You are looking at an established investment property, or you already own one. A colleague mentions the May budget and you nod along. But when someone asks you exactly what changed, and whether it affects your SMSF, the picture gets murky fast. Here is a plain account of what the rules now say.
What changed on budget night and why the cut-off matters
On 12 May 2026, as part of the 2026-27 Federal Budget, the Government announced it would reform negative gearing and capital gains tax arrangements. These measures are now law.
The hinge point is 7:30 pm AEST on 12 May 2026. Properties held at that moment, including those already under contract awaiting settlement, can continue to be negatively geared until they are sold. The contract date, not the settlement date, is what determines which side of the line you fall on.
From 1 July 2027, losses from established residential properties acquired from 7:30 pm AEST on 12 May 2026 will only be deductible against rental income or the capital gains from residential properties. In plain terms: if that property runs at a loss, you can no longer use that loss to reduce your salary or business income in the same year.
Instead, those losses will be quarantined and carried forward to offset future residential property income. The total tax benefit over the life of the investment may not disappear entirely, but the timing changes significantly.
Excess rental losses may be carried forward to future years. So the deduction does not evaporate; it waits until you have rental income from another property, or until you sell and realise a capital gain on a residential asset.
New builds are treated differently
If you purchase a newly constructed home, defined as a new dwelling that has not previously been sold as a residential property, you retain access to full negative gearing (losses offsetting all income, including salary).
The limitation applies only to residential property. Commercial property and other asset classes, such as shares, will remain subject to existing arrangements. Investments that support government housing programs, including affordable housing, will also be exempt.
This distinction between new and established stock is the core design of the policy. The change is designed to reduce investor demand for existing housing stock while preserving tax support for investment in new supply.
The CGT change running alongside
The 2026-27 Budget removes the current 50% CGT discount, which will be replaced with cost base indexation and a 30% minimum tax on net capital gains from 1 July 2027. Under the revised framework, cost base indexation will apply to CGT assets held for more than 12 months.
The CGT reforms will only apply to gains that accrue after 1 July 2027, not to gains built up before that date on assets you already hold.
Investors who acquire new homes will be able to choose either the existing 50% CGT discount or the new indexation and minimum tax treatment when they sell. That choice is not available to buyers of established property purchased after budget night.
The changes will apply broadly across all CGT assets, including pre-1985 assets, where those assets are held by individuals, trusts and partnerships. This is a detail worth raising with a tax adviser, particularly for anyone holding property in a discretionary trust or family trust structure.
The separate SMSF story: residential LRBAs are also gone
Running at the same time is a structural change to SMSF borrowing. The ban on new residential LRBAs commenced on 10 August 2026, 45 days after the legislation received Royal Assent on 26 June 2026. From that date, no new SMSF can enter a Limited Recourse Borrowing Arrangement for the purchase of residential property.
Commercial property LRBAs are completely unaffected by the August 2026 changes. SMSFs can still borrow to purchase business real property, which can be leased to related parties such as the fund members' own business at market rates.
For trustees who still want residential property exposure inside super with some form of gearing, alternatives include a related non-geared unit trust or holding the property as tenants-in-common with the fund, though the tenants-in-common structure prevents the fund from acquiring any further share of the property later. A unit trust structure is meaningfully different from an LRBA; the borrowing sits in the trust, not in the fund itself, and the fund contributes equity as a unit holder. This is a structure an SMSF specialist accountant and a licensed broker need to assess together for each fund's specific situation.
Residential property can still be purchased using cash reserves of the SMSF only, so for trustees with sufficient balances to buy without borrowings, the change in law has no real effect.
How this plays out in practice: two scenarios
Scenario A: personal name, established property Say you sign a contract on an established investment property today. The property costs $32,000 a year to hold (interest, rates, insurance, property management) and brings in $24,000 in rent, leaving an $8,000 shortfall. Under the new rules, from 1 July 2027, that $8,000 cannot reduce your salary tax. It is quarantined and carried forward. If you buy a second investment property next year that runs positively, or when you eventually sell and realise a residential capital gain, those banked losses become available. The cash flow gap in the holding years is real, and the after-tax economics need to be modelled accordingly with a tax adviser.
Scenario B: SMSF, wanting residential with gearing Your fund has $480,000 in cash. A new residential LRBA is no longer an option from 10 August 2026 onward. A straight cash purchase inside the fund remains available, with rental income taxed at 15% in accumulation phase (or 0% in pension phase, up to the Transfer Balance Cap). If a geared structure is the goal, the unit trust pathway exists but involves more structural complexity and its own compliance requirements under the Superannuation Industry (Supervision) Act. Trustees cannot occupy or rent the residential property from the fund. The numbers and structure need a licensed SMSF specialist accountant to sign off before anything is committed.
Practical next steps
These are not simple rule tweaks. The interaction between quarantined losses, CGT timing, holding costs, and SMSF structure means the numbers for each situation differ considerably. Three things worth doing now:
- Map your current position against the cut-off dates. Are your existing properties grandfathered? Is any planned purchase established or new build? Is your SMSF a cash buyer or did it miss the LRBA window? A clear factual inventory comes before any other analysis.
- Speak with a tax adviser or SMSF specialist accountant about your specific numbers. The quarantined-loss rules, CGT cost base indexation, and the 30% minimum tax rate interact differently depending on your marginal rate, your holding period, and whether the property sits inside or outside super. No two situations are the same.
- Review your finance structure with a licensed broker. If you are buying a new build in your personal name, the full negative gearing treatment still applies and that changes the borrowing conversation. If you are considering a unit trust structure inside an SMSF, a broker experienced with SMSF-related lending needs to be part of that conversation from the start.
If you want to understand how new-build investment properties or SMSF property structures fit within the current rules, our services page sets out how EWC coordinates property sourcing and finance referrals. You can also book a call to work through your situation before making any commitments.
General information only, not personal financial advice. Speak with a licensed adviser before acting.