2026 Negative Gearing & CGT Changes: Melbourne Developers

What the 2026 Federal Budget Tax Changes May Mean for Melbourne Small Developers

Important disclaimer: This article provides general information only about proposed tax policy changes and is not tax, financial, or investment advice. The legislation implementing these reforms has not yet passed Parliament and the final detail may differ from the Budget announcement. You must engage a qualified tax adviser and financial adviser for guidance specific to your circumstances before making any decisions.

The 2026 Federal Budget announced two significant proposed property tax reforms on Budget night — 12 May 2026. If legislated as announced, changes to negative gearing and the capital gains tax (CGT) discount would reshape the economics of residential property investment from 1 July 2027. For small developers operating across Melbourne’s eastern suburbs, the proposed reforms carry both risk and potential opportunity, depending on how your pipeline is structured.

The headline proposed changes are these: negative gearing on established residential properties acquired after 7:30pm AEST on 12 May 2026 would be quarantined from 1 July 2027, meaning rental losses could no longer be offset against salary or other personal income. Separately, the 50% CGT discount for individuals, trusts and partnerships would be replaced with cost base indexation and a 30% minimum tax on real capital gains — also from 1 July 2027. New builds are proposed to be carved out of the negative gearing restriction and retain preferential CGT treatment, a distinction that has direct implications for developers who deliver new dwellings to market.

This article outlines what was announced, who may be affected, the key proposed dates, and the practical questions Melbourne small developers may wish to raise with their advisers as they assess their current and future projects. It is general information only — not tax or financial advice — and you should engage a qualified tax adviser for guidance specific to your circumstances. For an overview of how planning decisions interact with development economics, see our guide to property development planning considerations.

What Was Announced: The Two Core Proposed Reforms

Negative Gearing: Proposed Quarantining of Losses on Established Property

Under the existing rules, an investor who purchases any residential property and generates a net rental loss may offset that loss against wage income, business income, or any other assessable income in the same financial year. Under the proposed new regime from 1 July 2027, that broad offset would no longer be available for established residential properties acquired after 7:30pm AEST on 12 May 2026.

Under the proposed new regime, losses from affected established properties would be quarantined. They may only be deducted against rental income from residential property or against capital gains from residential property. Excess losses could be carried forward indefinitely, so they would not be lost — but the immediate tax refund against a salary that made negatively geared property attractive to many investors would no longer apply to newly acquired established dwellings.

Critically, new builds are proposed to be fully exempt from this restriction. Negative gearing on newly constructed dwellings — including properties built on vacant land or where an existing dwelling has been demolished and replaced with multiple new dwellings — would continue under the existing rules. According to the Federal Government’s Budget fact sheet, “new builds” for this purpose means homes that add to housing supply; knock-down-rebuild single dwellings and substantial renovations of existing homes are understood not to qualify.

CGT Discount: Proposed Indexation to Replace the 50% Flat Discount

From 1 July 2027, the 50% CGT discount available to individuals, trusts and partnerships holding assets for more than 12 months is proposed to be replaced with a two-part regime: cost base indexation (adjusting the cost base for CPI inflation) and a 30% minimum effective tax rate on the real, post-inflation gain. Based on the Budget announcement, the proposed changes would apply to all CGT assets held by individuals, trusts and partnerships — not only residential property — though the negative gearing restriction is limited to residential property. Developers should confirm the scope with their tax adviser as legislation is finalised.

The proposed transitional treatment is important for developers with assets already on the books. For properties held before 1 July 2027 but sold after that date, the 50% discount would continue to apply to gains accrued up to 1 July 2027, with the new indexation and minimum tax applying only to gains accruing from that date forward. The asset’s market value at 1 July 2027 would effectively become the new cost base for the post-reform portion of any gain.

New builds are proposed to retain a choice: on disposal, investors in eligible new dwellings may elect between the existing 50% CGT discount or the new indexation method — whichever produces the better outcome.

Who May Be Affected: A Developer’s Lens

The proposed reforms may affect different participants in the Melbourne development market in different ways. For small developers in the eastern suburbs — those delivering townhouse projects, dual occupancies, and small apartment buildings across areas such as the City of Whitehorse, City of Boroondara, City of Manningham, and City of Monash — the picture is nuanced.

