Tuesday night's federal budget: scenarios and probabilities

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The federal budget drops Tuesday night, May 12. The conversation across our client base, the broker community, and the property investor channels I track has converged on a small number of expected changes to negative gearing and the CGT discount. The exact shape is still unknown, so I'm sharing a few potential scenarios below.

General information only. This article is general information and commentary only. It does not take into account your personal financial situation, tax position, or investment objectives. It is not personal financial advice, tax advice, or legal advice. Speak with a licensed financial adviser, qualified accountant, tax agent, or solicitor before acting on anything you read here.

What's on the table?

Two changes are expected on Tuesday night.

Negative gearing. The signals point to a meaningful tightening for new investments. The live scenarios are:

• Full abolition of negative gearing for new property purchases (with grandfathering of existing portfolios); and
• A hard cap at two properties per individual investor (with losses on the third property onwards quarantined). The single-property cap that dominated early discussion now looks unlikely.

Capital gains tax discount. Two scenarios are being commented on.

1. The first is replacing the 50% discount with full CPI indexation across all asset classes (property, shares, business, crypto), returning to the pre-1999 model.
2. The second is a less dramatic move from a 50% discount to 33%, aligning the property treatment with the existing superannuation treatment. Jeremy Iannuzzelli from Praedium Partners rates the capital gains tax discount change at 95% probability with grandfathering expected on a hard cut-off date. Pre-budget reporting across ABC News, AFR, and major accounting firms has consistently identified the indexation model as the most-cited approach for the CGT discount reset.

The combined revenue projection across negative gearing and capital gains tax changes is around $2 billion over four years and $25-30 billion over a decade. That gives a sense of the seriousness. Significant enough to warrant going through the political pain, not so large that the changes will be revolutionary on day one.

The four practical implications

1. Holding costs go up for negatively geared investors. Anyone deducting rental losses against salary income loses that mechanism for new acquisitions. Existing portfolios are expected to be grandfathered. The question to ask: does this property still make sense without the tax shield? If no, you were relying on a policy setting, not the fundamentals.

2. Capital gains tax treatment improves for long-hold investors if indexation lands. CPI indexation taxes only real gains, not nominal gains. For a property purchased ten years ago at $500K with cumulative CPI inflation of around 30%, the indexed cost base becomes $650K. The taxable gain reduces by $150K straight up. Long-hold investors come out ahead of the current 50% discount over sufficiently long periods. As a rough rule of thumb, at 3% sustained inflation, indexation can outperform the 50% discount for properties held 15-20+ years, depending on the actual property growth rate over the holding period. Below typical long-term Australian growth (~5% per annum), indexation tends to win sooner. Above it, the 50% discount can stay ahead even at 20+ years.

3. Losses beyond any negative gearing cap are quarantined, not eliminated. This is the most under-reported angle in the current commentary. Per Iannuzzelli's framing, losses on the third or further property cannot offset salary income but can be carried forward to offset future investment income from the portfolio. The "negative gearing is dead" headline overstates what is actually on the table. The mechanism shifts from immediate refund to deferred deduction.

4. The personal-name default may no longer be one-sided for new acquisitions. If capital gains tax moves to a 33% reduced discount, the effective top-bracket rate on capital gains in personal name rises from around 23.5% to around 31%, compared with a flat 30% in a passive investment company. The margin is small, around 1.5 percentage points, but it's the first time in 25 years that personal-name acquisitions don't automatically win on the capital gains tax comparison alone. The full structure decision still depends on factors the math doesn't capture: gearing position, rental income tax treatment, land tax thresholds, accounting costs, and estate planning. These trade-offs are situation-specific and worth discussing with a qualified accountant or registered tax agent.

What do the probabilities look like?

The 95% probability assessment from Jeremy Iannuzzelli at Praedium Partners aligns with the broad pre-budget consensus across major publications and accounting firms. The capital gains tax discount change is near-certain. The shape is uncertain but the direction is largely locked.

Negative gearing reform is highly likely. The full abolition scenario is the live one but a two-property cap remains in play. Quarantining of losses is the most probable middle ground regardless of the cap level. It lets the government claim deduction tightening without eliminating the mechanism that funds investor entry into the market.

The historical comfort, often missed in pre-budget panic: Capital gains tax was introduced in Australia in 1985 during 17-18% interest rates and widespread negative sentiment. The property market grew 50% between 1986 and 1990. Tax reform fear has typically exceeded actual market impact.

The rate environment compounds this

The RBA raised the cash rate to 4.35% on 5 May, the third consecutive 25 basis point hike in 2026. Variable rates for owner-occupiers now sit in the mid-5% range. Investor rates carry the typical loading and sit above 6%. The forecast spread is wide: CBA expects the RBA to hold for the rest of 2026, Westpac forecasts 4.85% by August.

At 6%+ investor rates, the offset account becomes a meaningful structural decision. A dollar in offset against a 6% mortgage delivers a 6% tax-free equivalent return for owner-occupiers, or roughly half that on an after-tax basis for investors at the top marginal rate (because investor mortgage interest is deductible, so the offset's saving is reduced by the foregone deduction). The same dollar in a term deposit at 3% taxable comes nowhere close in either case. For investors with positive after-tax cash flow, the offset arithmetic alone is worth revisiting in light of changed capital gains tax incentives.

Shane Oliver at AMP raised a separate macro concern worth flagging. Total government spending has expanded from around 22% of GDP before the pandemic to about 28% today. Federal expenditure specifically has climbed from just below 25% to roughly 27%. Every time the RBA cools demand, the fiscal side offsets with cost-of-living payments. The hiking cycle prolongs as a result. Tomorrow night's budget settings around stimulus versus restraint will signal whether that pattern continues.

The investor community lens

The property-investor frame isn't the only one these changes touch. The Australian startup, venture capital, and broader equity investor community has been vocal pre-budget, with a different concern: under the indexation model, the changes apply across all asset classes, not just property.

Paul Bassat (co-founder, Square Peg Capital; founder, AMPLIFY) has argued the broader stakes pre-budget, particularly in the context of AI reshaping the employment landscape and the need for Australia to keep creating high-quality jobs that startup capital funds.

Ben Grabiner (co-founder and general partner, Side Stage Ventures) raised the UK as a cautionary comparison: reductions in entrepreneurship relief and increased taxes on innovation have coincided with significant capital and talent flight. Australian productivity growth has averaged 0.2% per year over the past decade. The argument: this is the wrong moment to dampen risk-taking and capital formation.

Whether or not those arguments land for you, the indexation model treats all asset classes the same way. The same reset that affects a Melbourne investment property affects a startup equity holding, an angel investment, or a long-held public market position. The conversation isn't only about property investors. It's about everyone holding appreciating assets.

How does this change things going forward?

• For investors relying on negative gearing to make their math work, the question becomes whether the current setup is dependent on the deduction or whether it stands on its own.
• For buyers, running the numbers under both current and proposed settings is a sensible exercise. A deal that only works with negative gearing or the 50% capital gains tax discount is exposed to policy risk worth weighing.
• Borrowing capacity has tightened materially since the first 2026 hike. Quotes from six months ago can differ significantly from where capacity sits today across both owner-occupier and investor categories.
• For investors with a third property or considering one, the trust or company structure conversation is worth understanding. The break-even between holding structures has shifted, and the trade-offs are situation-specific. A qualified accountant or registered tax agent can run the math on a specific portfolio.
• Avoid reacting to headlines without doing the math on your specific position. CPI indexation may produce a better outcome than the current 50% discount for long-hold investors while quarantining of losses would preserve most of the negative gearing benefit, just on a delay.