Draft changes to the federal government’s tax overhaul have outlined protections for widows, trusts, and new housing.
The Albanese government has released Tranche 2 exposure draft legislation for consultation, spelling out how its capital gains tax (CGT) and negative gearing changes will be tempered by a series of carve‑outs for widows, divorcees, trusts, and new or affordable housing investments.
The most politically sensitive change tackles the so‑called ‘widow’s tax’ that emerged from the original budget reforms.
Under the earlier design, jointly owned investment properties purchased before budget night were meant to be grandfathered from the new limits on negative gearing and the shift to indexed capital gains plus a 30 per cent minimum tax.
But it was later revealed that if the asset was fully transferred to one co‑owner due to death or divorce, that transfer would be treated as an ownership change, causing the concessions to vanish.
The government confirmed in the draft changes that this would be removed, with Treasury noting that the Tranche 2 legislation would “preserve existing eligibility for negative gearing or treatment as a new build in certain circumstances, including for residential dwellings acquired from a spouse as a result of inheritance or relationship breakdown”.
In practice, this means widows and divorcees inheriting a partner’s share of an investment property will keep the tax settings they had before the reforms.
The draft changes also dealt with the issue of more complex ownership situations.
In some households, spouses are not listed on title or are treated as tenants rather than explicit co‑owners.
The Tranche 2 material made clear that these spouses would still be protected so long as they genuinely acquired the property through death or relationship breakdown.
Trust carve‑outs and ‘death tax’ concerns
Another major theme in the Tranche 2 legislation is the interaction between the CGT reforms and the new 30 per cent minimum tax on capital gains flowing through trusts.
Tax professionals and estate planners warned that, without carve‑outs, the changes could operate as a de‑facto death tax on testamentary structures.
The draft legislation clarified that capital gains distributed to beneficiaries via genuine testamentary trusts, deceased estates, and special disability trusts would be exempt from the minimum tax on capital gains.
Treasury noted that this was “consistent with exemptions from the minimum tax on discretionary trusts”, confirming that the concessions for structures formed on death aligned with those already promised for certain discretionary testamentary trusts.
New build, affordable housing, and negative gearing
The Tranche 2 package also refined how the new negative gearing limits will apply to new and affordable housing.
Under the budget rules, negative gearing is being confined from 1 July 2027 to residential properties that genuinely add to housing supply.
Yet the government has shifted its position on the timing test for “new” dwellings.
Originally, a property was considered new if it had been unoccupied for less than 12 months after a certificate of occupancy was issued before being sold.
However, industry figures said that this would force fire sales of unsold stock, with Treasury now proposing to extend this window.
The draft changes explained that “a property will generally be considered ‘new’ where it genuinely adds to housing supply, provided the property was acquired within 24 months of a certificate of occupancy being issued. This extends the 12 months set out in the budget to provide builders and developers time to sell stock on hand”.
Negative gearing for existing properties acquired after 1 July 2027 will also remain available where homes are being used as NDIS specialist disability accommodation, affordable housing delivered through eligible community housing providers, public housing, and qualifying build‑to‑rent developments.
Practical CGT transition and residency rules
From 1 July 2027, the 50 per cent CGT discount will be replaced by cost‑base indexation and a 30 per cent minimum tax on net capital gains for individuals, partnerships, and most trusts, with concessions grandfathered for gains built up before that date.
Rather than forcing owners of existing properties and hard‑to‑value assets to commission formal valuations, the Tranche 2 material proposed a formula that splits the gain between the old and new systems.
Treasury said this would allow taxpayers to apportion pre‑ and post‑reform gains without a valuation battle, reducing compliance costs and providing clearer guidance on how transitional taxing will work for long‑held assets.
The draft amendments also clarified how the reforms will apply to people who are Australian tax residents only for part of the period they hold an asset.
New residency rules will apportion capital gains and the minimum tax between resident and non‑resident periods, ensuring mobile workers and returning migrants cannot use residency changes to sidestep the new minimum rate.
Chalmers’ fairness pitch and next steps
In a statement, Treasurer Jim Chalmers stressed that the detailed adjustments would ensure the reforms landed fairly across different taxpayer structures.
He said the draft changes “would ensure Labor’s tax changes appropriately apply to a range of specific taxpayer circumstances and structures” and added that “the release of these draft materials reflects the government’s commitment to consult on more complex elements of the tax reforms announced in the budget”.
The Treasurer also linked the package to the broader political narrative around housing and intergenerational equity.
“The government is continuing to implement the ambitious tax reform package announced in the budget to deliver tax cuts for millions of Australians, a fair go for first home buyers, and a fairer tax system that better aligns the treatment of labour and asset income,” Chalmers said.
Consultation on the Tranche 2 exposure draft will run for two weeks, with Treasury stating that further tranches will follow as the reforms are finalised.
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