• Developers selling new dwellings to investors: The proposed new build exemption may be a structural advantage. Investors purchasing completed townhouses or apartments would retain full negative gearing and preferential CGT treatment under the proposal. This may influence demand for new stock relative to established property — though market outcomes will depend on many factors beyond tax policy.
• Developers holding established investment properties: If you acquired established residential properties before 7:30pm AEST on 12 May 2026, your existing negative gearing arrangements are proposed to be grandfathered for as long as you hold those assets. Your tax adviser can confirm the implications for your specific holdings.
• Developers who acquired established properties after Budget night: Rental losses from those properties may be quarantined from 1 July 2027 if the legislation passes as announced. If you are holding an established property as a development site and generating rental income in the interim, the potential tax treatment of any net loss is a matter to discuss with your tax adviser.
• Developers planning to sell completed projects post-2027: The proposed CGT changes may apply to gains accruing after 1 July 2027. The proposed 30% minimum tax rate means that high-income developers who previously benefited from the 50% discount may face a higher floor. The indexation component may partially offset this for projects held over longer periods in inflationary environments. Your accountant can model the potential outcomes for your specific projects.
• Trusts and partnerships: The proposed CGT changes are understood to apply to trusts and partnerships, not only individuals. Developers operating through discretionary trusts may wish to discuss the potential implications with their tax adviser.

Key Proposed Dates and Timeline

Understanding the proposed sequencing of these reforms is important for project planning. The following timeline summarises the critical milestones based on the Budget announcement and available commentary as at June 2026. Note that legislation has not yet passed Parliament, and the detail of the measures may be subject to change.

• 7:30pm AEST, 12 May 2026: Announcement date. This is the proposed contract date cut-off for negative gearing grandfathering. Properties contracted before this time are proposed to retain existing negative gearing treatment indefinitely.
• Now to 30 June 2027: A proposed transitional window. Established properties acquired after Budget night may still be negatively geared against all income until 30 June 2027 — the proposed quarantining rules would not commence until 1 July 2027.
• 1 July 2027: Proposed commencement date for both reforms. Negative gearing quarantining would apply to affected established properties. The 50% CGT discount would be replaced with indexation and the 30% minimum tax for gains accruing from this date.
• Post-1 July 2027 disposals of pre-existing assets: The 50% discount is proposed to apply to gains accrued up to 1 July 2027; the new regime would apply to gains accruing after that date.

Market outcomes remain uncertain and will depend on many factors beyond tax policy alone. Developers should discuss the implications for their specific projects with their financial adviser. For a broader overview of how planning and project structure interact with development economics, see our guide to property development planning considerations.

The Proposed New Build Advantage: What It May Mean in Practice

The proposed structural carve-out for new builds is the most significant feature of these reforms for Melbourne small developers. In Victoria, a new build for these purposes is understood to include dwellings constructed on vacant land or where an existing dwelling has been demolished and replaced with multiple new dwellings — the kind of townhouse and medium-density projects that form the core of development activity across Melbourne’s middle-ring eastern suburbs.

Historically, investor demand for new townhouse stock in established suburbs has been influenced by the tax treatment of new builds relative to established property. Some market commentators have noted that the 2026 proposed reforms may influence relative investor demand for new versus established dwellings — developers may wish to discuss the potential implications with their financial adviser. The new build exemption, if legislated as announced, would mean new dwellings retain both full negative gearing and the choice of CGT method on disposal.

For developers, this may be relevant to pre-sales and off-the-plan sales activity in the period leading up to and following the proposed 1 July 2027 commencement date. It may also influence the mix of buyers in a project — though market outcomes depend on many factors beyond tax policy alone. Understanding how to structure and subdivide land in Victoria to deliver qualifying new dwellings is an important early step in project planning.

Questions to Raise With Your Advisers

The following are general questions that small developers may wish to raise with their tax adviser, financial adviser, and planning consultant. They are not advice and should not be acted upon without professional guidance specific to your circumstances.

• What is your existing portfolio’s CGT position? For projects you expect to sell after 1 July 2027, your accountant may be able to model the potential tax outcome under both the existing 50% discount (applied to gains up to 1 July 2027) and the proposed new indexation regime (applied to gains thereafter).
• Do your proposed projects qualify as new builds under the proposed definition? Projects that qualify as new builds are proposed to retain the most favourable tax treatment for purchasers. Your tax adviser can advise on whether your proposed projects are likely to meet the new build criteria once the legislation is finalised.
• Do your indicative feasibility assessments need updating? If your indicative assumptions include investor purchasers who were previously relying on negative gearing against salary income, those assumptions may warrant review for established-property components of mixed projects.
• What are the implications for your trust or partnership structure? The proposed CGT changes are understood to apply to trusts and partnerships. If your development entity is structured as a discretionary trust, your tax adviser may wish to review the potential implications for distributions of capital gains post-2027.
• Is your planning permit strategy optimised for your timeline? The planning permit timeline in Melbourne’s eastern suburbs varies by council and application complexity. Getting permits in place now preserves optionality for projects you may wish to commence or sell before the proposed 1 July 2027 commencement date. Developers should also be aware of the Fast-Track Planning Bill and accelerated permit pathways that may be available for eligible projects.
• Is your project structured to maximise eligibility for the proposed new build exemption? The proposed new build exemption applies to dwellings that add to housing supply. Demolish-and-replace multi-dwelling projects are understood to qualify; single knock-down-rebuilds are not. Early design and planning advice can help ensure your project is structured appropriately — confirm the specific eligibility of your project with a qualified tax adviser.

