The federal government has just released the 2026 budget, and a lot of investors are upset and looking at what they’re losing as far as this budget goes, but smart investors are looking at the opportunities that have been created as part of this budget, and we’re going to run through that today.
Key takeaways
- The PAYG negative gearing loophole is closed: Investors can no longer offset residential property losses against regular salary income for properties bought after the budget announcement.
- Borrowing capacities will shrink: Reduced tax incentives mean lenders are adjusting serviceability calculations, likely dropping the average individual portfolio cap down to two properties.
- Capital gains tax overhaul: The 50% CGT discount is being replaced by an inflation-indexed model using CPI, moving investors to a minimum 30% tax rate upon sale.
How Labor budget policies target wealth creation
Look, it just shows you how much a politician’s word is worth. When we look at it and we unpack it, I don’t want to get too political today, but it is a political issue. Investors have always been an easy target.
And the thing is, like a lot of their generation, they created their wealth through property with these policies, and now they’ve gone and taken it away as a way to say that they’re helping the younger generation.
Market adaptation and first-time buyer supply
Of course, it’s going to benefit some people. It’s going to negatively impact others, but the people who he’s trying to negatively impact are the ones who seek opportunity in the market.
They’re not ones who just sit back and let life happen to them. They go, all right, well, this is the circumstances that I’m faced with. What do we need to do now to move forward with being able to make money?
They’re trying to reduce the competition in the market for first-time buyers. Because at the moment, first-time buyers, I think the study is they miss out on 60% of properties they go for.
The impact of capital gains tax changes
So we’re going to be focusing on the negative gearing and capital gains tax changes, not the whole budget, and what that means for everybody.
It’s a great window for first-time buyers because the investors who don’t want to deal with the capital gains and negative gearing implications. There’s going to be increased supply in a lot of these markets and it’s going to be a very rare opportunity that first home buyers can buy in a window that has increased supply in the marketplace.
So, if we look at the two main changes that are affecting property investors obviously negative gearing, so basically they’ve come out and the new rule is any properties that are purchased from today onwards.
Understanding the new negative gearing PAYG rules
So, they’ve basically separated the two income streams, which historically let’s say you earn $100,000 and you had $20,000 worth of negative gearing, you pay tax on $80,000.
That loophole has been closed now. They’ve got rid of that. So, what they’re doing now instead is they’re carrying forward those losses, so you’re able to carry those forward through and add it to the cost of holding when you do sell.
Lending implications and reduced borrowing capacity
There are a few issues that that’s created. The first one is the lending side; that’s less income.
So, when lenders work out your borrowing capacity with an investment there’s certain lenders that will allow you to add back the negative gearing to service more.
That will reduce. Obviously it’s going to go away for a lot of people and some lenders were very generous in that.
Some of those second tier lenders were very generous.
Corporate structures vs individual property ownership
So, their serviceability is probably going to be fine. And if you focus on just getting a property that’s near neutral or positively geared, then you just have to deal with the capital gains tax implications. The people who are above that one or two properties, they’re already using company or trust structures to purchase. So, serviceability isn’t really going to affect them.
And they’ve just going to have to change their structure.
The biggest people it’s going to affect is mum and dad investors.
Low or middle-income earners wanting to buy that one or two properties.
They’re the ones that are going to hurt the most from this.
It’s not the people that are owning the 10 properties. They’ve already bought them in corporate structures, like in trusts and companies.
Capital gains tax changes and the inflation model
The other big change is obviously the capital gains tax. So, currently, if you meet certain criteria, if you hold a property for more than 12 months, when you sell it, they take away essentially 50% of the purchase price and then you pay tax on the remaining 50%.
So, that’s the discount. They’re removing that discount and they’re moving towards an inflation model instead. You’ll pay a minimum of 30% tax, I believe, when you sell.
I did some rough numbers and on a $750,000 purchase over a 20-year holding period based on 6.5% growth average, it works out that you’re about $180,000 worse off.
Running property investment like a business
It becomes more important now that you run your property investing like a business. You keep your receipts. You really just go hard on it. And every single expense needs to be documented and then offset so that you can actually carry those losses forward, too.
A lot of people just look at yield, look at capital gains, and they look at how much growth they’ve got for the year, but when you’re analysing internal rate of return, you’re obviously assessing what money is worth that particular time as well, which is what you reference using CPI as well. What income are you generating during the year? What’s the dollar worth during that period of time? What growth have you got during those years? What’s your holding cost been throughout the whole time frame to determine what your overall return is.
A lot of people just go, “Oh, yeah, I’ve got an 80% return over 10 years.”
But they forget to ask: how much did it cost you to hold that property over those 10 years?
What people need to realise as well, in that scenario that I ran, you know, it depends how you want to look at it, but in that scenario, there was still a $1.2 million net profit at the end after taxes.
Tax-driven mindset shifts and new build risks
I think it’s a mindset shift for a lot of people as well. And I think the people that are extremely worried about tax and you get that in a huge portion. They say, “Oh, I’m not paying more tax.”
They’re going to lean towards new builds. So, they’re going to buy house and land packages. They’re going to buy and build, or they’re going to buy apartments off the plan because they’re so worried about tax that they’ll buy an underperforming property that has next to no capital growth, just to get a tax deduction, rather than taking a slightly lower tax benefit on an asset that actually grows in value. You know what I mean? Like, it’s a mindset shift.
Shifting strategies to positively geared properties
Never really made sense anyway. Of course, it’s great to get a tax benefit, but you’re spending 53 cents to save 47 cents. It was pretty stupid anyway.
You’re much better off having your property near neutral or positively geared, but it’s just very difficult to find those properties and still maintain growth.
So, now I think it’s just seeing opportunities for the mum-and-dad investors who don’t want to scale the portfolio, set up company structures, or trust structures. It’s finding the opportunities that are potentially going to be negative for a year or two, three years.
Self-managed super funds and housing supply issues
You look at purchasing more properties through a self-managed super fund, where those tax rules are completely different again. There’s always opportunity in these scenarios.
And I think it could be interesting to see what happens long term. I know that the heart was in the right place with this strategy, with these rules to make it easier for first home buyers.
My biggest concern is that given borrowing capacities for investors are going to be stripped out, they’re going to be going for those $600,000, $700,000 properties versus the $1.2 million property they would have bought a week ago. So, then it’s actually going to create more competition at the lower end of the market, which is what we’re trying to avoid.
Inflation and the historical precedent for tax rules
For the mum-and-dad investors, there’s 71% of investors who this is going to impact the biggest. Again, do they change up their strategy or do they just forget about the market generally?
They’re not going to forget about wanting to make money. Most of them are out there working hard. They’ve got a family they’re trying to pay for and they’re trying to set themselves up for retirement outside of their home that they already live in.