Treasury Laws Amendment (Tax Reform No. 1) Act 2026 (49 of 2026)
Schedule 2 Limit negative gearing for residential property to new builds
Income Tax Assessment Act 1997
1 At the end of Division 26
Add:
26-155 Using or holding residential dwellings
General rule
(1) If the amountsrelating to the using or holdingof*residential dwellings as residential accommodation that you could otherwise deduct for an income year exceed your assessable income from using or holding residential dwellings as residential accommodation for the income year, this Act applies to the amount of the excess as follows:
(a) it is not deductible for that income year;
(b) it is an amount (a quarantined amount ) that could be applied in accordance with the method statement in section 102-5 (about working out your net capital gain) for that income year;
(c) to the extent any part of it remains after applying that method statement - it is treated as an amount relating to using or holding residential dwellings as residential accommodation for the next income year.
Example: Henrietta acquires an established residential dwelling in July 2028. For the 2028-29 income year Henrietta has assessable income of $50,000 from renting out the residential dwelling as residential accommodation. For that year, Henrietta has (but for this subsection) $65,000 in deductions for the residential dwelling, including interest, insurance and strata costs. She can only deduct $50,000 and the remaining $15,000 is carried forward to the next income year.
For the 2029-30 income year, Henrietta has (but for this subsection) $70,000 in deductions and $52,000 of assessable income from renting out the residential dwelling as residential accommodation. She can deduct $52,000 and $33,000 is carried forward to the next income year (comprising the $15,000 carried forward from the 2028-29 income year and $18,000 from the 2029-30 income year).
For the 2030-31 income year, Henrietta has $20,000 in deductions and $72,000 of assessable income from renting out the residential dwelling as residential accommodation, having reduced her mortgage following an inheritance. She has net rental income from the residential dwelling of $52,000 for this income year and can fully offset the amount of $33,000 that has been carried forward from the previous income year.
Exceptions for non-quarantined residential dwellings
(2) For the purposes of subsection (1), disregard amounts you could otherwise deduct, and amounts of assessable income, to the extent those amounts relate to the using or holding of the following:
(a) an *ownership interest in a *residential dwelling you last *acquired before 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2026;
(b) a residential dwelling that is a *new residential dwelling in relation to you;
(c) a residential dwelling for an activity or purpose determined by the Minister by legislative instrument for the purposes of this paragraph.
Note: If you have a net gain from your non-quarantined residential dwellings for an income year: see subsection (6).
(3) Despite subsection 118-130(2), for the purposes of paragraph (2)(a) of this section, for a *residential dwelling that you *acquire under a contract, you have an *ownership interestin the residential dwelling from the time when you enter into the contract.
(3A) Before determining an activity or purpose for the purposes of paragraph (2)(c), the Minister must be satisfied that determining the activity or purpose will assist in achieving one or more of the following objectives:
(a) improving availability of social or affordable housing;
(b) improving housing outcomes for one or more of the following:
(i) Aboriginal or Torres Strait Islander persons;
(ii) persons with a disability;
(iii) aged persons;
(iv) another class of persons suffering disadvantage.
Exception for certain kinds of entities
(4) Subsection (1) does not apply to you if you are:
(a) a widely held unit trust as defined in section 272-105 in Schedule 2F to the Income Tax Assessment Act 1936; or
(b) a *complying superannuation entity.
Exception for fringe benefits
(5) For the purposes of subsection (1), disregard amounts you could otherwise deduct, and amounts of assessable income, to the extent those amounts relate to *providing a *fringe benefit.
Modification in relation to certain gains
(6) Reduce the amount of an excess referred to in subsection (1) for an income year (before applying any of paragraphs (1)(a) to (c)) by the sum of the following:
(a) any amount by which your assessable income covered by subsection (2) for the income year exceeds your deductions covered by that subsection for the income year;
(b) any gain you *realised for income tax purposes for the income year from a *realisation event occurring in relation to a *residential dwelling that is a *revenue asset.
Modification in relation to beneficiaries of trusts
(7) If:
(a) you are a beneficiary of a trust estate; and
(b) an amount is taken to have been included in your assessable income for an income year under Division 6 of Part III of the Income Tax Assessment Act 1936 in relation to the *net income of the trust estate;
to the extent that the amount is referable (either directly or indirectly through one or more interposed partnerships or trust estates) to using or holding *residential dwellings as residential accommodation, the amount is taken to be included in your assessable income from using or holding residential dwellings as residential accommodation for that year.
Modification if you become bankrupt
(8) The modification in subsection (9) has effect if:
(a) in an income year (the current year ) you become bankrupt or are released from a debt by the operation of an Act relating to bankruptcy; or
(b) you became bankrupt before the current year and:
(i) the bankruptcy is annulled in the current year under section 74 of the Bankruptcy Act 1966 because your creditors have accepted a proposal for a composition or scheme of arrangement; and
(ii) under the composition or scheme of arrangement, you have been, will be or may be released from some or all of the debts from which you would have been released if you had instead been discharged from the bankruptcy.
(9) This Act applies to you as if any amount that:
(a) is an amount that you cannot deduct for the current year in accordance with paragraph (1)(a); and
(b) has not been applied in accordance with the method statement in section 102-5;
were not an amount relating to using or holding *residential dwellings as residential accommodation that you can deduct for the current year or a later year.
26-160 Meaning of residential dwelling and new residential dwelling
Meaning of residential dwelling
(1) A residential dwelling means a *dwelling other than any of the following:
(a) a caravan, mobile tiny home, or other mobile home;
(b) a hotel, motel, inn, hostel or boarding house;
(c) a dwelling providing accommodation to students in connection with a school or an education institution that is not a school;
(d) a boat or other marine vessel.
(2) For the purposes of subsection (1), a residential dwelling is taken to include any of the following things to the extent that the thing is available for use by an occupant of the *dwelling:
(a) land adjacent to the dwelling;
(b) a garage, storeroom or other structure associated with the dwelling.
Meaning of new residential dwelling
(3) A *residential dwelling is a new residential dwelling in relation to you if the requirements determined under subsection (4) are metin relation to you and the residential dwelling.
(4) The Minister must, by legislative instrument, determine requirements for the purposes of subsection (3). Without limiting this subsection, the requirements may include requirements relating to one or more of the following:
(a) the kind of *residential dwelling;
(b) the kind of interest you hold in the residential dwelling and the circumstances in which you acquired your interest (such as whether you were the builder or a subsequent purchaser of the residential dwelling);
(c) circumstances relating to the creation of the residential dwelling (such as whether the residential dwelling was built on vacant land, was created through substantial renovations of an existing building, or was built to replace a demolished residential dwelling);
(d) whether the residential dwelling has a separate title, equitable title or similar legal interest that can be acquired by an entity.
(4A) Before determining requirements for the purposes of subsection (4), the Minister must be satisfied that determining the requirements will assist in achieving the objective of genuinely adding to the supply of residential dwellings in Australia.
(5) To avoid doubt, the Minister may determine requirements under subsection (4) relating to matters or circumstances existing before the commencement of this section.