House of Representatives

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

General outline and financial impact

Schedule 1 - CGT adjustments

Outline

Schedule 1 to the Bill and the Imposition Bill amend the income tax law to:

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replace the 50 per cent CGT discount for individuals, trusts and partnerships with cost base indexation to ensure only real gains are subject to taxation;

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introduce a 30 per cent minimum tax on capital gains, with an exemption for certain income support recipients, to ensure gains are subject to a tax rate closer to the tax rate individuals faced during their working life and commensurate with the tax rate paid by most workers; and

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apply the new arrangements prospectively to all capital gains accruing on and after 1 July 2027, including gains accruing on pre-CGT assets, while retaining access to the CGT discount to maintain support for new and affordable housing, and maintaining existing CGT concessions for small business.

Date of effect

Schedule 1 to the Bill (excluding the provisions relating to the minimum tax) and the Imposition Bill commence on the first 1 January, 1 April, 1 July or 1 April to occur after the day the Bill receives Royal Assent.

The provision in Schedule 1 to the Bill relating to the minimum tax commence immediately after the commencement of the Imposition Bill. This ensures that these provisions do not commence if the tax to which they relate is not imposed.

The amendments made by Schedule 1 to the Bill and the Imposition Bill largely apply in relation to assessments for the income year that includes 1 July 2027 and later income years.

Proposal announced

Schedule 1 to the Bill and the Imposition Bill partially implement the Tax Reform – Boosting Home Ownership – reforming negative gearing and capital gains tax measure in the 2026-2027 Budget.

Financial impact

Combined, Schedule 1 and Schedule 2 to the Bill are estimated to result in a $3.6 billion improvement in the underlying cash balance over the forward estimates period:

All figures in this table represent amounts in $m.

Impact Analysis

Consistent with the Government's Impact Analysis requirements, the Treasury has certified the Select Committee on the Operation of the Capital Gains Discount, Budget Statement 4 of the Federal Budget 2026-27 and Treasury Supplementary Analysis as having undertaken a process and analysis equivalent to an Impact Analysis.

The Impact Analysis Equivalent found that negative gearing and the CGT discount favour leveraged investment in existing housing, putting upward pressure on prices and directing capital away from potentially more productive uses. Alongside structures like discretionary trusts, these settings enable higher-income earners or high-wealth individuals to achieve lower tax rates than ordinary workers.

The measures in this Bill will level the playing field for first home buyers, supporting improved rates of homeownership while also maintaining incentives for new housing supply. They will also make the tax system fairer and more sustainable, helping to fund tax cuts for workers and create room for further tax relief over time. Treasury will monitor the efficacy of these changes through metrics published in the Intergenerational Report, the State of the Housing Market Report and the Tax Expenditures and Insights Statement.

Due to the extensive nature of these materials they have not been attached to this Explanatory Memorandum. They can be found at: https://oia.pmc.gov.au/published-impact-analyses-and-reports/capital-gains-tax-and-negative-gearing.

Human rights implications

Schedule 1 to the Bill and the Imposition Bill engage certain human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

Schedule 1 and Schedule 2 of the Bill are expected to result in some transitional and ongoing compliance costs for individuals and businesses. Guidance, calculators and tools will be made available to assist taxpayers in minimising their compliance costs. Treasury estimates the amendments made by Schedule 1 and Schedule 2 of the Bill will increase average regulatory costs by $88.4 million per year, over ten years.

Schedule 2 - Limit negative gearing for residential property to new builds

Outline

Schedule 2 to the Bill helps to level the playing field for first home buyers, whilst maintaining support for investment in new housing supply, by restricting negative gearing for residential dwellings to new builds. The Bill does this by amending the ITAA 1997 to require that a person's net rental losses on a residential dwelling used or held as residential accommodation are a quarantined amount. Quarantined amounts are only available to deduct from net assessable income derived in relation to residential dwellings used or held as residential accommodation or to reduce revenue or capital gains from a residential dwelling. This applies to interests in residential dwellings acquired on or after 7.30pm by legal time in the ACT (which is 7.30pm AEST), on 12 May 2026, unless an exception to this requirement applies.

Schedule 2 to the Bill maintains incentives for investors to increase the supply of residential property by excluding newly built residential dwellings (new residential dwellings) from the requirement to quarantine amounts. This means that investors who acquire new residential dwellings can continue to deduct net rental losses from these properties against their other assessable income, such as salary and wages.

Schedule 2 to the Bill exempts investments made prior to 7.30pm (AEST) on 12 May 2026 from the requirement to quarantine amounts. This ensures the arrangements for taxpayers who made investment decisions under the settings in place prior to Budget night on 12 May 2026 do not change.

