The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 received Royal Assent on 26 June 2026 and introduces significant changes affecting residential property investors and self-managed superannuation funds.
Two measures are particularly important for Gavel Law clients:
- The restriction of negative gearing deductions for established residential property; and
- The effective prohibition on SMSF’s using limited recourse borrowing arrangements (LRBA) to acquire residential property.
Although the Act received Royal Assent on 26 June 2026, the measures have different commencement and application dates. The negative gearing provisions commenced on 27 June 2026 but apply from the 2027–28 income year. The SMSF borrowing amendments commence on 10 August 2026.
- Negative gearing restricted to new residential dwellings
Under the new rules, an investor who owns an affected residential rental property will no longer be able to use a net rental loss to reduce salary, business income, interest, dividends or other unrelated assessable income.
Where the deductible expenses associated with affected residential dwellings exceed the assessable income earned from those dwellings, the excess will:
- not be deductible against the investor’s other income for that year;
- become a quarantined amount; and
- generally be carried forward for possible use in a later income year.
Expenses captured by the rule can include interest, insurance, strata levies, repairs, depreciation and other costs ordinarily deductible in connection with earning rental income.
The legislation therefore does not abolish deductions associated with residential property altogether. Instead, it prevents an affected net residential property loss from being used immediately against unrelated income.
Existing investments are grandfathered
The restriction does not apply to an ownership interest in a residential dwelling acquired before 7.30 pm Australian Capital Territory time on 12 May 2026.
For a property acquired under a contract, the relevant time is generally when the contract was entered into, rather than the later settlement date. Accordingly, residential properties contracted for before the Budget announcement time should generally retain access to the existing negative gearing treatment.
This grandfathering is attached to the ownership interest held by the particular taxpayer. It should not be assumed that grandfathered treatment will automatically transfer to a purchaser, beneficiary, related entity or replacement ownership structure.
A transfer between spouses, trusts, companies or other associated entities may therefore result in the recipient acquiring a new ownership interest after the grandfathering deadline. Clients contemplating restructures, family-law transfers or succession arrangements should obtain advice before changing ownership.
New residential dwellings remain eligible
The negative gearing restriction also does not apply to a dwelling that qualifies as a new residential dwelling in relation to the investor.
However, the Act does not provide a complete self-contained definition of every property that will qualify. Instead, the Minister is required to determine the relevant requirements by legislative instrument. Those requirements may address:
- whether the property was constructed on vacant land;
- whether it resulted from substantial renovations;
- whether it replaced a demolished dwelling;
- whether the investor was the builder or a subsequent purchaser; and
- whether the dwelling has a separate legal or equitable title.
Before making those rules, the Minister must be satisfied that they will assist in genuinely adding to Australia’s housing supply.
Purchasers should therefore not rely merely on a developer or selling agent describing a property as “new”. The property must satisfy the statutory and regulatory requirements applying to the particular investor.
Other exclusions
The quarantining rule does not apply to complying superannuation entities or widely held unit trusts. The legislation also permits the Minister to exclude prescribed residential housing activities where doing so would support social housing, affordable housing or improved housing outcomes for disadvantaged groups.
The exemption for complying superannuation entities does not, however, mean that SMSF’s remain free to borrow to acquire residential property. The separate LRBA restrictions discussed below will substantially limit that strategy.
- How quarantined residential property losses interact with CGT
A quarantined residential property loss is not simply added to the property’s CGT cost base.
The Act expressly provides that expenditure denied as a deduction under the new negative gearing rule does not form part of the property’s cost base or reduced cost base.
Instead, a quarantined amount may be applied through the statutory CGT calculation against certain residential capital gains. The legislation requires quarantined amounts to be applied against deferred residential capital gains and residential capital gains before the CGT discount is calculated.
In practical terms, an investor’s quarantined losses may potentially be used:
- against positive net residential rental income in a later year; or
- against relevant residential capital gains under the new CGT calculation rules.
Any balance not used may generally continue to be carried forward, subject to the detailed statutory provisions.
This treatment is materially different from allowing the annual rental loss to reduce salary or other investment income. It delays the tax benefit and may materially affect the investor’s annual cash flow and after-tax holding cost.
The Act also introduces broader CGT reforms applying principally from 1 July 2027, including new categorisation rules for residential and non-residential gains, indexation arrangements and, for some Australian-resident individuals, a mechanism intended to impose an effective minimum tax rate of 30 per cent on certain capital gains. The precise CGT consequences will depend upon the taxpayer, the asset, the acquisition date, the period of residential use and any applicable exclusion for new or affordable housing.
- SMSF borrowing restricted to business real property
The Act also amends the limited recourse borrowing arrangement rules in section 67A of the Superannuation Industry (Supervision) Act 1993.
