Capital gains tax, negative gearing, SMSF borrowing and discretionary trusts
Overview:
This report provides a broad client-facing overview only. It is not intended to be a technical paper for practitioners or a substitute for personal tax advice. The impact for any client will depend on the asset, acquisition date, ownership structure, borrowing position, sale date and personal tax circumstances.
Executive summary
The 2026 Federal Budget tax reforms change the way some investment losses and capital gains will be treated. The most relevant changes for clients are the capital gains tax (CGT) reform, the negative gearing changes for established residential property, new limits on SMSF property borrowing and the proposed discretionary trust minimum tax.
The reforms do not automatically mean clients should sell assets. The main practical consequence is that sale timing, acquisition dates, asset type and ownership structure will matter more. Clients with investment properties, large unrealised gains, family trusts or SMSFs should review their position before selling, transferring, refinancing or restructuring assets.
Main Client Message:
Clients with large capital gains should not assume that the current 50% CGT discount will apply to all future growth. Gains accrued before 1 July 2027 are broadly kept under the existing rules. Gains accruing after that date will generally be subject to the new indexation and minimum tax rules, unless a specific exception applies.
Note: The $1,000 standard deduction and Working Australians Tax Offset are broader personal tax changes. They are not the focus of this briefing because the more material planning issues for affected clients are CGT, negative gearing, property ownership and trust/SMSF structures.
Key dates clients need to know
| Date | Why it matters |
|---|---|
| 7:30pm AEST, 12 May 2026 | Budget night grandfathering date for negative gearing on existing residential property interests. For property, contract date is critical. |
| 26 June 2026 | Royal Assent for the first tranche of the tax reform legislation. |
| 10 August 2026 | Commencement date for the new SMSF LRBA restriction on real property. |
| 30 June / 1 July 2027 | Transition point for the CGT changes. Assets held before this date and sold afterwards may need to be split into pre- and post-reform components. |
| 1 July 2027 | Negative gearing restrictions commence for affected established residential property. New CGT approach starts for gains accruing from this date. |
| 1 July 2028 | Proposed start date for the discretionary trust minimum tax. This area remains subject to final legislative detail. |
Practical Point:
For clients with investment property or other assets with large unrealised gains, the market value around 30 June/1 July 2027 is likely to become an important record. It may not be necessary to obtain a formal valuation immediately, but clients should preserve objective evidence of value.
How the CGT changes work broadly
The current 50% CGT discount has been a simple rule: eligible individuals and trusts that held an asset for at least 12 months could generally discount the capital gain by 50%.
From 1 July 2027, for affected assets, the approach changes. The post-1 July 2027 component of a gain will generally be calculated by indexing the cost base for inflation and then applying a 30% effective minimum tax to that post-reform capital gain.
| Situation | Broad treatment |
|---|---|
| Asset bought and sold before 1 July 2027 | Current CGT rules continue to apply. If the asset has been held for at least 12 months, the 50% CGT discount may apply. |
| Asset bought before 1 July 2027 and sold after 1 July 2027 | The gain is broadly split into two parts. Growth before 1 July 2027 is dealt with under the old rules. Growth after 1 July 2027 is dealt with under indexation and the 30% effective minimum tax. |
| Asset bought and sold after 1 July 2027 | The new indexation and minimum tax rules will generally apply to the whole gain. |
| New residential builds and affordable housing | There may be a choice between the existing CGT discount treatment and the new indexation/minimum tax approach. |
| Main residence | The family home remains subject to the separate main residence CGT exemption rules. The reforms are not intended to tax the family home where the main residence exemption applies. |
The 30% minimum tax is not the same as a flat extra 30% tax
The minimum tax operates as an effective tax floor on relevant capital gains. It does not mean that every investor pays an additional 30% on top of ordinary tax. High-income clients may already pay tax on capital gains at a rate above the minimum. Lower-income clients may be more affected if the tax otherwise payable on the relevant gain would fall below 30%.
Indexation is different from the old discount
Under indexation, the cost base is increased for inflation. Tax is then applied to the real gain after inflation. This can be better or worse than the current 50% discount depending on inflation, the holding period, the asset growth rate and the client’s tax position.
Direct impact on clients with investment properties and large capital gains
The most affected clients are likely to be those who hold investment properties or other assets with large unrealised gains and who may sell after 1 July 2027. The key issue is that the capital gain may no longer be treated as one simple discounted gain.
What happens when the property is eventually sold?
- The gain that accrued before 1 July 2027 is broadly kept under the existing CGT discount rules, provided the ordinary eligibility rules are met.
- The gain that accrues from 1 July 2027 to the date of sale is generally subject to the new indexation and 30% effective minimum tax framework.
- For a property held at 30 June 2027, the market value around that date becomes important because it separates the old-rule gain from the new-rule gain.
