Surviving spouses who inherit a partner’s investment property will keep the negative gearing treatment that applied before the death, under draft legislation released for public consultation this week. The fix addresses an unintended flaw in the May budget announcement that restricted negative gearing to new builds from July 2027.
The original policy grandfathered established properties owned before 12 May, but created an anomaly. A widow or widower inheriting their late partner’s share of a jointly owned property could be treated as acquiring it after the cut-off date, losing the ability to offset rental losses against other income. Critics labelled it a widow tax. The draft law extends the same protection to property received through divorce or family violence escape.
The inheritance carve-out: how it works
Under the proposed rules, negative gearing treatment follows the asset, not the transfer event. If a property was grandfathered on 12 May, it stays grandfathered when ownership passes to a surviving spouse, former partner in a separation settlement, or someone fleeing domestic violence. The consultation period closes 21 August.
The amendment responds to pressure from crossbench senator David Pocock, who argued the flaw would disproportionately hurt women. His statement this week welcomed the draft but flagged a timing concern: lenders need certainty now about preserved benefits when assessing serviceability for loans being written in the months ahead.
What else changed in the package
The draft law widens the definition of a new home to include properties sold within 24 months of the first occupancy certificate. That gives developers and initial buyers a window to on-sell without the next purchaser immediately losing negative gearing access, addressing a friction point for off-the-plan and display home sales.
Negative gearing remains available on established homes used for NDIS specialist disability accommodation, affordable housing delivered through registered community providers, public housing, and qualifying build-to-rent projects. The carve-outs aim to prevent the restrictions discouraging investment in supply-constrained housing segments.
A separate measure offers owners of hard-to-value assets a formula-based option for apportioning capital gains between the old 50 per cent discount system and the incoming indexed model tied to inflation. The alternative avoids forcing owners to commission formal valuations at the transition point.
Edge cases the law doesn’t address
The draft covers inheritance by spouses, divorce settlements, and domestic violence survivors. It does not explicitly extend to other involuntary transfers: inheritance by adult children, property received through deceased estates outside spousal relationships, or assets transferred under power of attorney arrangements for incapacitated owners.
Those scenarios involve the same policy tension. An owner did not choose to sell or acquire the property, yet the transfer could reset the grandfathering clock. The consultation period may surface whether Treasury considers these material gaps or acceptable trade-offs.
Key numbers
Grandfathering cut-off: 12 May 2025. Negative gearing restrictions take effect: 1 July 2027. New home sale window: 24 months from occupancy certificate. Consultation closes: 21 August 2025.
What the amendment signals about policy flexibility
The widow tax flaw emerged within weeks of the budget announcement. The government’s willingness to draft amendments before the primary legislation passes Parliament suggests it will adjust the framework when real-world edge cases create unintended harm.
That flexibility cuts both ways for investors. It reduces the risk of being caught by drafting oversights. It also means the final policy settings remain a moving target until all tranches of legislation are finalised and passed. Treasury has flagged further draft releases covering more complex elements of the tax package.
The Treasurer’s statement frames the changes as ensuring reforms apply appropriately to specific taxpayer circumstances. That language implies the government sees consultation as a chance to refine mechanics, not revisit the core policy direction.
Risks in the next six months
Timing is the immediate friction. Lenders are making serviceability decisions now for loans settling over the next 12 months. If the final law does not pass before year-end, borrowers and lenders face uncertainty about whether inherited properties retain grandfathered status. That uncertainty could tighten credit or delay transactions involving jointly owned investment properties.
The consultation period runs until late August, giving Parliament a narrow window to debate and pass amendments in the spring session. Any delay pushes passage into 2026, closer to the July 2027 effective date and election timing.
A second risk sits in the details Treasury has not yet released. The draft covers inheritance and divorce, but silent on trusts, companies, self-managed super funds, and other ownership structures commonly used for investment property. Further tranches of legislation may clarify or create new anomalies.
What it means for anyone holding or inheriting property
If you own an established investment property acquired before 12 May, the asset stays grandfathered if your spouse inherits it or receives it in a separation settlement. You do not need to act before July 2027 to preserve that treatment.
If you are considering buying an established property now with a partner, be aware the draft law only protects involuntary transfers. Voluntary sale and repurchase after 12 May resets the grandfathering. Estate planning that involves transferring property to adult children or into trusts may not be covered by the inheritance carve-out, depending on final wording.
If you are servicing a loan application involving an investment property that may be inherited or transferred, ask your lender how they are treating grandfathered status in serviceability calculations while the law is in draft. Some lenders may wait for final passage before giving credit for preserved negative gearing.
Anyone preparing for the capital gains tax changes can use the formula method to split gains between the old discount and new indexed system, avoiding the cost and complexity of a formal valuation. That option matters most for properties held long enough that inflation indexing delivers a smaller taxable gain than the 50 per cent discount.
For a deeper look at how the broader tax package reshapes investor decisions, see Property Tax Changes: 5 Wealth Moves Investors Must Check. If you are assessing first-home buyer competition in the context of the policy shift, read First-home buyers retreat as Labor’s tax gamble bites.
Practical call
If the draft law affects your circumstances, lodge a submission during the consultation period before 21 August. Treasury has a track record of refining details when stakeholders raise specific scenarios the drafting does not cover. If you hold property jointly with a spouse or partner, review your ownership structure and estate plan to confirm the inheritance protections apply as intended.
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General info, not financial advice.
