Law Council of Australia

Business Law Section

Capital Gains Tax and Negative Gearing—Tranche 2 Legislation

Submission Date: 26 August 2026

The Tax Committee of the Business Law Section of the Law Council of Australia (Committee) welcomes the opportunity to comment on Treasury’s consultation on Capital Gains Tax and Negative Gearing—Tranche 2 Legislation. The Committee’s submission addresses critical aspects of the Tranche 2 package, including the application of the reinstated CGT indexation regime to Attribution Managed Investment Trusts (AMITs), valuation of deemed sale and reacquisition, minimum tax treatment of deceased estates and testamentary trusts, deferred gains, foreign and temporary residents, and related consequential and implementation matters.

The consultation concerns the next stage of draft legislation implementing the 2026–27 Budget reforms to negative gearing and capital gains tax, following the first-stage legislation. The exposure draft is the Treasury Laws Amendment (Tax Reform No. 3) Bill 2026 and related materials.

The consultation addresses continuity of negative gearing or new-build status on inheritance and relationship breakdown, the application of the CGT changes to AMITs, exemptions for genuine testamentary trusts, deceased estates and special disability trusts, part-year Australian residents, deferred gains and certain CGT events, the definition of new residential dwelling, exempt housing categories, and valuation rules for real property and assets without a readily ascertainable market value.

Treasury’s draft identifies four cases in which a dwelling may be a new residential dwelling for an entity: construction or installation on land without a dwelling, addition of dwellings to land, conversion of a non-residential building, and acquisition from another entity no more than 24 months after the first certificate of occupancy. The common requirements are directed to dwellings in Australia that are legally occupiable and capable of being acquired by another entity. Treasury proposes to place the final definitions and exemptions in primary legislation, while later tranches will address CGT roll-overs and similar concessions, remaining foreign, mixed, and temporary resident issues, and special cases including consolidated groups.

The Committee recognises the policy objective of directing negative gearing towards additional housing supply and replacing the existing CGT discount for most gains with cost base indexation and a minimum 30 per cent tax rate on relevant capital gains from 1 July 2027. It considers, however, that the Tranche 2 rules must operate coherently for individuals, co-owners, trusts, AMITs, deceased estates and housing providers, and must be capable of being administered from ordinary commercial records. Without that coherence, the regime risks imposing disproportionate compliance costs and producing unintended inequities.

The principal recommendations are to keep substantive eligibility rules in primary legislation, provide objective new-dwelling and continuity rules, offer alternative valuation safe harbours, expand the minimum-tax exemptions, adopt a workable AMIT attribution model, provide transitional relief and elevated de minimis thresholds, and publish a Law Companion Ruling with worked examples by 31 March 2027.

The Committee’s principal concerns include the operational burden of applying member-specific AMIT gross-ups, uncertainty about the treatment of losses and multiple gains under proposed subsection 276-85(4B), uncertainty about the section 110-36A choice, and the interaction with unders and overs and CGT event E10. The Committee is also concerned about systems, data, and transitional costs. It supports the objective of investment neutrality but considers that these issues require targeted amendment and clear administrative guidance before the regime commences. In the Committee’s view, commencement without resolution of these matters would be premature and would expose investors to avoidable systemic risk.

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Last Updated on 28/08/2026

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