August 2026 Newsletter
Painful open tax surgery from the May 2026 budget
Some of the widespread consequences affecting most Australians
Hello everyone,
The May 2026 Australian Federal Budget introduced a series of significant changes that are affecting most Australians. We wrote about it in our May 2026 Newsletter, and here go into a little more details about two of the main changes:
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a prohibition on most negative gearing for residential properties and
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a capital gains tax that measures gains and losses in different ways.
Both of these measures have very serious financial consequences for a great number of people, directly and indirectly.
Property Investments, Negative Gearing and Rentals
For many, rental properties have become a much less attractive proposition and not only due to the negative gearing change as not all rental properties are positively geared due to low mortgages, i.e. the owner pays tax rather than receives a tax refund due to negative gearing.
However, for many the negative gearing change is a big deterrent and these investors may be more inclined to invest elsewhere, be it shares, bonds or commercial property.
We are already seeing this amongst our clients shying away from residential rental properties and looking to alternatives. That means such properties have become less valuable and their expected resale value is dropping, hurting all rental property owners and therefore renters.
Properties that are attractive for owner-occupiers may not be affected as much, but if rental property prices drop, some owner occupiers will switch to buying what was a rental property for their own use, reducing demand for owner occupier properties because a potential buyer has bought a different type of property, one which would normally only be bought as an investment property and not a home.
Negative gearing was previously abolished in the 1980s and reinstated two years later because people stopped building rental properties as demand for them evaporated. This time the government considers itself to act with more nous by allowing negative gearing for newly built properties.
Great some say, but maybe not – the negative gearing permission only applies to the first owner, not the second, again making rental properties less valuable and such properties less attractive to purchase and thus build.
Less investment properties also means a reduction in the pool of houses for rent. This has been immediately felt in the rental market where rents have increased since May 2026, it has become increasingly harder to find a property to rent and auction clearances have fallen off a cliff.
The barefoot investor, a media personality with a column in the Daily Telegraph, thinks that falling property prices are a great idea as it will help younger people to get in the market.
Again, that feels half-baked. The best way to lower property prices is by improving supply, building many more properties, but building has become prohibitively expensive due to councils being incredibly difficult to deal with, building codes and regulations have increased at an extreme level and, for big apartment blocks, there is the issue of corruption in the building industry.
When a government makes life harder and harder due to more and more regulations, they introduce many issues including then having to punitively increase taxation to make property prices go down… which introduces further issues. This is not a partisan political statement – all governments for a long time have created more and more rules and regulations, making development and infrastructure more and more difficult and even prohibitive to build and we can see many bankruptcies amongst builders and developers.
Capital Gains Tax Changes
I have investigated how the old and the new capital gains tax impact investment returns – the answer is that the difference in returns is not big unless you have been lucky with your investment outcomes, and when there is a lot of inflation, the new regime actually leads to lower tax payments.
However, the new capital gains tax works on different calculation principles, accepting that purchase prices need to be adjusted for inflation when there is a capital gain but NOT when there is a capital loss. The tax is also very high.
As a consequence, people are moving from shares with small dividends, which are usually smaller companies, to shares with larger dividends, usually larger companies and from buying individual shares to buying share funds. There is nothing wrong with either strategy – in fact I have recommended them for years – but if there is a general movement in that direction, then small companies get starved of capital.
The reason is that a portfolio of individual shares, especially small company shares, will have winners and losers but the losers are not adjusted for inflation. That can lead to taxation rates of 60% for investors who try to avoid such an iniquitous outcome.
This will make it much harder for small companies to grow and is therefore supporting the big end of town and removing investments from small companies. This hurts the middle class that owns many of the small companies disproportionally and punishes risk taking.
The government promised during the previous election that they will not implement either of these two measures, abolishing most negative gearing and increasing capital gains taxes but did it anyway. They have been forced into these actions as they have been spending vast extra amounts on welfare due to the many unskilled migrants and some say the NDIS.
That creates a certain amount of guilt in my opinion – breaking your firm word is still frowned upon – and shows up in errors like the one recently exposed in the Australian Financial Review, showing the wrong calculation in two of the examples given in the legislation, understating the capital gains tax payable in the example by over $80,000.
As you can see, the direct effects where people feel the impact of the two policies are substantial but limited whereas the indirect effects are hurting everybody and more than many realise.
Very important for those that have an asset that is not their own home
If you have an asset that is not your home and that you expect to sell at some point in the future, it is bordering on the imperative that you get an official valuation for the value of the asset (property, unlisted shares) as of July 1st, 2027. If you don’t book a valuer now, you will not get one around that date when the media will be full of this requirement.
You might ask why you would want to pay for an expensive valuation when the ATO has a method to calculate the value as of July 1st, 2027 automatically?
The reason is that they use ‘the proportional method’. If you buy a property for $1 million in 2017 and sell it on July 1st for $1.75 million, then the ATO will say that 10/15 or $500,000 of the capital gain is under the current rules and 5 years/15 years held is under the new rule.
However, if property prices are falling, the property may already be worth $1.75 million after 10 years, i.e. on 1 July 2027 and then have no change in value until it is sold, which means that you could expect to pay substantially less capital gains tax if it is cheaper under the old regime. If you have a valuation done, you can choose either method to my knowledge. If not, you are limited to the ATO method.
It is obviously completely unrealistic that registered valuers will be able to do more than a small fraction of the needed valuations and the government may loosen the requirements but then they may not.
Please feel free to contact us should you want to discuss this or anything else. There is much to take into consideration here.
Warm Regards,
Christoph, Nicola, Marian, Alvin, Lin and RJ.
Dr Christoph Schnelle
Financial Adviser and Life Insurance Broker
In Your Interest Financial Planning
t: 1800 332 225
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