Labor’s 2027 Budget: Help or Hindrance to Aspirational First Home Buyers and Business Owners?

Treasurer Jim Chalmers has framed Labor’s proposed 2027 tax reforms as a necessary correction to “distortions” in the Australian economy – particularly the overinvestment in housing compared to productive assets such as equities and businesses.

On the surface, that sounds reasonable. Australia undeniably faces housing affordability challenges, widening wealth inequality, and growing frustration among younger Australians who feel locked out of the property market.

But beneath the political messaging lies an important question:

If the goal is to encourage investment away from housing and toward productive assets, why are the proposed Capital Gains Tax changes being applied to all asset classes – including businesses, direct shares and exchange-traded funds (ETFs)?

That contradiction goes to the heart of the debate.

Punishing the Very People Trying to Get Ahead

Many aspirational first home buyers are everyday Australians trying to build a deposit while battling rising rents, inflation, and stagnant affordability.

For years, direct shares and ETFs have been a practical and relatively accessible way for younger Australians to save and grow wealth faster than they could through ordinary savings accounts or term deposits. Long-term investment markets have historically outperformed cash, helping disciplined savers gradually build the equity needed to enter the housing market.

Yet under Labor’s proposed changes, these investments will also face heavier taxation.

If the Government genuinely wants to encourage productive investment and wealth creation outside housing, why make equity investment less attractive for younger Australians trying to save for their first home?

The reality is that these reforms risk discouraging wealth creation altogether.

The End of Rentvesting?

One of the more practical strategies adopted by younger Australians in recent years has been rentvesting.

Rentvesting occurs when a first home buyer purchases an investment property in a location they can afford while continuing to rent closer to work, family, schools, or social networks.

For many Australians, particularly those living in major capital cities, this has been one of the only realistic pathways into the property market.

Typically, these buyers target established homes because they are:

• More affordable than brand-new properties;
• Often located on larger blocks;
• More suitable for renovations or value-adding opportunities;
• Better positioned in established communities and infrastructure corridors.

The long-term strategy is simple: build equity over time, eventually sell the investment property, and upgrade into a principal residence that better suits the buyer’s lifestyle and career.

However, once you simultaneously:

• Remove or reduce negative gearing benefits;
• Reduce or remove CGT concessions;
• Increase holding costs;  

…the economics of rentvesting become substantially less attractive.

The Government appears to assume that investors will simply pivot into new housing stock instead. But new homes are often significantly more expensive, built on smaller allotments, and offer far less opportunity for value creation through renovation or redevelopment.

For many younger Australians, the result is not a shift in investment behaviour – it is complete exclusion from the market.

Will Rents Rise Even Further?

One of the most overlooked consequences of reducing investment incentives is the likely reduction in rental supply.

Australia is already experiencing severe rental shortages across many regions. If fewer investors purchase rental properties, fewer homes become available to tenants.

And who are those tenants?

In many cases, they are the same young Australians trying to save for a first home deposit.

Higher rents mean:

• Less disposable income;
• Reduced borrowing capacity;
• Slower deposit accumulation;
• Greater financial stress.

Policies designed to improve affordability may ultimately worsen it.

Borrowing Capacity Risks Are Already Emerging

Another immediate concern largely absent from the political debate is the impact these proposed tax changes may have on bank lending assessments and borrowing capacity.

Many lenders currently factor negative gearing benefits into serviceability calculations when assessing investment property loans. In simple terms, the expected tax benefit associated with investment property losses can improve a borrower’s assessed repayment capacity and therefore increase the amount they are eligible to borrow.

However, as lenders begin reassessing how the proposed changes may impact future taxation outcomes, there is growing concern that previously issued conditional approvals — particularly for existing investment properties — may be re-evaluated.

If negative gearing concessions are removed, the projected after-tax position of an investment property changes significantly. This may reduce a borrower’s assessed servicing capacity and ultimately lower the amount the bank is prepared to lend.

That creates a very real risk for buyers currently active in the market.

Many Australians attend auctions or enter into unconditional contracts relying on indicative or conditional finance approvals obtained under existing taxation assumptions. If lending policies tighten or tax benefits are excluded from servicing calculations before settlement occurs, some buyers may suddenly find themselves unable to complete the purchase.

This is particularly important in auction environments, where contracts are generally unconditional and buyers may have limited legal protections if finance cannot be secured.

Prospective purchasers — especially first home buyers and smaller investors — should seek updated advice from their broker or lender before committing to purchases under the evolving policy landscape.

