Schedule 1 to the Bill makes a range of consequential amendments to the ITAA 1997 and related legislation to address the consequences of the primary amendments relating to cost base indexation and the CGT discount, including adding definitions to the Dictionary and incorporating and updating guide material.[Schedule 1, items 1 to 3, 7, 33 to 35, 47, 51, 64 to 79, 80 and 81, sections 100-25(1), 100-40(2), 100-50), 102-30 (table item 2AA), subsection 104-71(4) and 115-125(2) and (3), paragraph 115-125(4)(a), paragraphs 115-215(3)(a),(b) and (c), 115-215(4)(b), 115-220(2)(b), 115-222(4)(a), 115-225(1)(a), subparagraph 115-225(3)(a)(i), subsection 115-228(1), sections 152-1, 152-200, 152-205, and subsection 995-1(1) of the ITAA 1997 and subsections 12‑405(2) and 12A‑110(5) in Schedule 1 to the TAA 1953]
In addition, various consequential amendments are made to reflect the addition of Division 119 and the introduction of the minimum tax on capital gains. These amendments are to guidance provisions as well as operative provisions including those which explain how to calculate tax liability and define terms used within the Division. [Schedule 1, items 54 to 56, and 58 to 60, section 4-25 and subsection 995‑1(1) of the ITAA 1997]
Commencement, application, and transitional provisions
Commencement
Schedule 1 to the Bill (excluding the provisions relating to the minimum tax) and the Imposition Bill commence on the first 1 January, 1 April, 1 July or 1 April to occur after the day the Bill receives Royal Assent.[items 2 and 4 of the commencement table in clause 2 of the Bill and item 1 of the commencement table in clause 2 of the Imposition Bill]
The provisions in Schedule 1 to the Bill relating to the minimum tax commence immediately after the commencement of the Imposition Bill. This ensures that these provisions do not commence if the tax to which they relate is not imposed. [item 3 of the commencement table in clause 2 of the Bill]
Application
Division 119 (minimum rate of tax on capital gains) applies to capital gains from CGT events happening on or after 1 July 2027.[Schedule 1, item 60, Division 119 of the ITTP Act]
The amendments made by Part 1 of this Schedule to section 115-125 (relates to affordable housing) apply in relation to CGT events happening on or after 1 July 2027. [Schedule 1, item 83]
Section 115-235 (relates to giving information to beneficiaries), as inserted by Part 1 of this Schedule, applies in relation to the income year that includes 1 July 2027 and later income years. [Schedule 1, subitem 84(2)]
All other amendments in this Schedule apply in relation to assessments for the income year that includes 1 July 2027 and for later income years.[Schedule 1, item 82 and subitems 84(1) and (3)]
Transitional provisions
Schedule 1 to the Bill provides for a number of transitional arrangements to ensure taxpayers have time to understand and make arrangements to comply with the new regime. These arrangements are discussed in detail under the relevant sections above. In summary, for CGT assets other than new residential dwellings or affordable housing:
assets owned and sold prior to 1 July 2027 are unaffected;
assets owned prior to 1 July 2027 and sold after 1 July 2027 will be treated under current arrangements on gains made prior to this date, and under the new arrangements for gains made after this date (with no impact until realised); and
assets purchased after 1 July 2027 will be treated under the new arrangements.
Future amendments
These amendments are the first tranche of changes to establish the new CGT regime. Legislating significant reforms in tranches is a standard approach, and is appropriate to ensure the core policy features that apply broadly to most taxpayers are in place, providing certainty to taxpayers and market participants, while enabling further consideration and consultation on subsequent tranches of legislation dealing with more complex or specific policy issues.
A range of areas are under consideration to determine if future amendments may be appropriate, including to manage complex interactions between CGT and other rules. Given the complexity and specificity of these amendments, they will benefit from time for closer engagement with experts and affected stakeholders.
Limit negative gearing for residential property to new builds
Table of Contents:
Outline of chapter 67
Context of amendments 68
Comparison of key features of new law and current law 68
Detailed explanation of new law 69
Meaning of residential dwelling 71
Modifications to the general rule for loss quarantining 81
Commencement, application, and transitional provisions 87
Outline of chapter
Schedule 2 to the Bill provides that expenses relating to residential dwellings used or held as residential accommodation can only be deducted against:
assessable income from residential dwellings used or held as residential accommodation subject to quarantining;
net income from such properties not subject to quarantining; or
revenue or capital gains on residential dwellings.
