Capital Gains Tax and Negative Gearing – Tranche 2 Legislation
The Tax Institute welcomes the opportunity to make a submission to the Treasury in relation to the consultation on:
- the exposure draft Treasury Laws Amendment (Tax Reform No. 3) Bill 2026: CGT adjustments (tranche 2) and accompanying explanatory material;
- the exposure draft Income Tax Assessment (Method for Apportioning Capital Gains and Capital Losses) Determination 2026 (apportionment Determination) and accompanying explanatory statement;
- the exposure draft Treasury Laws Amendment (Tax Reform No. 3) Bill 2026: Negative gearing (tranche 2) amendments and accompanying explanatory material; and
- the exposure draft instrument and explanatory material defining a ‘new residential dwelling’ and negative gearing activity exemptions.
We acknowledge the need for the apportionment Determination and new residential definition definitions, and some of the complexities involved in transitioning to these new CGT and negative gearing rules.
We have set out below some suggestions for improvement.
Amendments to tranche 1 legislation
The Government’s announcement that it will address the so-called ‘widow tax’ and ‘divorce tax’ will no doubt be welcome news to many taxpayers and their advisers. The changes in this tranche that preserve existing tax treatment for certain property transfers arising from death and relationship breakdown respond to these concerns, and should provide greater certainty for families dealing with inheritance and relationship breakdown.
However, the need for these amendments so soon after the first tranche of legislation passed Parliament highlights a broader concern about the process used to develop changes of this scale. Many of the measures in the two Tranche 2 exposure draft Bills are not new policy initiatives, but corrections to unintended outcomes, technical deficiencies and design issues that stakeholders and the Government identified only after the legislation had already been enacted. These are significant, economy-wide tax changes affecting millions of Australians, and a more comprehensive consultation process before the first tranche was passed would have likely identified many of these issues earlier, and avoided the need for successive rounds of legislative correction.
It is welcome that the Government is willing to listen to community concerns and improve the legislation. However, these amendments also raise an important question: if a number of significant problems have already emerged and required correction, what other unintended consequences remain undiscovered? That question is particularly pressing, given that Treasury has already flagged that further tranches of legislation will be required to address unresolved issues. This is not how good tax policy should be developed, and it adds to the uncertainty and cost that taxpayers and advisers already face in adapting to changes of this scale.
Consultation timeframe
We made a similar point in our submission to the Senate Economics Legislation Committee on 9 June 2026 (June 2026 submission) regarding the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 (Tranche 1). In that submission, we expressed concern that the CGT discount and negative gearing measures were introduced into Parliament without any public consultation. We also noted a broader pattern of limited or rushed consultation on significant tax reforms.
We welcome the release of this second tranche for public consultation, unlike Tranche 1. However, we remain concerned that the timing and sequencing of the consultation process continue to reflect the same underlying issues.
Consultation on the minimum tax on discretionary trusts closed on 31 July 2026. Treasury then released draft regulations and a determination relating to Tax Practitioners Board sanctions reforms on 3 August 2026, with submissions due by 14 August 2026. The following day, on 4 August 2026, Treasury opened consultation on the CGT and negative gearing Tranche 2 legislation, with submissions due by 21 August 2026. During the same period, Treasury also conducted targeted consultation on the Innovative Business CGT Concession and on other aspects of the Tranche 2 package.
Each of these measures is significant on its own and involves many of the same stakeholders, advisers and representative bodies. Running multiple major consultations simultaneously limits stakeholders' ability to thoroughly analyse the proposals, engage with their own stakeholders, including members, and provide considered feedback on each proposal.
Against this background, our submission focuses on the aspects of the exposure drafts that we consider raise the most significant policy, technical, and administrative issues. In particular, we comment on the prescribed apportionment method, the scope of the minimum tax exemption for testamentary trusts and deceased estates, and the definition of a new residential dwelling. We also identify a number of interactions with existing provisions of the tax law that we consider require further clarification.
We encourage Treasury to continue engaging with stakeholders as these measures progress. We also intend to provide further comments should additional issues emerge.
Finally, we reiterate the recommendation made in our June 2026 submission that the Government should recommit to the principles of good tax policy development. This includes early and ongoing engagement with the tax community on complex legislative changes, and better sequencing of major consultations so that stakeholders can give each proposal the careful consideration it deserves.
A summary of our key issues and recommendations is contained in Appendix A. Our detailed comments and recommendations are contained in Appendix B.