From the Great Depression to the 2026 Federal Budget — the full story of negative gearing and capital gains tax
If you own an investment property, manage one, or advise clients who do, the 2026 Federal Budget has changed the landscape in ways not seen since 1999. But to understand where we are now, it helps to understand where we have been.
Here is the complete story — from 1936 to today.
1936: The beginning
Negative gearing was not invented by property spruikers or invented as a tax lurk. It was introduced by the conservative Lyons government during the Great Depression, when building new homes was considered a social good and getting private capital to fund that supply was the policy problem of the day.
The principle was simple: if the costs of owning a rental property exceed the rental income it earns, that loss can be offset against your other taxable income. It was a deliberate incentive, designed to attract private investors into housing when the government could not afford to build enough itself.
For almost fifty years, negative gearing remained untouched — and uncontroversial.
1985: Everything changes at once
The Hawke/Keating government introduced two significant reforms simultaneously in September 1985.
First, a comprehensive capital gains tax (CGT) applied to assets acquired from 20 September 1985 onward. Prior to this, most capital gains in Australia were entirely tax-free. The new CGT used an indexation method: only the real gain (after adjusting the cost base for inflation) was taxed. In an era of high inflation, this was a meaningful concession.
Second, negative gearing was quarantined. Rental losses could no longer be offset against wages or other income — they could only be offset against other investment income. This was the first time in nearly fifty years that the original 1936 policy had been restricted.
The quarantine lasted just two years.
1987: A quick reversal
By 1987, rents had risen sharply in Sydney and Perth. Housing construction had slowed. Landlords were exiting the market. Paul Keating — the same Treasurer who had quarantined negative gearing — reversed the policy in 1987, restoring full deductibility of rental losses against all income.
This episode became the template for every future debate: those who support negative gearing point to 1987 as proof that removing it causes rental shortages; those who oppose it argue the evidence was cherry-picked and the effect was geographically concentrated.
The 1987 reinstatement has held for nearly forty years.
1999: The 50% CGT discount arrives
The Howard/Costello government accepted the recommendations of the Ralph Review of Business Taxation and, from 21 September 1999, replaced CGT indexation with a flat 50% discount for individuals who held an asset for more than twelve months.
The logic was that simplification would encourage investment and improve capital mobility. On a pure mathematical comparison, the 50% discount and indexation produced similar outcomes at moderate inflation and moderate growth rates.
But critics immediately identified the flaw: indexation only shielded the inflationary portion of a gain from tax. The 50% discount applied to every dollar of gain, regardless of inflation. In a period of sustained strong property price growth — which is exactly what followed — this was an enormous concession.
The combination of full negative gearing and a 50% CGT discount created a powerful dual incentive for property investment: you could offset losses today and halve your tax bill on the eventual gain.
2016–2022: Reform debated, twice rejected
Under Bill Shorten’s leadership, Labor proposed limiting negative gearing to new builds only, and cutting the CGT discount from 50% to 25%. The policy was taken to both the 2016 and 2019 elections.
In 2019, the Coalition won what many commentators had described as an unlosable election for Labor. The NG/CGT policy was widely regarded as a significant factor in the defeat.
Anthony Albanese, who succeeded Shorten as Labor leader, quickly abandoned the policy. When Labor won the 2022 election, it did so after explicitly promising not to touch negative gearing or the CGT discount. The same commitment was given ahead of the 2025 election.
12 May 2026: The 2026–27 Federal Budget
Against this backdrop, the Albanese government’s 2026 Budget announcement represented a significant reversal of its stated position — and the most substantial reform to property tax settings in nearly thirty years.
The key changes, effective from 1 July 2027:
Negative gearing: Limited to new residential builds. Investors who purchase established properties after 7:30pm AEST on 12 May 2026 can no longer offset rental losses against wages or other income. Those losses can still be offset against rental income from other properties or capital gains on disposal, and any unused losses can be carried forward. Existing property holders and those under contract before Budget night are fully grandfathered.
CGT discount: The flat 50% discount is replaced with CPI-indexed cost base adjustments — effectively returning to a methodology similar to the 1985–1999 era. A minimum 30% tax on realised capital gains is also introduced. Investors in new residential builds can choose between the old 50% discount and the new indexation framework. Gains accrued before 1 July 2027 are protected under the existing rules.
The grandfathering provisions are generous. If you already hold an investment property, nothing changes for you until you sell. But for new purchasers of established properties from Budget night onward, the economics of property investment have fundamentally shifted.
What this means in practice
The dual incentive that has driven Australian property investment for nearly four decades — offset losses now, halve the tax on gains later — is being unwound for established property.
For new builds, both incentives remain. The policy intent is clear: the government wants to redirect investor demand toward construction rather than the turnover of existing stock. Whether this produces the intended increase in housing supply, or simply reduces investor participation across the board, will be debated for years.
What is not in dispute is the historical significance of the moment. We have now come full circle: an indexation-based CGT (as in 1985), a quarantine on negative gearing losses for established properties (echoing 1985–1987), and a clear government preference for channelling private investment toward new supply rather than existing stock.
The 1936 intent — use private capital to build more homes — has reasserted itself, ninety years later.
The timeline image accompanying this article was produced using data from Abelson & Chung (2004), the Australian Treasury, and the 2026–27 Federal Budget documents.
This article is general information only. It does not constitute financial or tax advice. Please consult a qualified adviser before making any investment decision.
