The logic of negative gearing was relatively simple: borrow against property, offset interest and holding costs against salary or other income, hold the asset long term, benefit from capital growth, and eventually access the 50% CGT discount on sale.
Both sides of that equation are now under attack simultaneously.
What Has Been Proposed?
The Government has proposed that from 1 July 2027:
- negative gearing deductions for newly acquired residential property investments will be limited to newly constructed dwellings;
- existing investment properties held before the commencement date are expected to be grandfathered;
- newly acquired established residential properties may no longer allow rental losses to offset salary and wage income.
At the same time, the proposed removal of the 50% CGT discount significantly changes the long-term after-tax investment outcome.
Historically, negative gearing and the CGT discount worked together as a combined investment strategy. Both are now under pressure at the same time.
Why Negative Gearing Historically Worked
Most negatively geared investors accepted short-term cash flow losses because they expected:
- rental growth over time;
- capital growth;
- tax deductions during the holding period;
- concessional tax treatment on eventual sale.
The 50% CGT discount was a major part of the equation. If negative gearing becomes restricted AND the CGT discount is reduced or removed, the investment model changes materially.
Existing Investors May Be Protected
Current indications suggest existing properties held before the commencement date may retain current treatment. That is important.
For many existing investors, the immediate impact may therefore be limited, provided they do not substantially restructure ownership. But future acquisitions may operate under very different rules.
What This Could Mean for Future Investors
Under the proposed framework, established and new build properties move in opposite directions:
Existing Established Properties
- Rental losses may no longer offset PAYG income
- Holding costs become less tax effective
- After-tax cash flow pressure increases
New Builds
- Negative gearing concessions may remain available
- Depreciation benefits may continue
- Governments clearly want to stimulate supply
This creates a major strategic shift toward new developments, house-and-land packages, build-to-rent projects, and newly constructed dwellings.
Example: Current Negative Gearing Outcome vs Proposed Position
Current Rules
Assume: investor earns salary of $250,000. Investment property loss = $30,000.
| Item | Amount |
|---|---|
| Salary income | $250,000 |
| Less rental loss | ($30,000) |
| Taxable income | $220,000 |
Approximate tax saving at top marginal rates: $14,000. The Government effectively subsidises part of the holding loss.
Under the proposed position, the rental loss on a newly acquired established property can only be offset against future rental income or carried forward against future property gains. That materially changes investor cash flow, borrowing capacity, and after-tax holding costs.
The Bigger Issue: Interaction With CGT Changes
This is where many investors are missing the bigger picture. Historically, investors accepted low yields, high leverage, and negative cash flow because the eventual capital gain was taxed concessionally. If the 50% CGT discount disappears, future after-tax returns reduce materially.
Current Rules
$1M capital gain, individual investor
$235,000
After 50% CGT discount, taxable gain is $500,000. Tax at top marginal rate. Effective rate: 23.5%.
Proposed Rules
$1M capital gain, no discount
$300,000+
Minimum 30% effective tax on full $1M gain. Additional tax of at least $65,000. Higher if in a higher marginal bracket.
That is a very material reduction in after-tax investment returns.
Why Investors Need Structure Reviews
The traditional strategy of buying property in discretionary trusts, negatively gearing losses, distributing income flexibly, and retaining gains concessionally is now under pressure from multiple directions simultaneously.
Investors should now review:
- ownership structures;
- borrowing structures;
- future acquisition strategy;
- estate planning;
- and expected after-tax returns.
What About Existing Investors?
Most existing investors are unlikely to need panic action immediately. But they should:
- review future acquisition strategy;
- review ownership structures;
- review future estate planning;
- and understand how the proposed CGT changes may affect long-term after-tax returns.
Because even if existing properties are grandfathered, the future economics of residential property investment in Australia may look very different from the past 20 years.
The Bottom Line
The proposed negative gearing reforms are not simply about housing policy. They represent a major shift in investment incentives, a push toward newly constructed housing, and a broader move away from tax-favoured leveraged property accumulation.
For investors, the key issue is not panic. It is understanding whether future investments, future structures, and future strategies still work under the next version of Australia's tax system.
Better Questions to Be Asking Now
- Does this investment still work after tax?
- What does cash flow look like without full negative gearing?
- Is a new build now more attractive than an established property?
- Does the structure still make sense?
- How exposed are we to future CGT changes?
- Should future acquisitions sit in different entities?
- What happens if interest rates stay higher for longer?
- Are we relying too heavily on future capital growth?
This article is general in nature and does not constitute financial, legal, or taxation advice. The proposals discussed are subject to legislative change and have not yet been passed into law. Please consult a qualified adviser before making any decisions regarding your investment strategy or property ownership structure.
