Proposed Negative Gearing and CGT Reforms: Tranche 2

Capital Gains Tax and Negative Gearing Reforms – What does Tranche 2 mean?

Treasury has released the second tranche of draft legislation implementing the Government’s capital gains tax (CGT) and negative gearing reforms.

The first tranche established the broad framework for the reforms from 1 July 2027. The Tranche 2 legislation addresses some of the issues identified in the original legislation and expands on how the new rules will apply in more complex situations.

The measures remain in draft and are subject to consultation, with the consultation period closing on 21 August 2026.

A summary of some of the key changes is set out below.

Property Changes

New residential dwellings

A new definition of “new residential dwelling” has been introduced for the CGT rules.

Broadly, a new residential dwelling includes:

• new homes built on land without an existing dwelling;
• additional dwellings that increase the number of homes on the land (provided the dwellings are capable of being separately titled);
• non-residential buildings converted into residential dwellings; and
• dwellings that were “new” for the seller and are acquired within 24 months of the first certificate of occupancy.

The proposed 24-month acquisition period is particularly notable, as it provides a longer period than the 12-month period originally contemplated.

Qualifying new residential dwellings will generally be able to continue accessing negative gearing, and their owners can generally choose between the existing 50% CGT discount and the new indexation-based regime.

Importantly, the special CGT treatment is not simply a blanket exemption for any property described as “new”. The proposed rules contain detailed requirements concerning the dwelling’s history and whether it falls within the statutory definition.

Further exemptions from negative gearing restrictions

Tranche 2 also proposes that the negative gearing restrictions will not apply while a residential dwelling is used for certain types of housing, including:

• NDIS specialist disability accommodation;
• eligible community housing used to provide affordable housing;
• public housing provided through a government agency or local government body; and
• dwellings forming part of an active build-to-rent development.

These exemptions are directed at housing arrangements that provide broader social or housing policy benefits and will be subject to the detailed eligibility requirements in the draft legislation.

Property transfers on death or relationship breakdown

Tranche 2 proposes to preserve existing tax treatment for property ownership changes following death or relationship breakdown.

In certain circumstances, a surviving spouse, existing co-owner or person receiving property following a qualifying relationship breakdown may retain the previous tax treatment.

This will be particularly relevant to estate planning and relationship property settlements involving negatively geared investment properties.

Changes to CGT

Exemptions for deceased estates and certain testamentary trusts

The proposed changes would exempt certain trusts and estates from the 30% minimum tax on capital gains, including:

• testamentary trusts – trusts established under a person’s will;
• deceased estates – property of a deceased person while the estate is being administered; and
• special disability trusts – trusts established for the care and accommodation needs of a person with a severe disability.

The exemption is intended to apply to gains genuinely arising from the deceased estate. Integrity rules can deny the exemption where arrangements are entered into to obtain the benefit of the exemption, including arrangements involving property being acquired by a deceased person for the purpose of accessing the concession.

The draft also contains specific anti-avoidance provisions dealing with schemes involving property of deceased estates.

Apportionment between the old and new CGT rules

One of the more technically significant aspects of Tranche 2 is the proposed method for determining the portion of a capital gain that accrued before 1 July 2027 and the portion that accrued from 1 July 2027.

For assets held across the transition date, the gain will generally need to be split between the old CGT regime and the new indexation regime using a value determined as at 30 June 2027.

Taxpayers will generally have the option of relying on a market valuation at the transition date or, for real property and certain other assets without a readily ascertainable market value, using the proposed statutory apportioning method.

The alternative apportioning method

The proposed apportioning method is particularly noteworthy because it avoids the need for a formal valuation in some circumstances, but it is also considerably more complicated than a simple straight-line apportionment.

Broadly, the proposed method works backwards from the eventual capital proceeds and uses the asset’s growth rate over the relevant ownership period to estimate the asset’s value immediately before 1 July 2027. The resulting amount is then used to determine the portion of the gain attributable to the pre-1 July 2027 period.