Frequently Asked Questions

Are my existing investment properties affected by the proposed negative gearing changes?

Properties contracted before 7:30pm AEST on 12 May 2026 are proposed to be grandfathered under the existing negative gearing rules for as long as you hold them. The proposed quarantining of losses would apply only to established residential properties acquired after that date and only from 1 July 2027. Confirm the position for your specific holdings with your tax adviser.

Does the proposed new build exemption apply to townhouse developments in Melbourne’s eastern suburbs?

Based on the Budget announcement, new builds that add to housing supply — including dwellings constructed where an existing property has been demolished and replaced with multiple new dwellings — are understood to be proposed to be exempt from the negative gearing restriction. You should confirm the specific eligibility of your project with a qualified tax adviser, as the legislation has not yet been finalised.

How might the proposed CGT change affect a developer selling a completed project after 1 July 2027?

For assets held before 1 July 2027, the 50% CGT discount is proposed to apply to gains accrued up to that date. Gains accruing after 1 July 2027 would be subject to cost base indexation and a 30% minimum tax on the real gain. New builds may retain the choice between the 50% discount and the new indexation method on disposal. Your accountant can model the potential outcomes for your specific projects.

What is the proposed 30% minimum tax on capital gains?

Under the Budget announcement, from 1 July 2027, regardless of an investor’s marginal tax rate, the effective tax rate on real capital gains would not fall below 30%. This is proposed to prevent high-income earners from reducing their effective rate on gains below that floor through indexation in low-inflation periods. Income support recipients are understood to be exempt from the minimum tax. Confirm the implications for your circumstances with your tax adviser.

Do the proposed negative gearing changes affect commercial property or shares?

No. Based on the Budget announcement, the proposed negative gearing restriction would apply only to established residential property. Commercial property and other asset classes such as shares would continue to be taxed under existing arrangements and are not proposed to be affected by the negative gearing changes. The proposed CGT discount changes, however, are understood to apply to all CGT assets held by individuals, trusts and partnerships.

Has the legislation passed Parliament yet?

As at June 2026, the legislation implementing these reforms has not yet passed Parliament. The measures were announced on Budget night and are proposed to take effect from 1 July 2027. The detail of the final legislation may differ from the Budget announcement, and developers should monitor developments and seek updated advice as the legislation progresses.

How might these proposed changes affect buyer demand for new townhouses in Melbourne’s eastern suburbs?

The proposed new build exemption may influence relative investor demand for new versus established dwellings, given that new dwellings are proposed to retain full negative gearing and preferential CGT treatment. Market outcomes will depend on many factors beyond tax policy alone — discuss the implications for your specific projects with your financial adviser.

What This May Mean for Your Next Project

The proposed 2026 negative gearing and CGT reforms represent a potentially meaningful shift in the tax landscape for Melbourne property developers. The proposed grandfathering provisions would protect existing holdings, and the proposed new build exemption would preserve — and may strengthen — the investment case for new residential supply. For small developers in Melbourne’s eastern suburbs who are delivering townhouses, dual occupancies, and medium-density projects, the proposed reforms may create a more favourable relative position compared to established property investors, provided projects are structured to qualify as new builds. Confirm the implications for your specific projects with a qualified tax adviser.

SQM Architects has the local knowledge of Melbourne’s eastern suburbs planning environment to help developers ensure their planning and design decisions are well-positioned. The most important step is to get your planning permit strategy and project structure right well before any proposed commencement dates.

Book a Strategy Call — have a 30-minute conversation with SQM Architects about your development site. Call us on (03) 9005 6588.

This article provides general information only about proposed tax policy changes that have not yet been legislated. It is not tax, financial, or investment advice. For project-specific guidance, consult with qualified tax, financial, and planning professionals.

Reviewed June 2026 by Sammi Lian, Principal Architect — SQM Architects (ABN 32 600 928 390, ARBV Reg. No. 51498). This article is general information about Victorian planning and development, not personal, legal or financial advice.