that loss to reduce their current-year taxable income. The loss is instead carried forward, so the tax benefit is delayed and less valuable in present-value terms.

That makes established property less attractive relative to new housing, which is the policy’s main intent.

CGT changes

The budget also replaces the current 50% CGT discount for individuals, trusts and partnerships with indexation and a 30% minimum tax rate from 1 July 2027.

In plain terms, instead of halving nominal gains, taxable gains will be adjusted for inflation first, then taxed under the new minimum-rate framework.

This means the system becomes more tied to real gains rather than nominal gains.

If house price growth is modest and close to inflation, the new approach can be more favourable than the old 50% discount; if prices rise strongly above inflation, the new rules are usually less favourable for the investor.

 

Who is impacted:

💰 Property investors selling after 1 July 2027: they lose the automatic 50% discount on future gains.

💰 Trusts and partnerships: they are included in the reform, so the change is broader than just individual investors.

💰 Long-term holders of high-growth assets: likely to be most affected because the discount was most valuable when nominal capital growth was strong.

💰 Owners of pre-change gains: the new rules apply only to gains arising after 1 July 2027, so earlier gains are treated under transitional rules.

Practical Effects

For negative gearing, the biggest effect is on cash flow: investors who used debt heavily and depended on tax deductions will feel a higher ongoing holding cost.

For CGT, the biggest effect is on exit returns: investors will face a lower tax concession when they eventually sell, especially if the property has produced large capital gains above inflation.

The combined effect should make established investment property less attractive and redirect some demand toward new housing.

CBA’s analysis says the changes are expected to make house prices about 3% lower than they otherwise would have been, with a relatively small and gradual effect on rents.

Bottom Line

The reforms mainly hit future investors in existing residential property, especially those using debt and relying on tax losses and resale gains.

Existing investors are largely protected by grandfathering, while new-build investment is being kept more tax-friendly to support housing supply.

Before vs After

Negative Gearing

 

Item	Before 1 July 2027	After 1 July 2027
Established residential property	Rental losses could generally be offset against wages and other income.	New investors can no longer offset losses immediately; losses are carried forward instead.
New residential property	Negative gearing generally available.	Negative gearing remains available.
Existing investors	Same rules applied to both new and existing investors.	Existing investors are grandfathered and generally keep current treatment.
Main impact	Property losses reduced taxable income in the year they occurred.	Tax benefit is delayed for affected properties, reducing the appeal of geared established homes.

 

CGT

 

Item	Before 1 July 2027	After 1 July 2027
Individual investors	50% CGT discount on eligible capital gains.	50% discount replaced by inflation indexation and a 30% minimum tax rate.
Trusts and partnerships	50% CGT discount generally available.	Same reform applies, so the discount is no longer the main method.
Tax treatment of gains	Nominal gain was generally halved before tax.	Gains are adjusted for inflation first, then taxed under the new framework.
Main impact	Larger tax concession on sale.	Lower concession for many assets, especially high-growth properties.

 

What this Means

Negative gearing becomes less useful for established properties bought after the change because investors can no longer use rental losses to reduce their current taxable income. CGT also becomes less generous because the old 50% discount is removed, which means investors may pay more tax when they eventually sell.

The combined effect is to make established investment property less attractive, while keeping new builds comparatively better supported.

We hope this article helps explain how the 2026 Federal Budget will affect you. If you have any questions, please give us a call on 02 9545 5668.