How the tax changes impact property investors and first home buyers

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Labor will limit negative gearing and the capital gains discount to new build properties while introducing a 30 per cent minimum tax for family trusts, in a series of major changes designed to rebalance the tax system.

These will pay for a permanent $250 tax offset for 13 million workers – people who earn their income from wages or salaries – that will increase with indexation each year. It will be called the working Australians tax offset and come in from July 2027.

What are the negative gearing changes? When do they start?

Negative gearing applies when landlords make a loss on their investment by renting out a property for less than the cost of owning it. Investors are allowed to subtract the net loss from their other income to reduce their taxable income.

Tuesday night’s budget will restrict the use of negative gearing to new builds only, from July 2027.

These changes will be grandfathered – everyone who already negatively gears their investment properties can keep doing so until they are sold, regardless of whether they own new or existing properties.

But all investors who purchase existing properties from 7.30pm Tuesday night onwards will be captured by the new rules, although they won’t come into effect straight away. Anyone who invests in an existing property in the next few months will be able to negatively gear it until July 1 next year. After that, they lose the ability.

Anyone who invests in a new build property from 7.30pm on Tuesday night will be able to negatively gear it indefinitely.

What are the CGT changes? When do they start?

The Howard government in 1999 introduced the capital gains tax discount, which required people to pay tax on only half their earnings from investment assets.

The Albanese government will scrap this 50 per cent discount and largely revert to the capital gains calculation used last century.

Under this system, when investors sell their asset, the Australian Tax Office will use the consumer price index to determine how much its value has grown in real terms. Tax will then apply to the capital gain that has accrued on top of the indexed amount.

The tax rate on those capital gains will be at least 30 per cent. It will be higher if the seller is in a higher income tax bracket. This is designed to stop people deferring the sale of their assets to a time when they have lower taxable income to minimise their tax bill.

Again, people who invest in new properties can be exempt from the changes – they can choose to receive the old 50 per cent CGT discount or be taxed under the new system. The family home will continue to be exempt, as will investors in government and affordable housing.

For everyone else – including people who have invested in existing property stock, shares and other assets such as art and cryptocurrencies – the new tax rate will apply to real capital gains made from July 2027 onwards.

To determine how much their asset is worth come July 2027, investors will be able to seek a valuation or use a formula tool provided by the tax office.

Which properties classify as new builds? Who’s exempt?

People can keep these tax breaks if they invest in “new builds” that increase property supply.

The government is classifying these new builds as new apartments bought off the plan, residential buildings constructed on previously vacant land, and knock-down rebuilds where a freestanding house is replaced by a duplex or apartments. It also includes properties bought from a builder that have been occupied for less than a year.

Existing properties will be ineligible for the tax breaks. Other types of housing that won’t qualify include existing properties that have been extended, knock-down rebuilds where a new single freestanding house replaces a previous one, and granny flats built on the land of an ineligible property.

New tax on trusts

The budget also contains significant changes to how trusts are taxed from July 2028.

There are about 1 million trusts in Australia, of which about 840,000 are discretionary. About 90 per cent of private trust wealth is held by the wealthiest 10 per cent of households, according to data cited by the government on Tuesday.

There is currently no set tax rate that must be paid on a trust’s annual income – instead, the amount of tax paid is generally determined by the marginal tax rates of the trust’s various beneficiaries.

The government’s concern is that trustees can lower their taxes by “income splitting” – they allocate parts of their income to other family members who have a lower marginal tax rate, while keeping the money.

The government’s fix is introducing a 30 per cent minimum tax on a trust’s taxable income.

Trustees will continue to determine how much income beneficiaries earn, but the trust’s entire taxable income will be subject to a 30 per cent minimum tax rate paid by the trustee, rather than its beneficiaries’ various marginal rates.

Beneficiaries will still need to declare their trust income on their tax return, but they will receive a non-refundable credit to recognise that tax has already been paid.

Small businesses that want to restructure out of discretionary trusts will have three years to make other arrangements.

The minimum tax will not apply to other types of trusts such as fixed and widely held trusts, superannuation funds, special disability trusts, deceased estates or charitable trusts. Discretionary trusts used by farmers and vulnerable children who use discretionary trusts will also be exempt.

The 30 per cent minimum tax rates is designed to bring taxes on income from assets more closely in line with taxes on workers, who pay that tax rate on earnings between $45,001 and $135,000.

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