- Any quarantined residential property losses may be available later to offset residential income or residential capital gains, but they cannot be deducted against salary or other non-residential income each year.
Simple sale example
The example below is illustrative only. It is designed to show the mechanics, not to calculate a client’s actual tax position.
| Item | Illustrative amount | Broad treatment |
|---|---|---|
| Original cost base | $600,000 | Historical acquisition cost, ignoring transaction costs for simplicity. |
| Market value at 30 June 2027 | $1,200,000 | Pre-reform gain is broadly $600,000. This component may retain the 50% CGT discount if eligible. |
| Sale price in a later year | $1,500,000 | Post-reform growth is broadly $300,000 before any indexation adjustments. |
| Tax outcome | Depends on CPI, deductions, losses and tax position | The post-1 July 2027 growth generally does not receive the old 50% discount. Indexation and the 30% effective minimum tax framework are relevant. |
Practical consequence:
A client with a large gain should obtain advice before deciding whether to sell before or after 1 July 2027. Tax should not be the only factor. Investment merit, debt, cash flow, transaction costs, estate planning and replacement investment options also matter.
Clients should retain valuation evidence
For property, clients should keep evidence that supports the market value around 30 June / 1 July 2027. This may include market appraisals, comparable sales, rental records, valuation reports, insurance valuations and other objective evidence. A formal valuation may not always be required immediately, but poor records could create problems when the asset is eventually sold.
Negative gearing: what changes for residential property?
The negative gearing changes are narrower than the CGT changes. They are focused on established residential property. They do not generally apply to shares, commercial property or properties held before Budget night.
| Client situation | Broad consequence |
|---|---|
| Residential investment property acquired before 7:30pm AEST on 12 May 2026 | Grandfathered. Net rental losses can generally continue to be deducted against other income under existing rules, assuming ordinary tax rules are satisfied. |
| Main residence acquired before Budget night and later rented out | Grandfathering is based on when the ownership interest was acquired, not when the property first became income-producing. |
| Established residential investment property acquired after Budget night | From 1 July 2027, losses are generally quarantined. They may be carried forward and used against residential income or residential capital gains, but not salary or other non-residential income. |
| New residential build | New builds are intended to remain eligible for negative gearing before and after 1 July 2027. |
| Commercial property and shares | Generally, outside the negative gearing quarantine. The CGT reforms may still be relevant. |
What does “quarantined” mean?
A quarantined loss is not necessarily lost. It is deferred. The issue is timing and cash flow. A client may lose the annual tax benefit of using a property loss against salary, but the isolated amount may still be useful later against residential rental income or residential capital gains.
Client impact:
For a client relying on annual tax refunds from negative gearing, the after-tax cash flow of a post-Budget established residential property could materially worsen from 1 July 2027.
Common client situations
| Situation | What clients should understand |
|---|---|
| Existing negatively geared property bought before Budget night | The negative gearing treatment is broadly protected. However, CGT treatment on eventual sale can still change for gains accruing after 1 July 2027. |
| Established property bought after Budget night | Negative gearing losses after 1 July 2027 may not reduce salary or business income. Sale planning becomes more important because quarantined losses may be used against residential gains. |
| Property with a large unrealised gain | The sale may involve a pre-1 July 2027 component and a post-1 July 2027 component. Valuation evidence around 30 June / 1 July 2027 is important. |
| Former home converted to rental | If the property interest was acquired before Budget night, the negative gearing grandfathering should generally continue even if it becomes a rental later. The main residence exemption rules still need separate advice. |
| Death, inheritance or relationship breakdown | Public updates indicate further legislation has been passed to preserve existing eligibility in certain cases. Clients should still seek advice before changing ownership or transferring interests. |
| Family trust holds investments | The CGT reforms can apply to trusts. The separate discretionary trust minimum tax proposal may affect future income distribution planning. |
| SMSF wants to borrow to buy property | New SMSF borrowing for real property is now significantly restricted and generally limited to business real property. Existing arrangements may be grandfathered. |
SMSF property borrowing
The SMSF change affects limited recourse borrowing arrangements (LRBAs) over real property. From 10 August 2026, an SMSF can generally no longer enter into a new LRBA to acquire ordinary residential investment property. If the asset is real property, it must generally be business real property.
- Existing LRBAs entered into before the commencement date are broadly grandfathered.
- Refinancing existing grandfathered borrowings may remain possible, subject to the rules and lender requirements.
- Contracts entered into before commencement may be protected even if settlement occurs afterwards.
- Ordinary SMSF investment rules continue to apply, including the sole purpose test, investment strategy requirements and related-party acquisition rules.
Client impact:
Clients considering property through an SMSF should obtain advice before signing contracts or borrowing. The rules are now more restrictive, and the lender market may also be limited.
