Treasury Releases Tranche 2 of the Tax Reform Package: More Clarity, More Complexity

The latest tranche of Treasury’s tax reform package is less about introducing new policy and more about fixing practical problems identified after the original legislation was released. In many respects, the consultation process appears to be working, with Treasury addressing several unintended consequences raised by advisers, investors and industry groups.

Here are the key takeaways from the latest tranche:

1. Treasury Has Fixed Several Unintended Outcomes

One of the biggest concerns following the original legislation was that taxpayers could inadvertently lose grandfathering concessions due to events completely outside their control.

The new draft legislation largely resolves this by preserving concessions where property ownership changes because of:

• inheritance from a spouse;
• inheritance from a co-owner; and
• relationship breakdowns.

2. We Finally Have a Definition of a “New Residential Dwelling”

One of the biggest unanswered questions since Budget night was:

What exactly qualifies as a “new residential dwelling” for the purposes of continuing access to negative gearing and the CGT discount?

Treasury has now proposed a detailed framework. Broadly, a dwelling may qualify where it:

• is built on vacant land;
• increases dwelling numbers on a site (where the dwelling is legally capable of being acquired by another entity);
• results from conversion of a non-residential building into housing; or
• is  acquired within 24 months of the first occupancy certificate being issued.

The extension of the sale period from 12 months to 24 months is likely to be welcomed by developers and the property industry, particularly in the apartment sector.

The draft rules are designed to ensure the concessions are limited to activities that genuinely increase housing supply. For example, granny flats without separate titles will generally not qualify as new residential dwellings in their own right, and Treasury has included specific anti-avoidance provisions to prevent artificial arrangements designed to access the concessions.

It is worth noting that where a granny flat is constructed on the same title as an existing residential property, it is generally regarded as part of that residential property rather than as a separate asset. As a result, the granny flat should inherit the tax treatment of the underlying property. That means that if the original property falls within the grandfathering provisions and continues to qualify for negative gearing, the addition of a granny flat should not, of itself, prevent deductions relating to the granny flat from being claimed against other income.

3. Alternative CGT Valuation Method Released

Perhaps the most controversial and heavily debated element is the proposed methodology for splitting gains between pre and post 1 July 2027 growth.

Rather than requiring valuations for every asset, Treasury has released an optional apportionment method. This time-based apportionment method splits the gain into the pre- and post- 1 July 2027 amounts based on a daily compound growth assumption over the asset’s ownership period. This method can be used for real property and assets where market values are difficult to determine.

While this may suit some circumstances, it is unlikely to eliminate valuations altogether. For high-value assets, property owners may still prefer a formal valuation where the formula produces an outcome that does not reflect actual market movements.

What’s Next?

If the first tranche was about announcing the policy, this tranche is about confronting the reality of how those policies operate in the real world. Treasury should be credited for addressing several unintended consequences, particularly around family circumstances.

A number of important issues remain under consideration, including how the rules will apply to companies, partnership interests and certain commercial restructures where there is no substantive change in ownership. Treasury has also indicated that further work may be undertaken on aspects of the new residential dwelling framework and housing-related exemptions.

The latest tranche provides greater certainty, but it also confirms that these reforms will involve significantly more complexity than the current system. For investors and business owners, the challenge is no longer understanding the headline announcements, but identifying how the growing list of exceptions, concessions and transitional rules apply to their specific circumstances.

Need advice?

If you’d like to understand how the new negative gearing and CGT rules may affect your property portfolio, trust structure or investment strategy, get in touch with the Macro team. We’re closely monitoring the consultation process and helping clients navigate the practical implications before the reforms commence on 1 July 2027.

The Macro Group Limited AFSL: 485843 Tax Agent Number 24 76 5236.

The information in this article contains general information only. We have not taken into consideration any of your personal objectives, financial situation or needs. Before taking any action, you should consider whether the general advice contained in this communication is appropriate to you having regard to your circumstances and needs and seek appropriate professional advice if you think you need it. We recommend that you consult a licensed or authorised financial adviser if you require financial advice that takes into account your personal circumstances.