Budget bust-up

The federal government dropped a policy bombshell on 12 May, when it finally unveiled the details of its housing tax reform. While the rumour mill had been rife in the lead-up to the budget, what was actually handed down – and its implication for borrowers and businesses alike – took many by surprise.

In what Treasurer Jim Chalmers MP described as the “most important and ambitious budget in decades,” the Albanese government’s fifth federal budget has taken a sledgehammer to Australia’s longstanding property tax framework. With home ownership rates among 25–34-year-olds plummeting by 7 percentage points since 2001 and housing prices outpacing full-time earnings by more than double since 1999, the government declared that the system is broken. The remedy? A sweeping tax reform package explicitly designed to dismantle “intergenerational inequity.”

But as the dust settled on the 12 May announcement, the mortgage and finance broking industry braced for a seismic shift. As lenders quickly rewrite their credit rulebooks in anticipation of the housing tax reforms, brokers are finding themselves on the frontlines of an overnight market recalibration.

The core measures: Budget 2026–27

So, what is all the fuss about? At the heart of the budget is a record $47 billion total investment in housing, designed to rebalance the scales between first home buyers and speculative investors. The government has unveiled two structural changes to property taxation that fundamentally alter the math of property investment.

Negative gearing overhaul

In what is being billed as the most radical change to property tax in a generation, negative gearing has been restricted strictly to newly built properties.

From 1 July 2027, losses from established residential properties can only be deducted against rental income or capital gains from residential properties – not a taxpayer’s salary or wages.

Excess losses must be carried forward. This applies to established dwellings acquired after 7:30pm AEST on 12 May 2026. Properties acquired before this cut-off (including contracts entered into but not yet settled) are grandfathered and exempt until they are sold. Under the proposed changes (which are yet to be legislated), eligible new builds remain fully exempt to encourage new housing stock.

Overhauling the CGT discount

The move that has raised more eyebrows is the government’s proposed move to scrap the 50 per cent capital gains tax (CGT) discount on all assets.

While this discount has been in place since 1999, the Albanese government has said the discount will be replaced by a cost base indexation method adjusted for inflation, although there will be a 30 per cent minimum tax on net capital gains. The budget also introduced a minimum 30 per cent tax rate on many discretionary trust distributions.

The CGT changes only apply to gains arising on or after 1 July 2027. Crucially, investors in new residential properties can choose between the old 50 per cent discount or the new indexation method, preserving an incentive for adding to supply.

Treasury modelling suggests these changes will temporarily cool house price growth by around 2 per cent over a couple of years, saving an average buyer roughly $19,000. Treasury estimates this shift will result in 75,000 additional owner-occupiers over the next decade, effectively reversing 10 years of
declining home ownership.

However, the move to expand CGT to all asset classes has been causing controversy. These changes will apply to all CGT assets (including property and shares) held by individuals, partnerships, and trusts for at least 12 months.

For high-income earners already in the highest personal tax bracket ($200,001+), the undiscounted capital gain will be taxed at their full marginal rate of 45 per cent (plus the 2 per cent Medicare levy), which means some taxpayers – including small-business owners – could be paying up to 47 per cent tax.

IAWO made permanent

Beyond investor tax changes, the government announced an additional $2 billion infrastructure fund to unlock up to 65,000 new homes by funding sewerage, water, and electricity connections. It also earmarked $85.2 million to fast-track skills assessments for trades-industry migrants and extended the ban on foreign investors buying existing homes until mid-2029.

For small businesses, the budget delivered a highly anticipated win by making the $20,000 instant asset write-off (IAWO) a permanent feature of the tax system for businesses with an annual turnover under $10 million. Additionally, companies turning over less than $1 billion can now carry back tax losses up to two years earlier, while start-ups will gain access to loss refundability from 1 July 2028.

The budget reply

The government’s proposals have been met with criticism from the Coalition opposition. In his budget reply on 14 May, Opposition Leader Angus Taylor fired back, labelling the government’s strategy “intergenerational fraud” and an “assault on aspiration.”

Taylor pledged that a future Coalition government would completely repeal the negative gearing and CGT reforms, saying they would reduce rental supply, crush wealth creation, and hand housing investment over to foreign multinational funds.

Instead, the Coalition’s alternative housing strategy focuses heavily on curbing demand via immigration and cutting red tape:

• Tethering migration to supply: The Coalition vows to legally cap net overseas migration based directly on the number of new dwellings completed each year. “If Australia does not build enough homes, migration must come down,” Taylor warned.