From 10 August 2026, where an SMSF uses an LRBA to acquire real property, the property must be business real property within the meaning of the superannuation legislation.
As a result, an SMSF will generally no longer be permitted to enter into a new LRBA to acquire an ordinary residential investment property.
Business real property is broadly real property used wholly and exclusively in one or more businesses, subject to the detailed statutory rules. It commonly includes qualifying commercial premises, warehouses, offices, factories, retail premises and certain farming land.
The classification depends on the property’s actual use and the applicable legal tests. A property does not become business real property merely because it is held in an SMSF, leased under a commercial-style agreement or acquired as part of an investment strategy.
Mixed-use properties, residential premises used for short-term accommodation and properties involving related-party occupation require particular care.
Existing SMSF arrangements are protected
The amendment contains transitional protection for certain arrangements entered into before 10 August 2026.
The existing LRBA rules may continue to apply to:
- a borrowing arrangement entered into before commencement;
- the maintenance or refinancing of a borrowing entered into before commencement; and
- a borrowing connected with an acquisition made under an arrangement entered into before commencement, even where settlement occurs later.
This means that the relevant contractual and borrowing arrangements—not merely an intention, loan approval or general investment strategy—must be carefully examined to determine whether the transitional protection is available.
An existing residential property LRBA is therefore not automatically invalidated on 10 August 2026. Genuine refinancing of a protected pre-commencement borrowing may also remain permissible. However, a refinancing that materially changes the arrangement, increases borrowing for a new acquisition or introduces a different asset may fall outside the transitional protection.
- What the reforms mean for property investors
For individuals, family groups and private investors, the changes significantly alter the economics of acquiring established residential investment property after the grandfathering deadline.
An investor who acquires an affected established property may still claim deductions up to the amount of residential property income available under the legislation. However, any net loss will not provide an immediate offset against salary or other unrelated income.
This may result in:
- higher annual income tax;
- increased after-tax holding costs;
- greater dependence on rental yield and cash reserves;
- reduced attractiveness of highly geared established properties;
- greater demand for qualifying new developments; and
- increased importance of modelling the timing and use of quarantined losses.
The changes may be particularly significant for professionals, business owners and other higher-income taxpayers who previously factored the immediate tax value of rental losses into their acquisition decisions.
Clients should compare investments using their after-tax cash requirements, rather than relying on pre-reform negative gearing assumptions.
- What the reforms mean for SMSF trustees
SMSF trustees contemplating a residential property acquisition with borrowed money face a more immediate deadline.
After 10 August 2026, an SMSF will generally be unable to establish a new LRBA for an ordinary residential investment property. Trustees may still acquire residential property using existing fund cash, provided the acquisition complies with the fund’s investment strategy, the sole-purpose test, related-party rules and all other superannuation requirements.
However, the inability to borrow may make residential acquisitions impractical for many funds or create excessive concentration and liquidity risk.
SMSF trustees should also be cautious about attempting to characterise residential property as business real property. Incorrect classification could result in a contravention of the borrowing prohibition and potentially expose the fund and its trustees to significant compliance consequences.
- Matters Gavel Law clients should review
Clients who own, are acquiring or are restructuring residential property should consider:
- whether the ownership interest was acquired before the 12 May 2026 grandfathering deadline;
- the date on which a binding acquisition contract was entered into;
- whether a proposed property will qualify as a new residential dwelling;
- whether a transfer or restructure could cause grandfathered treatment to be lost;
- how quarantined losses will affect annual cash flow and future CGT;
- whether ownership through an individual, trust, company or superannuation fund remains appropriate;
- whether an SMSF acquisition and borrowing arrangement was sufficiently established before 10 August 2026;
- whether a proposed SMSF property genuinely qualifies as business real property; and
- whether refinancing an existing LRBA remains within the transitional protection.
Early legal and tax advice is increasingly important
These reforms affect both the tax treatment and legal structuring of residential property investments.
The distinction between an existing and newly acquired ownership interest, the definition of a new residential dwelling, the treatment of carried-forward losses and the transitional rules for SMSF borrowings can each materially change the result.
Gavel Law can assist clients with:
- property acquisition and contract reviews;
- ownership and investment-structure advice;
- trust and entity restructures;
- SMSF acquisition and LRBA documentation;
- business real property analysis;
- refinancing and transitional-rule reviews; and
- coordination with clients’ accountants, financial advisers and SMSF auditors.
Should you wish to discuss these matters, and how they may impact you, please do not hesitate to contact us.
Clients considering acquiring, transferring or refinancing residential property should obtain advice before signing binding documents.
This article provides general information only and does not constitute legal, taxation, financial or superannuation advice. The application of the legislation depends on each client’s particular circumstances. Specialist advice should be obtained before acting.
