A budget that will be remembered

On May 12, 2026 the Australian Federal Labour Government handed down a budget with significant increases in tax.

If your main assets are your home and your superannuation, then very little has changed but if you hold other investments, then your costs have just increased substantially in the form of the abolishing of negative gearing and much higher capital gains taxes except for the first owner of a newly built residential property.

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If that is you or your family, now or in the future, read on.

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A cynical view of the budget could be that it is from a government that with the Greens has a majority in both houses and need not fear the electorate for the time being as the right of the political centre has fractured with the rise of the One Nation party. That last part can change very quickly the way it has changed in the UK but Australia may take some time before there is a unified right of centre in politics again.

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If multiple parties stand against each other in an election, the flow of second and third preferences is crucial. Labor and the Greens swap most of their preferences while it is not clear how preferences will distribute among the other parties. In the past such situations have led to the more unified party or parties winning elections in a landslide, hence Labor currently perhaps feeling unusually secure in bringing down a high-taxing budget.

The rise in capital gains taxes makes Australia far less attractive for entrepreneurial start-ups or for companies planning large expansions. The effects of that lack of new companies will not be visible for a long time but is expected to lead to big losses in earnings from those companies that didn’t happen 5-20 years down the track.

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Many economists think increasing capital gains taxes and bringing them more in line with how wages are taxed is good for an economy as taxes on wages such as income and payroll taxes can be reduced. That is true but there is no sign of that happening – that is the part of the budget that has many people up in arms over this budget.

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As income taxes are not being reduced, the overall tax burden on the population will increase sharply and we are heading more towards European levels of taxation which means, together with increased borrowings, there is more money for the government’s priorities such as the NDIS, welfare and supporting unskilled migrants which are, unlike in the past, the large majority of migrants.

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Amongst the expected downsides from increasing taxes and spending the money for economically unproductive activities are higher inflation as more money chases the same amount of goods and services, higher interest rates as the government borrows more when running budget deficits despite the extra taxes and a number of second order effects such as existing homes more likely to be dropping in value and rents going up.

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There was a supportive article of the budget from a ‘tax expert’ in the Australian Financial Review as, from a theoretical point of view these changes could mean that the total national income of Australians will go less to the owners of assets and more to those who receive wages. That is true if the money is used to reduce income taxes but there were no signs of that in the budget. The author was comparing the benefits of non-existing income tax reductions with the tax increases proposed in the budget.

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The abolishment of most negative gearing will ‘have a modest influence on rents’ according to that article. I read it differently as rental property owners are more likely to become ferocious about not losing money on their properties which they will when the tax benefits of negative gearing are abolished, and therefore they will need to raise rents as much as they can to reduces their losses of holding rental properties. This rental rise will be supported by it being less appealing to be a property investor without negative gearing, likely leading to fewer investors buying residential property and thus less available properties for rent.

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I suspect banks will make major changes to the levels of loans they grant if the tax benefits of holding property outside super are reduced substantially. I have seen calculations that reduce the amount a property investor can borrow by over 25%. Currently the budget changes are not law but the government with the Greens has, as stated a majority in both houses so these changes are likely to happen even though they constitute major breaches of election promises.

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In addition, if demand for existing properties reduces, that will make building new homes, despite the extra tax incentives, less likely to happen, especially with the steady increases in planning, building and construction costs and complexity. A further consideration is that the tax benefits of buying a new home (choice of capital gains calculation and negative gearing, i.e. keeping the existing rules for new properties) are not available for the second owner of the property, reducing the chance of making a capital gain for the first owner as the property is less valuable to the second and subsequent owner.

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With Labor having no serious rival but politics also being in major foment due to the rise but inherent instability of One Nation there is much more care needed when including tax considerations when planning for the future.