Assets With Birthdays
Canberra's argument is about who the Budget's tax changes are fair to. The market question is quieter: what the grandfather clause tells the landlords it exempts to do next.
By the team at Banyantree Investment Group
This essay is adapted from analysis first shared in our Monthly Investment Letter of 20 May 2026.
There are assets in Australia that have never paid a dollar of capital gains tax. They were acquired before 20 September 1985, the day the tax began, and for forty years the exemption travelled with each one: it could not be bought, it could not be transferred, and it died the moment the owner sold. Entire estate plans were built around a single instruction. Don't sell.
This May, the Federal Budget finally came for them. Under the changes it announced, even pre-1985 assets join the net from July next year, but only for gains accruing from that day forward; every dollar of gain earned across the previous four decades stays where it has always been, outside the tax.¹ And in the same Budget, on the same night, the country began minting the next vintage.
The rest of the package, as announced, is easy to state. For established properties bought after 7.30pm on 12 May 2026, rental losses lose their deduction against wages from July 2027; they are quarantined instead to residential property income, including the eventual capital gain, and carried forward until used. Properties already held, or under contract by that evening, keep the old treatment until they are sold, and new builds keep it regardless, by design. For gains, the 50 per cent discount generally gives way from July 2027 to indexation of the cost base with a minimum 30 per cent tax on the gain, though buyers of qualifying new builds may choose between the old discount and the new arrangements. A separate minimum 30 per cent tax on discretionary trust income follows a year later, from July 2028, with its own carve-outs. The reception was as cold as any budget in a decade: Newspoll found 11 per cent of respondents expecting to be better off and 52 per cent expecting to be worse off, the weakest post-budget reading since 2014.²
The argument that followed has been about fairness. Whether the reforms favour the generation that already owns property over the one trying to buy it, and whether grandfathering rewards exactly the people the reform was pitched against. These are reasonable questions. The more useful question for an investor is what the package tells the people who already hold the assets to do. And the answer, written into the clause that was meant to soften the package, is: nothing.
Start with what a capital gains tax actually taxes. It is charged on realisation, so it falls on the sale rather than the gain, and a gain never realised is never taxed. Public finance has had a name for the consequence for as long as the tax has existed: the lock-in effect. An investor sitting on a large unrealised gain can defer the bill indefinitely by declining to transact, and that cost arrives whoever the buyer is, growing as the gain grows.
Grandfathering is usually read as a transition arrangement, a courtesy to people who made decisions under the old rules. This grandfathering deserves a more careful definition, because it does something stronger. The protected treatment attaches to the current owner of the current holding, and it is extinguished by the sale. Sell a grandfathered property and the immediate deduction cannot be rebuilt by buying another established dwelling; the replacement's losses sit quarantined, waiting for rental income or a capital gain to absorb them. The deduction survives for the next owner in deferred form, and the deferral has a price.
Treasury's own worked example puts numbers on it.³ A $1 million investment property, yielding 3.1 per cent against a 5.7 per cent interest rate, loses $14,810 a year. For an owner earning $210,000, the immediate deduction is worth $6,961, call it $580 a month. In Treasury's ten-year illustration the same rules end up costing just $186 more in total tax, because the quarantined losses are eventually used. The $186 and the $6,961 answer different questions. One measures the tax an investor eventually pays. The other measures the cash they must find each month in the early years, when the loan is largest, the rent falls furthest short, and the buffer is thinnest. Discount five years of delayed refunds at 5 per cent and the timing alone is worth roughly $4,500 to $6,500 today, around half a per cent of the purchase price, stacked on top of agents' fees and stamp duty on the way back in.⁴ Half a per cent sounds ignorable until you look at what transaction costs do here. When Davidoff and Leigh studied stamp duty, a 10 per cent increase cut housing turnover by about 3 per cent in the first year and 6 per cent over three.⁵ A few thousand dollars at the point of moving decides the transactions that were close.
So the wedge is real. Be precise about where it sits. It bites against the investor bid, because an owner-occupier never priced the deduction. It varies buyer by buyer: an investor with positive rental income elsewhere absorbs quarantined losses quickly, a first-time investor carries them for years. And it is widest where investor sells to investor, which is where the incumbent's reservation price now settles above the best bid, and a trade that used to clear now clears less often. A grandfathered concession stops being policy on the day it is drafted. It becomes property. And property of this kind is kept by not selling.
Trace the chain past that decision. An owner already close to selling can now hold on for years more, or for good. Listings of established investor stock thin. The grandfathered pool shrinks one settlement at a time, because each property that trades converts, permanently, into the new regime. The result, wherever the decision was close, is a market that transacts less, and everything priced off transactions feels that before anything priced off prices does.
