Infinity Capital Solutions CIO Piers Bolger unpacks a busy budget…
The Federal Government handed down its 2026/27 Federal Budget last night, with a clear focus on maintaining the strength of its political base and ensuring that the after effects of the Farrer by-election are not repeated across traditional Labor heartland seats. That by-election saw One Nation defeat the Liberal National Party to claim its first lower-house seat. Whether this strategy proves effective remains to be seen. However, the announcements made last night, particularly the focus on reducing some of the more favourable tax treatments associated with investing in both property and shares, signal that the Government is prepared to consider broader structural tax reform.
The flagship policy of the Budget was tax reform within the housing sector, specifically changes aimed at reducing the favourable tax treatment of capital gains and limiting the use of negative gearing. These changes are intended to reduce the attractiveness of investing in established housing and, in turn, improve housing affordability. However, as is often the case, the detail matters. The introduction of generous grandfathering provisions risks undermining the stated objective of improving intergenerational equity, as existing favourable tax regimes are effectively locked in, often for the benefit of wealthier Australians who already own investment properties.
In contrast, younger Australians seeking to build wealth through investment will now face a materially less generous capital gains tax (CGT) regime. This applies not only to housing investments, but more broadly across all asset classes. In this context, the planned changes will leave Australia with one of the most heavily taxed CGT regimes among key global peers.
While the new system will not take effect until 1 July 2027, any established property acquired after Budget night may still be negatively geared up until that date. In addition, to incentivise new housing supply, the Government will allow investors in newly constructed residential properties to choose between the existing 50% CGT discount or the new indexation method.
Despite the Government pointing to a potential decline in property prices, our initial estimates suggest that the impact on prices is likely to be more modest, potentially less than a 5% decline over the medium term. If there is no meaningful increase in net new supply, property prices could, over time, continue their upward trajectory.
The Main Changes
While the Budget addressed a range of policy areas, from a financial perspective the four main changes are as follows:
- The abolition of negative gearing for established residential properties.
- The approach to taxing capital gains will revert from the current 50% discount to the pre‑1999 system of indexation. The new rules apply to both property and shares held by individuals, family trusts, and partnerships. In addition, these rules bring previously exempt pre‑1985 assets into the tax net if sold after the relevant deadline, although gains accrued prior to 1 July 2027 will remain exempt.
- The introduction of a minimum 30% tax on the income of discretionary trusts. This will be partially offset by a number of tax measures, including a $250 Working Australians Tax Offset and the small business instant asset write-off of up to $20,000 being made permanent.
- A meaningful reduction in the growth rate of National Disability Insurance Scheme (NDIS) spending, which is expected to deliver savings of approximately $35 billion over the five years to 2030/31.
Fiscal and Market Implications
From a fiscal perspective, the Budget was broadly neutral, with the forecast deficit of around 1% of GDP coming in slightly lower than market consensus expectations. This may marginally reduce the near-term pressure on the Reserve Bank of Australia to raise interest rates. However, with an additional A$18 billion being injected into the economy, and with other external inflationary pressures remaining elevated, we believe the Reserve Bank is likely to continue increasing the cash rate through 2026, with one, and potentially two, further rate hikes.
Importantly, the majority of meaningful budget savings do not begin to flow to the bottom line until the 2029–30 financial year, when the Budget projects net savings of A$19.3 billion from discretionary policy decisions. Nevertheless, the removal of the capital gains tax discount increases the relative attractiveness of income-focused investment strategies over time. This should provide support for industrials, utilities, real estate investment trusts (REITs), and other income-generative asset classes.
For the banking sector, the removal of the CGT discount may result in smaller average loan sizes, while simultaneously encouraging longer asset hold periods. Together, these dynamics could slow credit growth and, ultimately, weigh on bank earnings.
Investment Market Impact
Overall, the Budget changes represent a negative shock to the after-tax returns of established investment housing, with the removal of negative gearing being the dominant factor. The change to capital gains taxation reinforces this shift by reducing the tax advantage associated with strong nominal capital gains. Combined, these measures are likely to result in lower established dwelling prices relative to the prior baseline, alongside modest upward pressure on rents over time.
We are also likely to see reduced property turnover, although there is potential for some increase in new construction—assuming financing costs remain manageable in an environment where inflation and interest rates are expected to stay elevated.
At this stage, we are not making any immediate changes to either asset allocation or security selection across our portfolios. However, the Budget does have the potential to gradually alter the investment profile of certain portfolio components over time, particularly against a backdrop of ongoing geopolitical instability and broader market volatility.
Our focus remains on ensuring that portfolios are positioned to deliver on their long-term investment objectives. While this Budget may alter some of the underlying dynamics, the importance of maintaining a disciplined investment approach, supported by a dynamic and flexible asset allocation framework, remains central to our investment philosophy.