Date of effect

Schedule 2 to the Bill commences the day after Royal Assent.

Schedule 2 to the Bill applies to income years commencing on or after 1 July 2027.

Proposal announced

Schedule 2 to the Bill partially implements the 'Tax Reform – Boosting Home Ownership – reforming negative gearing and capital gains tax' measure in the 2026-27 Budget.

Financial impact

Combined, Schedule 1 and Schedule 2 to the Bill are estimated to result in an improvement in the cash balance over the forward estimates period of $3.6 billion:

All figures in this table represent amounts in $m.

Impact Analysis

Consistent with the Government's Impact Analysis requirements, the Treasury has certified the Select Committee on the Operation of the Capital Gains Discount, Budget Statement 4 of the Federal Budget 2026-27 and Treasury Supplementary Analysis as having undertaken a process and analysis equivalent to an Impact Analysis.

The Impact Analysis Equivalent found that negative gearing and the CGT discount favour leveraged investment in existing housing, putting upward pressure on prices and directing capital away from potentially more productive uses. Alongside structures like discretionary trusts, these settings enable higher-income earners or high-wealth individuals to achieve lower tax rates than ordinary workers.

The measures in this Bill will level the playing field for first home buyers, supporting improved rates of homeownership while also maintaining incentives for new housing supply. They will also make the tax system fairer and more sustainable, helping to fund tax cuts for workers and create room for further tax relief over time. Treasury will monitor the efficacy of these changes through metrics published in the Intergenerational Report, the State of the Housing Market Report and the Tax Expenditures and Insights Statement.

Due to the extensive nature of these materials they have not been attached to this Explanatory Memorandum. They can be found at : https://oia.pmc.gov.au/published-impact-analyses-and-reports/capital-gains-tax-and-negative-gearing.

Human rights implications

Schedule 2 to the Bill engages human rights. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

Schedule 1 and Schedule 2 of the Bill are expected to result in some transitional and ongoing compliance costs for individuals and businesses. Guidance, calculators and tools will be made available to assist taxpayers in minimising their compliance costs. Treasury estimates the amendments made by Schedule 1 and Schedule 2 of the Bill will increase average regulatory costs by $88.4 million per year, over ten years.

Schedule 3 - Working Australians tax offset

Outline

Schedule 3 to the Bill amends the income tax law to introduce the working Australians tax offset, a non-refundable tax offset that provides targeted tax relief to Australian resident individuals who earn labour income.

Date of effect

Schedule 3 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October after the day the Bill receives Royal Assent.

Schedule 3 to the Bill applies to the 2027-28 income year and later income years.

Proposal announced

Schedule 3 to the Bill fully implements the 'Tax Reform – cutting taxes with a Working Australians Tax Offset' measure in the 2026–27 Budget.

Financial impact

Schedule 3 to the Bill is estimated to result in a $6.4 billion decrease in the underlying cash balance over the forward estimates.

All figures in this table represent amounts in $m.

Human rights implications

Schedule 3 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

This measure is expected to have a minor regulatory impact.

Schedule 4 - Standard deduction for work-related expenses

Outline

Schedule 4 to the Bill amends the ITAA 1997 to introduce a $1,000 standard deduction for work-related expenses for individuals who are Australian tax residents who derive assessable labour income, so that eligible taxpayers can rely on a simple deduction instead of claiming their work-related expenses.

Schedule 4 also makes associated supporting amendments to substantiation, capital allowance (including low-value pools), and capital gains tax rules. It also makes amendments to the 'otherwise deductible' rule and an FBT exemption in the FBTAA. These amendments ensure the new standard deduction operates coherently with existing tax laws, including by seeking to prevent taxpayers obtaining a double benefit.

Date of effect

Schedule 4 to the Bill commences the first day of the quarter after Royal Assent.

The amendments to the income tax laws apply in relation to assessments for the 2026-27 income year and later income years.

The amendments to the FBT laws apply in relation to FBT years starting on or after 1 April 2027.

Proposal announced

Schedule 4 to the Bill fully implements the Government's election commitment on tax reform for easier, faster, better tax returns announced on 13 April 2025. The commitment forms part of the tax reform package announced in the 2026-27 Budget.

Financial impact

Schedule 4 to the Bill is estimated to result in a $2.6 billion decrease in the underlying cash balance over 4 years from 2025-26.

All figures in this table represent amounts in $m.

Human rights implications

Schedule 4 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights — Chapter 5.

Compliance cost impact

The amendments in Schedule 4 to the Bill are estimated to collectively save individuals $380 million in compliance costs each year.