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Australia to Offer One-Year Grace Period for Negative Gearing and Housing Tax Changes
The Albanese government will announce major changes to capital gains tax and negative gearing in Australia in this week's federal budget. The 50% CGT discount on assets held more than a year will be scrapped from July 2027, reverting to pre-1999 inflation-indexed taxation. Negative gearing will be grandfathered for existing investors, but from budget night, only newly built properties will qualify going forward. Existing properties bought after budget night can still be negatively geared until July 2027. A one-year grace period applies to both changes. The same policies cost Labor the 2019 federal election.
The Albanese government has planned bold changes for two of Australia’s most contentious taxes in this week’s federal budget. Phasing out concessions on capital gains tax and negative gearing to existing homes for new investors.
Key Highlights
- Capital gains tax discount of 50% on assets held for more than 12 months will be eliminated from July 2027.
- Buyers after budget night this week will continue to benefit from the existing 50% CGT discount until mid-2027.
- Negative gearing in Australia will only apply to newly constructed properties from budget night onwards.
- Because of an immediate shift in policy for existing properties bought after budget night, these can still be negatively geared until July 2027.
Big Overhauls to Capital Budget Gains Tax and Negative Gearing
The Australian Financial Review reported federal government changes have proposed big reforms to capital gains tax and negative gearing for the budget.
This is probably the most significant change with a major loss of the 50% CGT discount that has been entrenched since 1999. Investors will instead face taxes on capital gains under the new system, reverting Australia to a framework last seen before the Howard government introduced the discount more than 20 years ago.
To ease the transition, there will be a year-long grace period introduced by the government. Investors buying assets after budget night will still be able to access the existing 50% discount until July 2027 before the new rules come into force.
Negative gearing rules are another one of the changes the government is making. Grandfathering provisions would apply to existing investors with negatively geared properties, meaning the Government will not change the situation for them. But starting in October 2023 the rules will become much stricter for subsequent purchases. After budget night, negative gearing bonuses or entitlements will only go to new builds.
Why Labour Is Re-Examining These Policies
For many years, the Australian housing affordability debate has been dominated by discussions about capital gains tax concessions and negative gearing. Public scepticism of the policies, which critics claim drive speculation, is in favour of investors at the expense of first-home buyers and further inflates property prices by making investment housing an attractive alternative to an owner-occupied home.
They include getting rid of the 50% capital gains tax discount on assets held for longer than a year from July 2027, but maintaining a transition period until mid-2027 for new investors. The government would also restrict negative gearing to purchases of newly built homes from the end of 2019, although existing landlords would continue with existing tax breaks. Reforms are aimed at improving housing affordability as well as increasing new housing supply, but about 1.3 million Australians already hold negatively geared investment properties.
What Investors and Home Buyers Should Know About the Changes
This represents the largest change to Australia’s property investment tax framework in over two decades, since the introduction of the CGT discount in 1999.
Current property investors will definitely be affected but largely mitigated via grandfathering protections. Current negatively geared investments will be grandfathered under existing arrangements, which lessens the chance of sudden impacts from extra sell pressure on an already volatile housing market.
The future, however, looks very different for investors.
From July 2027 only purchasers of a newly built property will be able to negatively gear their investment profits. Thereafter, those investments must pay for themselves without continued tax advantages.
At the same time, newly constructed homes will remain eligible for negative gearing so that investor demand is directed to the increasing supply of housing, not competing over existing properties. The reforms signal to first-home-buyers that the government is trying to tackle, longstanding tax settings which many believe have been allowing investors to drive this market.
FAQs
- What is changing with capital gains tax in Australia?
From July 2027 the government will abolish the 50% CGT discount on assets held for greater than one year. This investment will be taxed under a system similar to that used before 1999 whereby investors would instead pay taxes on inflation-adjusted gains.
- What is the duration of the transition or grace period?
You can buy assets up to the night of budget week this week and still get a 50% CGT discount for purchases until about mid-2027 there is time for an adjustment before any rollover fully affects investors.
- What is happening with negative gearing?
Investors with existing holdings would retain their existing negative gearing arrangements. But from now on, only newly constructed homes will qualify for long-term benefits from negative gearing.
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