The broader irony is difficult to ignore:
policies intended to improve affordability may instead reduce borrowing capacity for the very Australians attempting to enter the market without any significant adjustment to housing prices due to insufficient supply.

The “Grandfathering” Problem

Another controversial element of the proposed reforms is the grandfathering of existing investments.

In practical terms, this means Australians who have already benefited from existing tax concessions will continue to retain those benefits moving forward, while younger generations entering the market later will not.

This creates an uncomfortable perception:
those who already climbed the ladder get to keep their advantages, while the ladder is pulled up behind them.

It may also create a supply problem.

Existing investors benefiting from legacy tax arrangements may be even less inclined to sell assets, particularly established homes. Reduced turnover means fewer existing properties become available for aspiring first home buyers.

Again, the outcome may directly conflict with the Government’s stated objective.

Small Business Owners Are Also Families and First Home Buyers

The debate surrounding these reforms often portrays “investors” and “business owners” as wealthy elites disconnected from ordinary Australians.

That narrative ignores reality.

Many small business owners are first home buyers, young families, or middle-income Australians trying to build financial security.

Labor’s proposed changes to discretionary trust taxation – including the effective imposition of a minimum 30% tax rate on trust income – will directly impact many family-run businesses.

For decades, Australia’s tax system has recognised an important economic principle:

Starting and building a business involves substantial risk.

Business owners routinely:

• Mortgage family homes;
• Invest personal savings;
• Work below minimum wage during startup phases;
• Forego superannuation contributions;
• Prioritise paying employees and suppliers before themselves.

Unlike salaried employees receiving compulsory superannuation, many small business owners rely heavily on the eventual sale of their business to fund retirement.

Treasurer Chalmers has argued these reforms improve “fairness” by aligning the taxation of business profits more closely with employee wages.

But this overlooks a fundamental difference:

Employees generally assume limited financial risk. Business owners often assume enormous personal risk.

Australia’s taxation system has historically rewarded entrepreneurship because successful businesses:

• Create employment;
• Increase productivity;
• Generate innovation;
• Strengthen the broader economy.

Reducing those incentives carries consequences.

A Dangerous Signal to Future Entrepreneurs

The broader concern is not simply about tax rates themselves. It is about the signal these reforms send to the next generation of Australians considering entrepreneurship.

Why would young Australians take the risk of starting a business – often with significant personal guarantees and financial exposure – if the Government ultimately claims close to half the reward upon exit?

Capital is Mobil.

Business investment can increasingly move offshore to jurisdictions with more favourable tax environments and stronger incentives for innovation and growth.

If Australia becomes less attractive for business formation and investment:

• Fewer businesses will be started;
• Expansion slows;
• Productivity weakens;
• Employment opportunities decline.

And that again circles back to younger Australians.

How does limiting business growth help young people secure meaningful employment capable of supporting:

• Rising living costs;
• Higher rents;
• Mortgage repayments;
• Future family formation

Small business remains the backbone of the Australian economy. Governments should be encouraging participation and investment – not discouraging it.

A Tax Reform or a Revenue Grab?

Perhaps the most politically difficult aspect for Labor is the perception that these reforms contradict previous election commitments.

At the last election, Labor repeatedly assured Australians there would be no changes to negative gearing or Capital Gains Tax settings.

Now the Government argues circumstances have changed.

But many Australians are asking a reasonable question:

What exactly has changed?

At the time of the election:

• Property prices were already historically high;
• Migration was already elevated;
• Government spending was already significant;
• Inflation and living costs were already major concerns.

In fact, housing markets in several states had already begun losing momentum or retracing.

So why the sudden reversal?

Critics argue the reforms increasingly resemble a revenue-raising exercise framed as intergenerational fairness.

The Risk of Unintended Consequences

There is no doubt Australia needs serious housing and tax reform. But meaningful reform should encourage aspiration, productivity, investment, and supply creation – not suppress them.

Young Australians do not need fewer pathways to build wealth.

They need more.

Policies that:

• Discourage investing;
• Reduce rental supply;
• Penalise entrepreneurship;
• Increase business uncertainty;
• Reduce borrowing capacity;

…may ultimately make affordability and inequality worse rather than better.

The challenge for any government is balancing fairness with aspiration.

Because if aspiration itself becomes financially unattractive, Australia risks creating a future where fewer people invest, fewer people build businesses, fewer homes are supplied, and younger generations are left with even fewer opportunities than before