Schedule 2 to the Bill also provides that the requirement to quarantine net rental losses from residential dwellings used or held as residential accommodation does not apply to new residential dwellings, residential dwellings for an activity or purpose determined by the Minister by legislative instrument, residential dwellings for a business or enterprise of a kind determined by the Minister, or residential dwellings acquired before 7.30pm (AEST) on 12 May 2026. The requirement to quarantine amounts also does not apply to an amount incurred in providing a fringe benefit or to widely held trusts, complying superannuation entities, or an entity in a class of entities determined by the Minister by legislative instrument.
Schedule 2 to the Bill also ensures that any quarantined amount that an entity has accrued that could be carried forward is extinguished if the entity is declared bankrupt.
Context of amendments
Prior to the amendments, where deductions in respect of residential property investments (such as interest payable on a loan to purchase the property) exceeded the rental income received by the owner of the property, the net rental loss could be deducted against other assessable income, such as salary and wages and other business and investment income. This arrangement is commonly referred to as negative gearing.
Negative gearing, in combination with the 50 per cent capital gains discount, contributes to low or sometimes negative effective tax rates on property investments. These arrangements can create strong incentives for investors to take on highly leveraged housing investments, especially in established (as opposed to new) dwellings. This contributes to higher house prices - as investors bid up the price on a scarce resource.
Further, the tax benefits from negative gearing are concentrated among high income earners. Higher income individuals are more likely to invest in property, report larger rental losses, and have more negatively geared property interests.
These amendments will improve the fairness of the tax system and help address housing affordability pressures facing first homebuyers, allowing more younger Australians and future generations to own their own home. These amendments are expected to reduce investor demand for existing properties, while eligible new builds will be exempt from the changes, ensuring the benefits of negative gearing are directed to investment that support growth in Australia’s housing stock.
Comparison of key features of new law and current law
Comparison of new law and current law
New law
Current law
From 1 July 2027, net rental losses from dwellings used or held as residential accommodation acquired on or after 7.30pm (AEST) on 12 May 2026 are quarantined to only be available as a deduction against net assessable income from non-quarantined residential dwellings used or held as residential accommodation or to reduce revenue or capital gains on residential dwellings.
These quarantined amounts are not required to be deducted against net exempt income before being carried forward to the following income year.
Net rental losses from residential properties owned by an entity that are rented out are available as a deduction against all assessable income of the entity.
If an entity has rental deductions that exceed their assessable income then, after deducting the net loss against their net exempt income, they can carry forward the remaining net loss to the following income year and deduct it against assessable income in that later income year.
Detailed explanation of new law
‘Negative gearing’ occurs when an entity’s (e.g. an individual, trust, or company) deductions relating to an income-producing investment, such as residential housing, exceed the assessable income the entity earns from the investment in an income year. When this occurs, an entity’s net losses can be applied against their other assessable income, such as salary and wages, business income, or other investment income. This results in a reduction in the entity’s taxable income for the income year.
The general rule for loss quarantining
Schedule 2 to the Bill amends the ITAA 1997 to limit the availability of negative gearing for investments in residential dwellings used or held as residential accommodation. This is established by the general rule in Schedule 2, which sets out how to apply deductions resulting from using or holding residential dwellings as residential accommodation (i.e. residential investment properties).
First, the general rule requires that to the extent that an entity’s deductions relating to quarantined residential dwellings used or held as residential accommodation in an income year exceed their assessable income from residential dwellings used or held as residential accommodation for that year, those amounts are not deductible for that income year.
To be an amount that is deductible against net assessable income from non‑quarantined residential dwellings (ie residential dwellings acquired before 7.30pm (AEST) on 12 May 2026, new residential dwellings or other residential dwellings excluded by a determination made by the Minister), or revenue or capital gains from using or holding residential dwellings as residential accommodation, the amounts must relate to the use or holding of residential dwellings as residential accommodation. Relating to requires that there is some connection or association between the subject matters - i.e. the amount sought to be deducted and the residential dwellings used or held as residential accommodation. While this connection or association can be direct or indirect or substantial or real, it must be relevant. A remote or tenuous connection will not be sufficient to establish that the amounts relate to residential dwellings used or held as residential accommodation.
[Schedule 2 to the Bill, item 1, subsection 26-155(1) of the ITAA 1997]
Second, the general rule provides that those amounts that are not deductible against assessable income from using or holding residential dwellings as residential accommodation for that income year, so far as they exceed assessable income from such dwellings, can be applied as a deduction against net assessable income from non-quarantined dwellings, and revenue and capital gains on residential dwellings in accordance with the method statement in section 102-5 of the ITAA 1997. The amounts referred to are described as ‘a quarantined amount’.