The method involves a nine-step calculation, including determining the relevant growth rate, applying that growth rate over the relevant periods and working backwards to determine the estimated 30 June 2027 value.

This is particularly important because a simple division of the gain based on the number of days held before and after 1 July 2027 will not necessarily produce the same result.

For example, an asset held for ten years with half of its ownership period occurring before 1 July 2027 will not necessarily have 50% of its capital gain allocated to the old CGT rules. A compounding growth methodology can produce a materially different result, particularly where the asset has experienced significant growth.

For taxpayers with assets that are difficult to value including certain business assets, real property and other illiquid assets, the choice between obtaining a valuation and relying on the prescribed apportioning method could therefore have significant tax and compliance consequences.

Deferred gains

Another important issue addressed by Tranche 2 is the treatment of deferred capital gains.

A deferred gain is a capital gain that is calculated at an earlier point but not taxed until a later event, such as when the asset is sold.

The first tranche introduced a deemed sale and reacquisition mechanism for certain assets owned as at 1 July 2027. Tranche 2 contains further rules intended to ensure that a technical CGT event does not cause a deferred gain to be taxed prematurely where the underlying asset has not actually been realised.

In particular, the Tranche 2 legislation seeks to ensure that deferred capital gains are not inadvertently taxed in circumstances where the taxpayer does not actually dispose of the CGT asset in question. The draft therefore excludes certain capital gains from giving rise to a tax liability on the deferred capital gain.

Further, the draft legislation ensures that the deemed disposal and reacquisition is ignored for the purposes of determining eligibility for certain exemptions – most significantly, this mechanism ensures that the period for determining access to the 15-year exemption is not disrupted by the deemed disposal and reacquisition on 1 July 2027.

While the draft legislation does not yet address the remaining tax rollovers, the Explanatory Memorandum provides in this respect that:

Similar issues arise for roll-overs and similar types of concessions where a gain or loss is disregarded and the cost base of the asset or a replacement asset is modified. These include the relationship breakdown roll-over in Subdivision 126-A and the concession for transfer of the assets of a deceased estate to a beneficiary.

The intention of the Government is that CGT events for which the gain or loss is disregarded as a result of a roll-over or similar concession will not cause an individual to make a deferred gain or loss.

However, additional complexities arise for deferred gains and losses in the context of roll-overs and similar concessions, especially where the asset to which the deferred gain relates is transferred to another entity or replaced as a result of the roll-overs. These complexities have meant that the amendments to address this issue are not included in this tranche of legislation. Instead, these amendments are intended to progress in a future tranche of legislation.

What remains unresolved?

Despite the additional detail provided by Tranche 2, a number of important issues remain unresolved.

The exposure drafts specifically acknowledge that the following issues remain unresolved but will be addressed in further tranches of amendments:

• the CGT treatment of rollovers and similar concessions (including the concession for beneficiaries receiving assets from deceased estates);
• how the reforms apply to foreign, mixed and temporary residents;
• the interaction between the CGT reforms and value shifting rules;
• how the regime will apply to consolidated groups, listed investment companies, employee share schemes, demergers and options;
• the interaction between the deemed sale and reacquisition of CGT assets held before 1 July 2027 and the rules requiring the determination of cost base at a point before an asset is realised.

What should taxpayers do now?

The Tranche 2 measures are still draft and consultation is underway. Treasury’s current consultation period closes on 21 August 2026.

For taxpayers holding significant investment assets, particularly residential property, assets held through trusts or AMITs, or assets acquired as part of a restructure, it will be important to consider the proposed rules well before 1 July 2027.

In particular, taxpayers should ensure that acquisition dates, cost base records, ownership periods and residency information are properly documented, as these records may become increasingly important when determining the portion of a capital gain subject to the existing CGT rules versus the new CGT rules.

Kara Bentley
Senior Associate