• Prioritising citizens: The 5 per cent Deposit Scheme would be strictly limited to Australian citizens, and build-to-rent tax breaks for foreign multinationals would be axed.

• Slashing building costs: The Coalition plans to fund a $5 billion Housing Infrastructure Fund (more than double Labor’s $2 billion commitment) to unlock 400,000 homes. It also pledged to “slash” the National Construction Code to save up to $70,000 on the cost of building a new home.

• Supercharging small business: Outside of housing, Taylor promised to more than double the permanent instant asset write-off threshold, lifting it from $20,000 to $50,000 for small businesses.

The broker verdict

Regardless of whether or not the budget reforms pass through Parliament, the industry is already experiencing an onslaught of borrowers inquiries, with many investors worried that their borrowing power has taken a massive hit given that lenders routinely use projected negative gearing tax refunds as “add-backs” to boost an investor’s verified income.

Indeed, Macquarie Bank became the first major lender to move, stripping out negative-gearing tax add-backs from its serviceability calculators for established property contracts executed after the 12 May cut-off. While grandfathered assets and dollar-for-dollar refinances retain the benefit, new purchases of existing stock face a brutal assessment. Other major lenders, including Westpac, NAB, CBA, and ANZ, have confirmed they are actively reviewing their settings.

The real-world impact is already hitting live files. In one case shared with The Adviser, Macquarie recalculated a pre-approved investment loan, slashing the maximum loan size from $1.7 million to $1.27 million.

Alex Veljancevski, founder of Eventus Financial, modelled a clean client profile and found that removing negative gearing caused an immediate 20 per cent drop in borrowing capacity (from $750,000 to $600,000), despite no change to interest rates or income.

Sydney-based broker Tony Xia, director of The Mortgage Agency, saw even steeper declines. “We recently re-ran borrowing power for a client on a $100,000 salary looking to buy after 12 May,” Xia said. “Their pre-budget borrowing power was $675,000. Post-budget, it fell to $490,000 – a drop of nearly 30 per cent. Investors will have to lower their expectations.”

Given the serviceability squeeze, aggregation leaders have been quick to showcase this as a prime opportunity for brokers to cement their status as trusted credit advisers.

“Investor clients will need more strategic conversations,” Finsure CEO Simon Bednar said. “The shift means new builds will become more important. Brokers who understand construction lending, progress payments, and builder due diligence will be better placed to capture demand.”

Sam White, CEO of Loan Market, agreed that the tax settings would deliberately push investors toward higher-density new developments on city outskirts, potentially leaving existing homes free from investor competition for first home buyers. However, White cautioned that “growing construction costs and shortages of skilled workers will continue to limit the number of new developments”.

Connective executive director Mark Haron echoed this, noting that while first home buyers face less investor competition in established markets, brokers will need to spend extra time double-checking property purchase dates and contract execution times before hitting submit.

David Bailey, CEO of ASX-listed aggregator AFG, expressed serious doubts that steering investors toward new builds would automatically solve the supply crisis. “New housing remains constrained by planning, infrastructure, labour shortages, and finance conditions,” Bailey told The Adviser. “There is a risk that investors crowd into a narrower new-build segment, pushing up prices there.”

There is a risk that investors crowd into a narrower new-build segment, pushing up prices there
- David Bailey, CEO, AFG

Bailey also raised alarms that the CGT changes extend far beyond residential property, impacting shares, commercial assets, and small businesses. “Applying these reforms more broadly may affect investment appetite across the economy,” he warned.

The Commercial & Asset Finance Brokers Association (CAFBA) went a step further, labelling the housing tax changes a net negative. CAFBA CEO David Bushby warned that the “extremely complex new rules, transitional provisions, and ongoing valuation requirements” could result in unintended market distortions and encourage tax avoidance behaviour.

CAFBA advocacy chair David Gandolfo OAM also expressed disappointment, noting that a $20,000 cap falls well short of the $150,000 limit the industry had campaigned for.

Speaking for the Mortgage & Finance Association of Australia (MFAA), CEO Anja Pannek concluded that clear information is now the industry’s primary currency.

“Brokers will be having practical conversations with clients who are trying to understand what these changes mean for their own circumstances,” she said. “The priority must be clear, practical guidance.”