Australia has run this experiment on itself before, which is why the vintage at the top of this essay is more than a curiosity. The pre-1985 exemption has outlived every government that touched it, and the advice attached to those assets never changed, partly because the endgame is so clean: hold a pre-CGT asset until death and the gain accrued in life falls out of the tax system entirely, because the beneficiary inherits it at market value.⁶ The 1999 layer is just as instructive. The 50 per cent discount the May Budget marks for abolition was itself the reform once, installed in September 1999 on the Ralph Review's recommendation in place of the indexation that had run since the tax began, with holders of older assets keeping a choice between the two.⁷ So the Budget's "new" indexation is the system Australia ran from 1985 to 1999, the residential market now carries four tax vintages of the same asset class, and each transition was preserved for the people already inside it. And the 1999 record has a detail the drafters of the May Budget may not have enjoyed: part of the stated case for the discount was that indexation discouraged the sale of assets that would otherwise have traded. The system now on its way back was removed partly for causing lock-in, and it comes back cushioned by a clause that causes more of it. This year the practice reached its logical end: when the reform finally reached for the pre-1985 stock, it drew its line at July 2027, taxing only what accrues after it. Now even the gains have birthdays.
There is even a control experiment in the record. In July 1985 the government of the day quarantined negative gearing for newly purchased properties, and reversed it by September 1987 amid claims that rents had exploded.⁸ The evidence was always murkier than the folklore: rents rose sharply in Sydney and Perth, where vacancy was tight before the change, and moved little elsewhere. The folklore won anyway, and it has done more work in the decades since than the data ever did. It helps explain why the 2026 reform arrived wearing a grandfather clause in the first place. The quarantine lasted two years; the exemption from the same year is still standing. Repeal takes a concession off everyone at once, so it creates an argument. Grandfathering takes it only from people who don't yet hold it, so it creates a constituency.
The extreme case is Californian. Proposition 13, passed in 1978, capped the assessed value of a property while its owner held it and reset it to market on sale, so the benefit grew with every year of tenure and vanished at settlement.⁹ Economists who went looking found what the structure implies: owners stayed put measurably longer, and the longer they stayed, the more expensive moving became. The analogy has limits worth stating plainly, and the most important one is how each benefit ages. Proposition 13's subsidy grows the longer you hold. A negative gearing deduction usually shrinks, as rents rise and the loan amortises, while the capital gains liability on the same property grows. So the May reform's two locks tighten on different schedules: the deduction grips hardest early, on recent and heavily geared owners, and the tax on the accrued gain takes over as the years pass. What carries across all three cases is only the structure. A benefit that dies on sale puts a price on transacting, and its defenders multiply while it lasts. Nobody in California in 1978 thought they were legislating for the 2020s.
Now put the chain into markets. The most exposed business models are the ones paid by the transaction rather than by the asset: listing portals such as REA Group, settlement infrastructure such as PEXA, the agency industry, and, in the largest line of all, the state governments, whose transfer duty is collected one transaction at a time and whose budgets assume the transactions keep coming. None of them is a simple volume proxy, though, and the difference is where the work starts. REA has lately been growing straight through a listings decline: in the first half of its 2026 financial year, national residential listings fell 6 per cent while Australian residential revenue rose 7 per cent, on a 14 per cent lift in yield from pricing, premium products and depth.¹⁰ So the operating question is whether revenue per listing can keep outrunning the flow of properties reaching the portal, because a cyclical dip in listings can be monetised through price and mix, while a tax-induced stretch in holding periods asks the yield engine to work harder for longer. PEXA is a mix question for the same reason. An owner who sells generates a transfer, a discharge and a new mortgage; an owner who keeps the property and moves the debt generates the mortgage activity without the transfer, so the mechanism would show up in the composition of the platform's volumes before it shows up in their total. The banks sit one step behind, on both sides of the trade at once: weaker investor purchases slow origination, owners protecting a grandfathered position refinance rather than sell, and the result is slower growth in new lending with harder competition for the borrowers who stay. Developers sit on the other side of the ledger by design. More than 80 per cent of new investor lending had been flowing into existing dwellings; pointing it at new stock is the point of the policy, and the reform makes its strongest case when a redirected investor gets a dwelling built rather than merely changing who owns one.¹¹ Prices and volumes can part company through all of this, and in Australia they have: in 2017 the Reserve Bank noted that housing turnover had fallen even as prices ran, and traced the fall into loan approvals, credit growth and the incomes of the industries that live on settlement.¹²
Where is the edge in all this? The price question is being argued everywhere at once, and Treasury has handed the consensus its numbers: price growth about 2 per cent lower over a couple of years than otherwise, median rents higher by less than $2 a week, roughly 75,000 additional households into home ownership across a decade.¹³ Forecasts will absorb those first, through prices, investor lending and construction. The volume question is quieter, and the duration question, how long the two-class market lasts, is quieter still. If the consensus has this right and the grandfather clause works like a transition, the readings below will say so within a few quarters. The forty-year record reads differently: splits like this one persist for decades, and while the deduction's grip loosens with a property's age, the vintages themselves never close.