Discretionary trusts and family trust planning
The discretionary trust measure is a separate reform area. The announced direction is a minimum 30% tax on discretionary trusts from 1 July 2028, with exceptions and restructure relief proposed. This is not the same as the CGT minimum tax. It is aimed at income distributed through discretionary trusts.
For clients, the key message is not that family trusts are now obsolete. Rather, income distribution strategies and ownership structures should be reviewed. Trusts may still have legitimate non-tax purposes, including asset protection, succession planning and business structuring.
| Potentially affected | What to consider |
|---|---|
| Family trusts used for income splitting | Future distributions may be subject to a minimum tax framework. The benefit of distributing income to lower-tax beneficiaries may reduce. |
| Trusts holding investment assets | The CGT reforms may affect future realised gains. Trust deed terms and beneficiary entitlements may become more important. |
| Small business trust structures | Review whether the structure remains appropriate. Proposed rollover relief may be relevant, but restructuring should not occur without tax and legal advice. |
| Fixed trusts and widely-held trusts | Public materials indicate these are less likely to be the target, but classification and deed terms matter. |
What clients should do now
Clients do not need to take automatic action. The appropriate response is to identify whether they are affected and then make decisions with proper advice.
- List all investment assets with large unrealised gains, including investment property, shares, managed funds, business assets and trust-held assets.
- Record acquisition dates and ownership details. For property, the contract date is particularly important.
- Identify whether any residential property was acquired before or after 7:30pm AEST on 12 May 2026.
- For properties and other assets likely to be held beyond 30 June 2027, keep evidence of market value around that date.
- Review negatively geared properties and model the post-1 July 2027 cash flow if annual losses are quarantined.
- Review estate planning, relationship breakdown settlements, transfers between spouses and ownership restructuring before changes are made.
- Review SMSF property strategies before entering into any new borrowing or property contract.
- For family trusts, wait for final details where relevant but begin reviewing distribution patterns, deed terms and succession objectives.
Questions to ask before selling an investment property
- Was the property acquired before or after Budget night?
- Is it established residential property, a new build, affordable housing, commercial property or mixed-use property?
- What is the estimated market value at 30 June/1 July 2027?
- How much of the gain accrued before 1 July 2027 and how much may accrue afterwards?
- Are there quarantined losses that could be used against the residential gain?
- Will the client’s marginal tax rate, taxable income or retirement status change around the proposed sale year?
- Are there estate planning, Centrelink, cash flow or debt repayment reasons to retain or sell the property?
Adviser discussion points
| Client type | Suggested discussion |
|---|---|
| Property investor with large gains | Model sale before and after 1 July 2027. Estimate the split between old-rule and new-rule gains. Ensure valuation evidence is preserved. |
| Client relying on negative gearing refunds | Assess annual cash flow impact if losses are quarantined. Consider debt, rental yield, interest rates and overall investment case. |
| Retiree or pre-retiree | Consider whether the 30% minimum tax applies, whether income support exemptions are relevant and whether sale timing interacts with pension, superannuation and estate plans. |
| Business owner using a family trust | Review whether the trust continues to serve succession, asset protection and commercial objectives. Monitor final trust legislation. |
| SMSF client considering property | Review whether the property is business real property and whether borrowing is still legally and practically available. |
What this report does not cover in detail
This report is deliberately limited to a broad client overview. The following issues are relevant for advisers, accountants and lawyers, but are not dealt with in detail here:
- Capital loss ordering rules;
- Managed fund and AMIT implementation details;
- Detailed small business CGT concession calculations;
- Foreign resident and temporary resident complexities;
- Technical LRBA edge cases, including mixed-use property and business real property tests;
- Trust deed drafting and fixed trust classification;
- Legislative section-by-section analysis.
Important limitations
This report is general information only. It does not consider any client’s personal objectives, financial situation, needs, tax position or legal circumstances. Clients should obtain personal financial, tax and legal advice before acting.
The tax law, ATO guidance and Treasury materials may continue to evolve. This report is based on public information and supplied materials available as at 31 August 2026.
This report should be read as a client discussion document, not as a technical advice memorandum. Individual calculations should be completed by a registered tax agent or suitably qualified adviser before any transaction is undertaken.
Public reference links
- Treasury – Budget 2026-27 tax system changes:
- Parliament of Australia – Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 Bills Digest:
- Treasury Ministers – Consultation on discretionary trusts reform implementation:
- Treasury Ministers – Consultation on next tranche of tax reform legislation:
- Treasury Ministers – Next Tranche of Tax Reforms Pass the Parliament:
Written by Rob Coyte
Director – Harbourside Investment Management
This information is general advice and does not take account of investors’ objectives, financial situation or needs. Before acting on this general advice, investors should therefore consider the appropriateness of the advice having regard to their objectives, financial situation or needs.