Negative gearing is now officially dead, buried, and cremated for existing properties. Unless you purchase a newly built house or apartment, you must already own your negatively geared older property to benefit from the tax deduction. Future investors will be forced into buying new builds if they also wish to enjoy these benefits.
If you are wondering whether you can knock down an existing older property and build a new one, thereafter enjoying the benefits of negative gearing, the answer is a firm no. The new build must add to supply. A like-for-like new build does not achieve that. If the block is subdivided or turned into apartments, then subsequent purchases can be negatively geared.
Former Labor leader Bill Shorten might not have had a hand in crafting this year's budget, but his legacy looms large. When Treasurer Jim Chalmers visited our office during the lock-up, we asked him about some of the similarities between reforms in this year's budget and Shorten's ill-fated 2019 election manifesto. He told us, 'I have a lot of time for Bill'. At the time, Chalmers served as Shorten's shadow finance spokesman.
Chalmers also stressed the importance of new builds 'adding to supply' to qualify for negative gearing. And if you wondered how the tax office will ensure compliance over such increased complexity, fear not—the budget includes funding for thousands of new ATO workers. Chalmers confirmed to us that this is all part of the government's strategy to make these changes work.
For most Australians, the changes to negative gearing are probably the most significant adjustment within the budget. Whether or not people invest in property, the aspiration of doing so has loomed large in Australia for many years. Chalmers is now doing what Shorten hoped to do, but the Prime Minister specifically ruled it out before the last election. The adjustments coming are therefore an unarguable broken promise.
The model Chalmers outlined in his 2026 budget includes abolishing negative gearing on existing properties, only allowing the tax deduction for new builds, whether houses or units. But before anyone who owns an already built unit or house starts to panic, don't—at least not insofar as your eligibility for a tax deduction goes. Labor is grandfathering that right for anyone who currently owns negatively geared properties; just don't sell them and hope to do the same thing next time, unless you buy a new build.
The primary reason Chalmers is pursuing this change is to try to make it easier for new home buyers to enter the market. Labor claims that its changes to how and when people can negatively gear, alongside its changes to capital gains tax concessions, will support 75,000 additional owner-occupier dwellings over the next decade. Of course, that plucked figure is impossible to verify, even if there is a surge in home ownership. Proving that it is causal is nigh impossible, and the modeling that underpins the assertion was not included in the budget papers.
The truth is that Chalmers has long wanted to limit negative gearing, but what is interesting in this budget is the way he has gone about doing it. While it is probably no coincidence that the model resembles the one Shorten attempted to win an election arguing for, it is more complicated and market-distorting than if Labor had simply restricted the number of properties taxpayers are allowed to negatively gear. But that is the whole point so far as the government is concerned. It wants to distort the market, or as it likes to put it, turn it into an equal playing field between investors and home buyers. And it certainly will do that for existing properties. Who in their right mind would buy an existing build as an investment with a financed loan if they cannot negatively gear it, when they can purchase a newly built property and do so?
The government hopes that a surge in investor interest in new build purchases will result in more housing being on the market, hence addressing the housing shortfall crisis, and perhaps even helping to moderate house price growth. But that is where things get more complicated, and perhaps messier too. If houses do not keep going up in value at a fast enough rate to attract investors, whether negative gearing is or is not possible becomes a redundant point. And there is every chance that, up to a certain price point at least, if investors are pushed out of the market for existing dwellings (because they will not be allowed to negatively gear their purchase), the prices of such properties also will not rise as fast as they used to.
You get the impression Chalmers would be happy with that outcome, although he does not want to say it out loud, or at least not too loudly, lest existing homeowners saddled with sizeable mortgages start to panic. And I am not just talking about investors. There is also a legitimate query about what happens to anyone renting older apartments, for example, when their current landlords start selling the properties to realise their capital gain. New buyers are more likely to be homeowners than investors, so where do the one-time renters go? Some might be able to afford to rent brand new apartments investors continue to negatively gear, but they all will not necessarily be in that financial position. It cannot be ruled out that the changes to negative gearing might carry the unintended consequence of making life even harder for lower socio-economic Australians who rent.
But give Chalmers credit where it is due. For starters, he is doing something he believes in, and not to win a popularity contest. He believes housing affordability is a problem, and he believes perks for investors are too generous, to the detriment of new home buyers. And he is probably right about that, whether or not he has gone about addressing it in the right way. The Treasurer also is not pursuing his negative gearing changes as a tax grab, because the grandfathering provisions, alongside continuing to offer negative gearing on new builds, mean that by the time the Treasury secures meaningful tax windfalls from the changes, Chalmers will be long gone. We are potentially talking decades rather than years.
The budget papers point out that last year 83 per cent of new investor loans were for existing properties rather than new builds. This policy change is all about changing that, and it surely will. But perhaps the more interesting data point will be what the changes do to overall investments in housing. Does the fact negative gearing will remain in new builds send those buying existing builds across, or just some such investors? Many others may shift their investments to other asset classes, or worst of all, invest overseas instead, including in properties abroad. The law of unintended consequences is always part of the risk equation when unveiling a tax shift such as this, and no amount of modeling can say with certainty that perverse outcomes will not follow. But Chalmers is at least having a crack at a reform attempted by the first Labor leader to support his elevation onto the frontbench.
