A decade of tax

The largest change to the taxation of Australian investment property in three decades is being legislated in instalments, and the profession is being given a fortnight at a time to respond to each one.

On 4 August the government released exposure drafts of the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 and related materials, covering the second stage of the negative gearing and capital gains tax reforms announced in the 2026-27 Budget. The drafts include the definition of a new residential dwelling and the categories of housing investment exempt from the negative gearing limits, with a property generally treated as new where it genuinely adds to housing supply. Consultation closes on 21 August 2026.¹

Seventeen days. For the definition on which the entire regime turns.

What is already settled

The core is law. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received assent on 26 June as Act C2026A00049.²

From 1 July 2027, the 50 per cent CGT discount for individuals, trusts and partnerships is replaced by cost base indexation together with a 30 per cent minimum tax rate on capital gains, so that investors are taxed on above-inflation profit. Negative gearing on residential investment property is limited to new builds, with losses on existing properties acquired after 7:30pm AEST on 12 May 2026 deductible only against other residential property income, including capital gains, from the 2027-28 income year. Excess losses carry forward. The government's stated objective is 75,000 additional homeowners entering the market over the next decade.³

Transitional protection is broader than the headlines suggested. Properties held at the announcement time are exempt from the negative gearing changes, and the CGT reforms apply only to gains accruing after 1 July 2027. Late amendments lifted the aggregated turnover threshold for the small business 50 per cent active asset reduction from $2 million to $10 million, and investors disposing of new residential dwellings or affordable housing on or after 1 July 2027 may choose between the 50 per cent discount and the indexation-plus-minimum-tax regime, with the deemed sale and reacquisition rules not applying where the discount is chosen.⁴⁵

That last point is the one advisers should sit with. A choice between two regimes, made at disposal, on an asset class defined by a term that was in exposure draft as recently as this week.

The staged approach is the problem

Tranche 2 does useful work. It preserves negative gearing eligibility and new build treatment where a dwelling is acquired from a spouse through inheritance or relationship breakdown, addresses apportionment, extends the period for builders and developers to sell stock on hand beyond the twelve months set out in the Budget, and brings the definition of new residential property out of a legislative instrument and into the primary legislation. Losses on affordable housing, public housing and build-to-rent dwellings will be able to be offset.⁶

Each of those is an improvement. The difficulty is the method.

Institute of Public Accountants senior tax adviser Tony Greco has said the sequencing, with further tranches still to come, is not how good tax policy should be implemented. CPA Australia tax lead Jenny Wong, while accepting that the definition appropriately targets dwellings that genuinely add to supply, has flagged the anti-avoidance rule as broad and self-executing.⁷

Both criticisms go to the same defect. A taxpayer cannot plan against a regime whose operative terms arrive in sequence over eighteen months, and an adviser cannot document a recommendation against rules that are open for comment. When the core legislation was introduced, practitioners noted that it deems sales of existing CGT assets and imposes substantial compliance obligations on a large population of taxpayers, with the relevant exclusions not yet known. Two months later, some of those exclusions are known in draft. Others are still queued.⁸

The gaps advisers should be watching

Three remain live.

First, the treatment of a property that was held at announcement but not then income-producing. It is not clear whether a former main residence that begins generating rental income after 12 May 2026 attracts grandfathering, and the detail on build-to-rent and government housing programme exemptions has been limited. This affects a large and unglamorous cohort: clients who moved house, kept the old place, and let it out.⁹

Second, discretionary trusts. The trust minimum tax is scheduled separately, and the rules for discretionary trusts were not settled when the primary bill was before Parliament. Private groups face structural decisions with a rollover window that opens well before the rules that govern it are final.¹⁰

Third, the interaction with entrepreneurial founders. The government announced an Innovative Business CGT Concession on 18 June in response to criticism that the reforms disproportionately affect founders of low cost base companies, offering eligible shareholders a choice between the existing discount and the new regime subject to conditions relating to turnover, residency and investor type. That concession was announced after the Senate committee reported and is not in the enacted bill. It is a further tranche.¹¹

What this means for practice now

Advisers should be doing three things and resisting a fourth.

Identify affected clients by acquisition date, not by portfolio value. The 12 May 2026 boundary is doing more work than any other date in the package, and clients who exchanged contracts in the weeks around the Budget need their position confirmed against the contract, not the settlement.

Document the uncertainty. Where a recommendation depends on new build status, the file should record that the definition was in exposure draft at the time of advice and that the client was told so. That is not defensive box-ticking. It is an accurate statement of the regulatory position, and it will matter if the final definition lands differently.

Make a submission, or support one. Seventeen days is short, but the consultation is genuinely open and the profession has a legitimate interest in the anti-avoidance drafting in particular.

The thing to resist is restructuring ahead of final law. Practitioners have consistently advised waiting for the detail before making structural changes for private groups, and that remains right. Clients under pressure from accountants or property advisers to act now should be told that the cost of acting on draft law that shifts is considerably higher than the cost of waiting.¹²

The broader point

Tax reform of this scale delivered in tranches is not unprecedented, and the government's willingness to consult on the complex elements is preferable to legislating them blind. But there is a real cost to the staged approach, and it is borne by advisers and their clients rather than by the drafters.

Every tranche resets the planning environment. Every consultation window is measured in weeks while the affected decisions are measured in decades. The profession can reasonably ask for one more thing from this process: a consolidated statement of the final regime, published far enough before 1 July 2027 that advice given against it can be relied upon.

This article is general commentary for financial services professionals and does not constitute legal, tax or financial advice. Tranche 2 remains in exposure draft.