New Residential Developments and the 2027 Capital Gains Tax Reforms: What Property Investors Need to Know
The Federal Government's 2026 taxation reforms fundamentally alter the taxation treatment of residential investment properties acquired after the commencement of the new regime.
Although much of the public discussion has centred on the proposed changes to negative gearing and capital gains tax (CGT), the legislation also introduces significant concessions for eligible new residential developments. Broadly speaking, the reforms are intended to encourage investment in housing that increases Australia's residential housing supply by preserving more favourable taxation outcomes for qualifying new developments.
Accordingly, investors proposing to acquire residential property should carefully consider whether the property constitutes an eligible new residential development before entering into a contract.
The Distinction Between Established Dwellings and Eligible New Residential Developments
The new taxation regime draws a clear distinction between established residential dwellings and eligible new residential developments.
For the purposes of the reforms, an eligible new residential development is generally one that results in a genuine increase in Australia's housing stock. Examples include:
construction of a dwelling on previously vacant residential land;
construction of new apartments within a residential development;
redevelopment of land where a single dwelling is replaced by multiple dwellings; and
developments that otherwise produce a net increase in residential housing.
Conversely, the following will generally not constitute an eligible new residential development:
the acquisition of an established residential dwelling;
substantial renovations to an existing dwelling;
cosmetic refurbishments;
redevelopment involving the replacement of one dwelling with a single replacement dwelling; or
the acquisition of a dwelling that has previously been sold by the developer to an earlier purchaser.
Whether a property qualifies is a question of the legislation as applied to the particular development and should not be determined solely by whether the dwelling appears to be newly constructed.
Significance of the First Sale
A feature of the reforms that is frequently overlooked is that the relevant concessions are generally directed towards the first qualifying acquisition of an eligible new residential dwelling.
Accordingly, where a developer disposes of a qualifying new dwelling to its first purchaser, that purchaser may obtain the benefit of the relevant concessions, provided the statutory requirements are satisfied. However, a subsequent purchaser will ordinarily acquire an established dwelling notwithstanding that the property may remain relatively new in a practical sense.
Investors should therefore undertake appropriate due diligence before exchange of contracts to ascertain:
whether the property has previously been sold;
whether the property has previously been occupied;
whether the vendor is the developer or builder;
whether the development satisfies the legislative criteria for increasing Australia's housing supply; and
whether any applicable concessions remain available.
Capital Gains Tax
From 1 July 2027, the existing 50% capital gains tax (CGT) discount will generally be replaced, for individuals, trusts and partnerships, by a new regime based on indexation of the cost base for inflation, together with a minimum 30% tax rate on real capital gains.
The reforms are intended to operate prospectively. For existing investments, the current 50% CGT discount will continue to apply to gains accruing before 1 July 2027, with the new rules applying to gains accruing from that date.
The reforms provide a different treatment for qualifying new residential properties. Subject to the property satisfying the applicable eligibility requirements and the legislation in force at the time of disposal, an investor may be able to choose between:
the existing 50% CGT discount; or
cost base indexation together with the new minimum tax regime.
This choice may make investment in qualifying new residential developments comparatively more attractive under the new CGT framework. However, the most advantageous treatment will depend on factors including the investor's circumstances, the period of ownership, inflation and the capital growth of the property.
Investors should not assume that a particular development will qualify as a “new build” for these purposes. The detailed eligibility requirements remain subject to the applicable legislation, and appropriate taxation and financial advice should be obtained before acquiring or disposing of an investment property.
Negative Gearing
The reforms also distinguish between established residential investment properties and qualifying new residential developments in relation to the treatment of rental losses.
Investors acquiring qualifying new residential properties may continue to offset eligible rental losses against other assessable income. By contrast, rental losses from many established residential investment properties acquired after the reforms commence will generally be quarantined and carried forward for use in accordance with the applicable taxation rules.
The distinction may materially affect the after-tax cost of holding an investment property. Investors should therefore confirm the taxation treatment of a proposed acquisition, and obtain appropriate taxation and financial advice, before entering into a contract.
Due Diligence Prior to Exchange
Given the substantial differences in taxation treatment, prudent purchasers should undertake comprehensive legal and taxation due diligence before committing to acquire a residential investment property.
Matters warranting consideration include:
whether the development satisfies the statutory definition of an eligible new residential development;
whether the dwelling has previously been sold or occupied;
whether the acquisition is directly from the developer;
whether the purchaser's proposed ownership structure remains appropriate;
the interaction of the reforms with future estate and succession planning objectives;
the purchaser's anticipated holding period; and
the taxation consequences upon eventual disposal.
Obtaining appropriate advice before exchange of contracts will ordinarily provide considerably greater flexibility than attempting to restructure the transaction after acquisition.
Conclusion
The 2027 reforms represent a significant change to the taxation of residential property investment and may affect the relative attractiveness of established properties and new residential developments.
The information in this article is current as at the date of publication. While key aspects of the reforms have now been legislated, further details remain subject to consultation and additional legislation before the reforms commence. Taxation laws and government policy may also change over time.
Property investors should therefore not rely on the general information in this article when making an investment decision. Before purchasing, restructuring or disposing of an investment property, investors should obtain advice from their own accountant and tax advisers regarding the application of the taxation rules to their particular circumstances and, where appropriate, obtain legal and financial advice as part of their broader investment strategy.