The objection, at full strength, starts with why the clause exists at all. An investor borrowed, and sized their buffers, against the rules that existed when they committed the capital; stripping the treatment from an investment already made would rewrite its economics retrospectively, and a hard deadline with no protection invites a rush of selling into it, compressing the adjustment into a few disorderly months. Grandfathering, on this view, is simply how a country changes tax law without staging a fire sale. From there the objection widens. Prices are set at the margin by the transactions that do occur, and the reform works on the demand side no matter what incumbents do: the night the Budget put an end date on immediate deductibility for established housing, every future investor bid for existing stock got smaller, whether or not a single grandfathered owner ever sells. Incumbents sell anyway, on the timetable of life rather than tax; death, divorce, retirement and leverage have cleared markets through every regime, and with trimmed mean inflation still at 3.5 per cent and borrowing costs where they are, carrying a geared property is not cheap.¹⁴ The lifetime tax difference in Treasury's own example is $186, hardly the stuff of a frozen market. And the sharpest version cuts deepest. The owners with the most deduction to lose are recent and heavily geared, exactly the ones least likely to sell soon, while the owners most likely to sell, older and further along, often have little deduction left to protect. The Reserve Bank's investor data point the same way: by 2022–23 the over-60s were 28 per cent of Australia's 2.3 million property investors, and only around half of those older investors still carried a mortgage on the property.¹⁵ If deduction value and selling propensity run opposite, the mechanism can be vivid in any single owner's spreadsheet and invisible in the national turnover statistics.
All of that is right, and the last part is the hardest, because it is an argument about size rather than direction, and size cannot be settled from here. What can be said is where the two channels agree. On prices they pull opposite ways, fewer bidders pressing down, withheld stock holding up, so the price prints will always be arguable. On volumes they pull together, one removing buyers, the other removing sellers. So the claim worth holding is modest and testable: turnover is where this reform shows itself first, if it shows itself at all, and the test is sharper than a single number. If investor purchases of established homes fall and investor listings rise alongside them, the conventional channel is doing the work and stock is passing to owner-occupiers as designed. If purchases fall and listings fail to rise with them, the incumbency effect is doing the work, and holding periods will stretch to prove it. The plumbing gives the same reading from another angle: refinancing staying firm while settlements soften is what retain-and-refinance looks like in the data.
The prints that decide it start arriving within months. Investor purchases and investor listings in the established market, read together, along the two paths above. Days on market, and auction volumes. Transfer duty against budget when the state accounts arrive in December. The lending split between new builds and established homes. And the weakeners deserve equal billing. Turnover normalising within two or three quarters would say the deadline merely pulled forward sales that were coming anyway. Price falls concentrating in high-investor suburbs without any collapse in volumes would say the marginal buyer matters more than the locked-in holder, and the wedge narrower than drawn. Grandfathered stock listing at ordinary rates would say owners weight the treatment far less than the arithmetic suggests. The fairness debate will still be roughly where it is now when those prints land.
The Budget's authors will be judged on prices, because prices are what the next election can see. The tax system keeps a longer ledger. Somewhere in Australia there is an asset bought in the winter of 1985 that has never paid a dollar of capital gains tax, held by an owner whose advisers have repeated the same instruction for forty years, and whose children may never pay tax on those forty years either. When the country finally moved against its oldest grandfather clause this May, the instrument it reached for was a newer one, drawn around the gain instead of the asset. That exemption was written as a transition. It has been lived as an estate. On 12 May the country started the next entries in the ledger, and the first effect of a ledger like this one, if it has one, is quiet: fewer sales, thinner listings, and a dwindling class of owners, closed to new members since a Tuesday evening in May, paid month after month to stay exactly where they are.
Status at publication
The Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 was introduced on 28 May and referred to the Senate Economics Legislation Committee; the measures described above were before the Parliament at the time of writing, with the grandfathering date already fixed at 7.30pm AEST on 12 May 2026 and the principal changes drawn to apply from the 2027–28 income year. The signposts above begin printing with the winter data, and the ABS June-quarter lending release, due on 14 August, will be the first scheduled print with any post-Budget window in it. The separation the two paths describe, if it comes, starts there.
General information only. Not personal advice. Past performance is not indicative of future performance. Examples are illustrative. This material is intended for wholesale and professional investors.
