Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 and Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026
Submitted by: Damian Collins Chairman, Westbridge Funds Management; Managing Director, Momentum Wealth
Date: 3 June 2026
Executive Summary
I make this submission from a broad, practical perspective across both residential and commercial real estate. I am Managing Director of Momentum Wealth, a residential property investment advisory business established in 2006 which has assisted thousands of Australian property investors, and Chairman of Westbridge Funds Management, an Australian property funds management business which has helped investors access managed residential and commercial property funds for more than 20 years. Westbridge currently manages approximately $1.06 billion in assets across unlisted funds.
There are a significant number of issues with the legislation more broadly and its impact on Australia’s future, However I will limit my submission to the impact on real estate investment and housing.
I support the policy objective of improving housing affordability and encouraging productive investment. However, the proposed reforms to negative gearing and capital gains tax are likely to have consequences for Australian real estate markets that will not achieve housing affordability, nor encourage productive investment.
This submission focuses on two concerns:
- Restricting negative gearing for established residential property is likely to reduce investor participation and place upward pressure on rents. Investors assess after tax, risk adjusted returns and cash flow. If residential rental losses can no longer be offset against other income, many investors will no longer enter the market or require higher rents to justify the risk and cash flow burden.
- Replacing the 50% CGT discount with indexation will materially reduce the reward for higher risk, growth oriented real estate investment. This will likely shift capital away from value add, development and refurbishment opportunities and toward lower risk assets with secure income and long leases.
Notwithstanding the increased rents that will come with the removal of negative gearing, at least to minimise the impact on the market, the Committee should consider more gradual and better targeted alternatives, including a staged phase out of negative gearing for new investors over ten years, or a limited annual passive loss allowance similar to arrangements used in other jurisdictions.
1. Background to the Bills
The Bills were referred to the Senate Economics Legislation Committee on 28 May 2026, with submissions closing on 9 June 2026 and a reporting date of 22 June 2026. The Government’s stated reforms include limiting negative gearing for residential property to new builds from 1 July 2027, replacing the 50% CGT discount with cost base indexation, and introducing a 30% minimum tax rate on real capital gains accruing from 1 July 2027.
While existing investments are proposed to be partly protected, the impact on future investment decisions will be significant. Property markets are forward looking. If the after tax return profile changes, investor behaviour will change.
2. Negative Gearing and Residential Rental Supply
Australian residential property has historically delivered lower income yields than many commercial assets. Investors have accepted this because residential property offers accessibility, familiarity, potential capital growth, and historically, the ability to offset holding losses against other income.
The proposed restriction will materially change that equation. Investors do not make decisions based on gross rents alone. They consider:
- after-tax cash flow;
- borrowing costs;
- maintenance and holding costs;
- vacancy risk;
- land tax and other state-based charges;
- expected capital growth; and
- the opportunity cost of investing elsewhere.
If rental losses from established dwellings can only be offset against residential rental income and carried forward, the cash flow burden increases immediately. This is particularly relevant for ordinary middle income investors who may own one or two properties and rely on their salary to manage the early year holding costs.
A. New supply will not increase for many years, if at all
The Government’s objective is to redirect investment toward new supply. However, in practice, not all investors will switch from established property to new builds. Many of these new properties will be in areas that do not have high rental demand. Most tenants want to live in established areas, where amenities are better. Some investors will simply not enter the market and thus not contribute to new supply.
The assumption that investors displaced from established housing will simply fund additional new housing also overlooks the current capacity constraints in the construction sector. Australia does not presently have an idle pool of builders, trades, materials and development ready land waiting for investor demand.
The National Housing Supply and Affordability Council has found that new housing supply remains well below underlying demand and is being constrained by labour shortages and high material costs. Master Builders Australia has estimated that tens of thousands of additional construction workers are required to meet the national housing target. Until that capacity exists, redirecting investors into new builds risks increasing competition with first home buyers for a constrained pool of new dwellings, rather than increasing aggregate supply. In practical terms, the policy may bid up the cost of new housing before it produces any material increase in the number of homes built.
B. Residential rents will rise
Other investors will seek higher yielding assets. Over time, this is likely to reduce the pool of private rental housing unless rents rise enough to restore an adequate after tax return.
Australia’s current gross residential rental yield in our capital cities is reported at around 3.57% according to Cotality. Net yields are closer to 2% after all operating costs are considered. Commercial properties produce gross yields of around 8%-9% and net yields of 6%-7%. Without the tax benefit of negative gearing, investors will gravitate to higher yielding assets, meaning fewer residential rental properties available and ultimately higher rents.
3. Alternative Approaches to Reduce Residential Rental Market Shock
If the Parliament proceeds with negative gearing reform, notwithstanding the likelihood of higher residential rents, I recommend considering one of the following alternatives to minimise the adjustment costs and smooth out any changes to rents over time.
