Draft legislation also extends protections to divorcees and domestic violence survivors
Australians who inherit an investment property from a deceased spouse will retain the negative gearing treatment that applied prior to their partner's death, under draft legislation released by the Albanese government for public consultation.
The proposed changes address an unintended consequence of Labor's earlier decision to restrict negative gearing to newly built homes. Under that policy, investment properties owned before 12 May were grandfathered, but established homes purchased after that date would no longer allow owners to offset rental losses against other income from July 2027.
The drafting created an anomaly whereby a surviving spouse who inherited a partner's share of a jointly owned property could be treated as having acquired it after the grandfathering cut-off — attracting what critics labelled a "widow tax".
ACT senator David Pocock (pictured right), who led complaints about the flaw, had warned the measure would "disproportionately negatively impact women."
Under the draft exposure legislation, open for consultation until 21 August, the negative gearing treatment would follow the inheritance. The same protection would extend to property received through divorce or separation settlements.
Pocock welcomed the draft, saying it appeared to address "many of the most urgent concerns" with the bill. "However, the timing for passage of this legislation is important," he said. "It's critical that lenders are able to consider preserved benefit in assessing loan serviceability in decisions they are making now and in coming months."
Beyond the inheritance fix, the government has proposed several carve-outs to prevent its restrictions discouraging investment in new or affordable housing. The definition of a "new" home would be extended to cover properties sold within 24 months of their first occupancy certificate, giving developers and investors a window to on-sell without the next buyer immediately losing negative gearing access.
Negative gearing would also remain available on established properties used for NDIS specialist disability accommodation, affordable housing delivered through eligible community housing providers, public housing, or qualifying build-to-rent developments.
The package also includes a practical measure for owners of property and other hard-to-value assets ahead of the incoming capital gains tax changes, which replace the 50% discount with an indexed model tied to inflation. Rather than commission a formal valuation, owners would be able to apply a formula to apportion capital gains between the old and new systems.
In a statement, Treasurer Jim Chalmers said the draft changes would ensure Labor's tax reforms "appropriately apply to a range of specific taxpayer circumstances and structures."
"The release of these draft materials reflects the government's commitment to consult on more complex elements of the tax reforms announced in the budget," he said.
Chalmers added that further tranches of legislation were being finalised, saying the package was designed to "deliver tax cuts for millions of Australians, a fair go for first home buyers, and a fairer tax system that better aligns the treatment of labour and asset income."
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