Australia's sweeping reforms to negative gearing and capital gains tax have become law, limiting deductions to new builds and introducing an indexation system. While the government aims to help first-home buyers and boost housing supply, several side effects could distort the market and inadvertently favour some investors.
What Has Changed Under the New Rules?
Negative gearing has not been abolished but is heavily restricted for residential property. For purchases after 7:30pm on May 12 (budget night), only new builds qualify for immediate deductions of rental losses against other income. For existing properties, excess expenses are “quarantined” and can only offset future rental profits or capital gains. The 50% capital gains exemption has been replaced by an indexation system that adjusts the cost base for inflation. Pre-existing investors are grandfathered, retaining the old rules.
Converting a Home into an Investment: A Unique Loophole
One overlooked aspect: the legislation only requires that a property be owned (or under binding contract) by the cutoff time to be eligible for the old negative gearing rules—not that it be an investment property at that time. This means homeowners who later buy another property and move into it can convert their former home into a rental and still access traditional negative gearing. Economists suggest this could disincentivise selling, potentially reducing housing supply.
Grandfathered Landlords Gain a Structural Advantage
Grandfathered landlords who owned properties before budget night retain the ability to negatively gear those properties. Moreover, if those older properties become profitable, the new law allows them to use excess profits from their old portfolio to immediately absorb and offset quarantined losses from newly acquired properties. This effectively preserves some tax advantages even when their portfolio is not in a net loss position.
Rental Losses Trapped in Property
The quarantine rule creates pools of undeducted rental expenses that can only be used to reduce capital gains tax upon sale. This gives investors an incentive to hold properties until they realise a sufficient capital gain to utilise those trapped losses. If many investors delay selling, the supply of established homes could shrink, putting upward pressure on prices—counteracting the reform's affordability goals.
Will Housing Become More Affordable?
Supporters argue that removing tax benefits for existing homes will cool investor demand and lower prices. Early signs suggest the market is beginning to cool, but it remains uncertain whether these reforms will have a lasting impact on housing affordability. As one economist noted, “The full effects will take years to play out.”
Disclaimer: This article is for educational purposes only and is not tax advice. Taxpayers should consult a registered tax agent or qualified professional.
