The Federal Parliament has now fixed an unintended issue in the recent negative gearing and capital gains tax reforms that became widely known as the “widow tax”.
A separate technical issue affecting homeowners who later decide to rent out their former main residence has also been addressed.
These changes provide greater certainty for property owners, particularly where a property is transferred following death or relationship breakdown, or where a former home is later rented out.
What was the ‘widow tax’ issue?
From 1 July 2027, new rules will generally quarantine losses from residential rental properties. These losses will only be available to offset income or capital gains from other residential rental properties.
However, properties acquired before 12 May 2026 are generally protected from these new restrictions.
The ‘widow tax’ issue arose where an ownership interest in a property was transferred after 12 May 2026 due to the death of an owner or a relationship breakdown.
Under the original rules, the transfer could potentially have been treated as a new acquisition. This could have resulted in a surviving spouse or former partner losing the protected negative gearing treatment that applied to the property when it was originally purchased.
What has changed?
The new rules specifically protect certain property interests transferred because of the death of a spouse or a relationship breakdown.
In some circumstances, the rules can also apply where someone inherits an additional interest in a rental property from a co-owner who is not their spouse.
As a result, an eligible transfer will not automatically cause the property interest to lose its original protected treatment for negative gearing purposes.
Case study 1 – Transfer after the death of a spouse
Sarah and David bought a rental property in 2019 as equal joint owners. The property has always been negatively geared, with annual rental losses of approximately $8,000.
Because they acquired the property before 12 May 2026, it was protected under the new rules.
If David died and his 50% interest passed to Sarah, the original rules could potentially have treated Sarah’s inherited interest as a new acquisition. This could have affected her ability to offset the rental losses against her other income.
Under the updated rules, this outcome is avoided. Because the transfer occurred following the death of her spouse, Sarah can retain the original protected treatment.
Former main residences
A separate technical issue involved properties that were originally purchased as a main residence before 12 May 2026 but were first rented out after that date.
Existing tax rules can, in certain circumstances, treat a former main residence as being reacquired at market value when it is first used to produce income. Under the original drafting, this could potentially have affected the property’s acquisition date for the new negative gearing rules.
The new legislation addresses this issue by disregarding the “first use to produce income” rule when determining the acquisition date for these purposes.
Case study 2 – Renting out your former home
James bought his home in 2018 and has lived there as his main residence ever since. In 2027, he decides to move in with his partner and rent out the property.
Under the original rules, first renting out the property after 12 May 2026 could potentially have resulted in a new acquisition date for negative gearing purposes.
The updated rules prevent this outcome. As James originally acquired the property before 7:30 pm on 12 May 2026, its original acquisition date is preserved for these purposes.
What does this mean for property owners?
The changes provide greater certainty for property owners whose circumstances change after 12 May 2026.
If you own an investment property jointly with your spouse, the new rules provide protection where an interest is transferred following death or relationship breakdown.
If you own a former main residence that you may rent out in the future, the new rules mean that first renting out the property should not, by itself, reset its acquisition date for the new negative gearing restrictions.
However, other tax considerations, particularly capital gains tax, may still need to be reviewed.
What should you do?
If you own property acquired before 12 May 2026, we recommend keeping clear records of:
- the original purchase date;
- ownership interests;
- changes in ownership; and
- the date a property is first used to generate rental income.
The rules around negative gearing and CGT can be complex, particularly when ownership changes or a former home becomes an investment property.
If you are affected by these changes on ‘widow tax’ or are considering renting out your home or transferring an interest in a property, please contact us to discuss your circumstances.
Pitt Martin Group is a firm of Chartered Accountants, providing services including taxation, accounting, business consulting, self-managed superannuation funds, auditing and mortgage & finance. We spend hundreds of hours each year on training and researching new tax laws to ensure our clients can maximize legitimate tax benefit. Our contact information are phone +61292213345 or email info@pittmartingroup.com.au. Pitt Martin Group, Sydney tax accountants, is located in the convenient transportation hub of Sydney’s central business district. Our honours include the 2018 CPA NSW President’s Award for Excellence, the 2020 Australian Small Business Champion Award Finalist, the 2021 Australia’s well-known media ‘Accountants Daily’ the Accounting Firm of the Year Award Finalist and the 2022 Start-up Firm of the Year Award Finalist, and the 2023 Hong Kong-Australia Business Association Business Award Finalist.
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This content is for reference only and does not constitute advice on any individual or group’s specific situation. Any individual or group should take action only after consulting with professionals. Due to the timeliness of tax laws, we have endeavoured to provide timely and accurate information at the time of publication, but cannot guarantee that the content stated will remain applicable in the future. Please indicate the source when forwarding this content.
By Yvonne Shao @ Pitt Martin Tax