Notes
1. Australian Treasury, Negative Gearing and Capital Gains Tax Reform, Budget 2026/27, 12 May 2026; and the second reading speech for the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026, 28 May 2026. Under the Bill, the capital gains changes would apply to all CGT assets, including those acquired before 20 September 1985, for gains accruing from 1 July 2027; gains accrued before that date remain outside the tax.
2. 2026/27 Federal Budget measures as announced 12 May 2026, including the Treasurer's Budget speech and Treasury's Budget-day materials: investors in qualifying new builds retain a choice between the 50 per cent discount and the new arrangements, and the minimum 30 per cent tax on discretionary trust income applies from 1 July 2028, subject to exceptions. Newspoll, published in The Australian following the Budget: 11 per cent of respondents expected to be better off and 52 per cent worse off, the weakest post-budget result since 2014.
3. Australian Treasury, Negative Gearing and Capital Gains Tax Reform, official worked examples and transitional rules, including the $1 million property example ($14,810 annual rental loss; $6,961 immediate deduction value at $210,000 of income) and the ten-year illustration (a $519,000 established property) in which total tax paid under the new rules is $186 higher.
4. Illustrative Banyantree calculation: five annual tax benefits of $4,761 to $6,961, each assumed received five years later than under the previous rules, discounted at 5 per cent, giving a present-value timing cost of approximately $4,500 to $6,500. It holds the annual loss and tax rate constant, and is not an estimate of lifetime tax cost or of any national transaction effect.
5. Ian Davidoff and Andrew Leigh, “How Do Stamp Duties Affect the Housing Market?”, Economic Record, vol. 89, no. 286, 2013. The study covers an earlier period and a cost borne broadly by purchasers; it is used only to show that transaction costs of this size can affect turnover, not to estimate this reform's effect.
6. Capital gains tax applies to assets acquired on or after 20 September 1985. For assets acquired before that date, a deceased estate's beneficiary acquires the asset with a cost base equal to market value at the date of death (ITAA 1997, s 128-15).
7. From 21 September 1999, following the Review of Business Taxation (the Ralph Review), the 50 per cent discount replaced cost-base indexation for individuals, with frozen indexation available by choice for assets already held. Australian Treasury, “A brief history of Australia's tax system”, Economic Roundup, Winter 2006, records that the 1999 change was intended partly to improve capital mobility and reduce the bias toward retaining assets.
8. Negative gearing deductions were quarantined for rental properties acquired from July 1985 and restored in September 1987. Subsequent analyses, including John Daley and Danielle Wood, Hot Property: Negative Gearing and Capital Gains Tax Reform, Grattan Institute, 2016, found rent rises concentrated in Sydney and Perth, where vacancy rates were low before the change, with little movement in other capitals.
9. Proposition 13, adopted by California voters in June 1978, capped property tax at 1 per cent of assessed value, limited growth in assessed value to 2 per cent a year while ownership was unchanged, and required reassessment to market value on change of ownership. On tenure, see Wasi and White, Property Tax Limitations and Mobility: The Lockout Effect of California's Proposition 13 (Brookings-Wharton Papers on Urban Affairs, 2005), which estimated average owner tenure rose by about one year relative to comparison states, and by two to three years in coastal cities where the subsidy was largest.
10. REA Group, “REA Group delivers strong yield growth in H1”, ASX announcement, 6 February 2026: national residential buy listings down 6 per cent; Australian residential revenue up 7 per cent, including a 14 per cent increase in buy yield from pricing, premium products and depth. PEXA Group's published Exchange product documentation lists transfers, mortgages and mortgage discharges among supported transactions.
11. Australian Treasury, Negative Gearing and Capital Gains Tax Reform, on the share of new investor lending directed to existing dwellings.
12. Reserve Bank of Australia, Housing Market Turnover, Bulletin, March 2017.
13. Australian Treasury, Negative Gearing and Capital Gains Tax Reform, estimates: price growth approximately 2 per cent lower over the forecast period than otherwise; median rents less than $2 a week higher; approximately 75,000 additional owner-occupier households over the decade.
14. Australian Bureau of Statistics, Consumer Price Index, Australia, March quarter 2026: trimmed mean CPI rose 3.5 per cent year on year in the March quarter 2026, above the Reserve Bank of Australia's 2 to 3 per cent target band.
15. Alexandra Michielsen, “Insights From New Data on Australian Housing Investors”, Reserve Bank of Australia Bulletin, 28 May 2026, drawing on linked administrative data to 2022–23: approximately 2.3 million individual housing investors; around 70 per cent holding one investment property; investors aged over 60 rising to 28 per cent of the total, with around half of older investors carrying a mortgage on the investment property.