Option A: Ten-year staged transition for new investors
Rather than an immediate restriction, deductions for newly acquired established residential property could be gradually reduced over ten years. This would allow investors, tenants, lenders and markets to adjust progressively, reducing the risk of a short term supply shock and sudden rental pressure.
Option B: Annual passive loss limited allowance
Other countries have adopted more targeted approaches to passive loss deductions against other income. In the United States, rental property losses are generally subject to passive activity loss rules, but qualifying individuals who actively participate in rental real estate may deduct up to US$25,000 of rental losses against non-passive income, subject to income phase outs.
These types of models are more targeted than an abrupt restriction. They can limit the scale of tax benefits while still recognising that private investors play an important role in supplying rental housing.
A capped passive loss allowance, for example $25,000 per person per annum, would limit the tax benefit for large scale loss making portfolios while preserving access for ordinary investors with one or two properties. This approach would better target the policy concern without discouraging all future investment in established rental housing.
Either approach would be preferable to a sudden change that risks pushing investors out before replacement rental supply is available.
4. Capital Gains Tax Reform and Risk Taking in Real Estate
The proposed replacement of the 50% CGT discount with indexation will have very different effects across property investment types.
Real estate investment is not uniform. A fully leased commercial property with a long lease to a strong tenant has a very different risk profile from a value-add asset requiring refurbishment, leasing risk, planning approvals, repositioning or development capital.
Investors require a premium for taking additional risk. If that premium is reduced after tax, rational investors will allocate less capital to higher risk, higher growth projects.
Our modelling illustrates this point.
Assume a $1 million commercial property investment held for five years with returns reinvested:
- Asset 1: a steady income and growth asset targeting 12% per annum, made up of 7% annual distributions and 5% annual capital growth.
- Asset 2: a value add opportunity targeting 15% per annum, made up of 4% annual yield and 11% annual capital growth.
- Assumptions: top marginal tax rate, 3.5% inflation, and sale at the end of year five.
Under the current system, the higher risk value add asset produces a meaningful after tax premium. That premium is what compensates the investor for greater uncertainty, lower income during the hold period, leasing risk, capital expenditure risk and reliance on a successful exit.
Under the proposed system, the value add asset still produces a higher total after tax return, but the reward for risk is materially reduced. Our model suggests:
- the higher-growth/value-add asset suffers an approximately 11% decrease in total after-tax return compared with the current system;
- the lower-risk, moderate-growth income asset sees an approximately 6% increase in total after tax return;
- the after tax risk premium falls by approximately 43%, from around $235,000 to $135,000; and
- to restore the same after tax risk premium, the value add asset would need to achieve capital growth of approximately 13.1% per annum, or about 2.1% per annum more than otherwise required.
This is a significant distortion. It encourages investors to favour assets where returns are delivered as income and inflation linked growth, rather than assets requiring capital investment, risk taking and active improvement.
The likely result is a reallocation of capital across real estate markets:
- less investment in development, refurbishment and value-add opportunities;
- more capital directed to established commercial assets with long leases and strong tenants;
- reduced appetite for projects where returns depend heavily on capital growth;
- higher required pre tax returns for higher risk projects;
- fewer marginal projects proceeding; and
- ultimately, less private capital available for new or improved commercial premises.
This outcome would be counterproductive. Australia needs more housing, more productive commercial space, more urban renewal and more private capital willing to take development and other risks. Tax settings should not unintentionally penalise the very projects that add capacity, improve ageing assets and support business growth.
5. Recommendations
The current laws should remain in place, however if the Committee is minded to making changes, I recommend that the Committee:
- Consider a staged phase out or capped passive loss model for residential rental losses on established properties rather than an immediate restriction, if the Committee is of the view that they wish to reduce negative gearing.
- Preserve stronger incentives for genuine new commercial supply and value add investment, including commercial redevelopment, refurbishment and adaptive reuse projects by keeping the capital gains discount on assets that improve or add to existing supply of commercial properties, just as the Bill seeks to keep the capital gains discount for new residential properties.
Conclusion
The proposed reforms are intended to improve fairness and housing affordability. However, in real estate markets, investor behaviour is driven by after tax, risk adjusted returns and cash flow. Restricting negative gearing is likely to reduce investor participation in established residential rental housing unless rents rise to restore returns. Similarly, the proposed CGT reforms are likely to reduce the attractiveness of higher risk, growth oriented commercial property investment, which is the supply we need for Australian businesses.
If changes are to be made, a more gradual and targeted approach would better balance fairness, housing affordability, rental supply and productive investment. The Committee should consider amendments that reduce short term disruption and preserve incentives for investors to provide rental housing and commercial property, fund new supply and take the risks required to improve Australia’s residential and commercial property stock.
We are happy to provide further information, attend a consultation meeting, or discuss any aspect of this submission.