Chapter 1 of this Explanatory Memorandum explains the operation of the method statement in section 102-5 of the ITAA 1997.
[Schedule 2 to the Bill, item 1, paragraph 26-155(1)(b) of the ITAA 1997]
The cost base and reduced cost base of a CGT asset, including a residential dwelling, is used in calculating the amount of a capital gain or loss from a CGT event that happens to that CGT asset. Expenditure that can be deducted is usually excluded from the CGT asset’s cost base and reduced cost base. Consistent with this principle, amounts that are quarantined, including amounts applied to reduce residential capital gains, are not included in a residential dwelling’s cost base or reduced cost base. This ensures that the amounts are not recognised twice.
[Schedule 2 to the Bill, items 2 and 3, subsections 110-38(8A) and 110-55(9JA) of the ITAA 1997]
Third, the general rule provides that to the extent any part of a quarantined amount remains after applying it in accordance with the method statement in section 102-5 of the ITAA 1997, that remaining amount can be carried forward and applied as a deduction against assessable income from using or holding residential dwellings as residential accommodation in the next income year or taken into consideration in determining any capital gain or loss from a CGT event happening to residential dwellings in a future income year.
How quarantined amounts are carried forward is discussed at paragraphs 2.67 to 2.77 below.
[Schedule 2 to the Bill, item 1, paragraph 26-155(1)(c) of the ITAA 1997]
The general rule for loss quarantining does not apply to other types of investments - for example, shares or commercial property, as it is only intended to apply to established residential dwellings. An entity can continue to deduct all losses and outgoings from owning other types of investments in an income year against assessable income from other sources in that income year - for example, against their salary and wages. If their deductions from holding non-residential investments exceed all other assessable income and net exempt income, then they can carry forward any losses not applied in that income year under the existing income tax loss rules to apply against any assessable income in subsequent income years.
Meaning of residential dwelling
For the general rule for loss quarantining to apply, the entity’s investment must be in a residential dwelling used or held as residential accommodation.
[Schedule 2 to the Bill, item 1, subsection 26-155(1) of the ITAA 1997]
A ‘residential dwelling’ is a dwelling, within the meaning of section 118-115 of the ITAA 1997, other than any of the following:
a caravan, mobile tiny home, or other mobile home;
a hotel, motel, inn, hostel, or boarding house;
dwellings providing accommodation to students in connection with a *school or an *education institution that is not a school;
a boat or other marine vessel; or
a dwelling in a class of dwellings determined by the Minister by legislative instrument.
[Schedule 2 to the Bill, items 1 and 4, subsections 26-160(1) and 995‑1(1) definition of residential dwelling of the ITAA 1997]
Further, the meaning of residential dwelling includes any adjacent land to the dwelling or structures, such as a garage, storeroom or other structure associated with the dwelling, for use by the occupant of the residential dwelling. This extension of the meaning of residential dwelling is intended to ensure that all of the land and structures that are on an entity’s property are included by the term residential dwelling.
[Schedule 2 to the Bill, item 1, subsection 26-160(2) of the ITAA 1997]
This means that a residential dwelling is a unit of accommodation that is a building or is contained in a building; and consists wholly or mainly of residential accommodation; and any land immediately under the unit of accommodation, as well as any adjacent land and structures to the extent the land was used primarily in association with the dwelling as residential accommodation. A residential dwelling includes detached and semi-detached houses, units, apartments and townhouses.
The requirement that a residential dwelling is a dwelling limits the general rule to the types of buildings that are able to be occupied as residential accommodation. However, there is no restriction based on the length of time the residential dwelling is able to be continuously occupied for. For example some dwellings such as apartments may be rented by their owner for short stay accommodation, despite being suitable for long term rental. However, the term residential dwelling specifically excludes certain types of short-term accommodation from being able to be a residential dwelling - such as a hotel, motel, inn, hostel or boarding house.
An entity can use or hold a residential dwelling as their main residence at the same time as using or holding the residential dwelling as residential accommodation to gain rental income. In this situation, it is not possible for an entity to claim deductions in relation to the portion of the residential dwelling used as their main residence. The entity must therefore apportion their deductions so they are limited to the part of the dwelling that is used or held as residential accommodation (i.e. the portion that is rented out and generating income).
Quarantining of rental losses from a residential dwelling
Nikolai purchases a split-level house with dual street frontage on 1 August 2027 with a $700,000 mortgage. The house is his main residence. However, after he moves in, he decides to rent out the downstairs rooms and backyard, including a gardening shed, to a tenant to help cover his mortgage repayments.