For a town where holiday cottages outnumber long-term rentals on many streets, the federal budget handed down on 12 May carries some pointed implications. The sweeping changes to negative gearing and capital gains tax will reshape the economics of short-term rental investment across Australia — but in a place like Daylesford, with one of the highest concentrations of Airbnb properties in regional Victoria, the effects will be felt particularly sharply.
The picture, however, is not straightforward. For existing owners, the changes offer more shelter than many feared. For new investors, the equation has shifted considerably. And for locals who have watched long-term rental housing steadily disappear into the short-stay market, the reforms may not deliver the relief they hoped for.
Two Blows, Not One
It is easy to focus on the budget night announcements, but Airbnb-style investors are actually facing two separate changes at once.
The first arrived quietly before the budget. The Australian Taxation Office has issued new guidance — effective from 1 July 2026 — that tightens how holiday homes are treated for tax purposes. Under the old approach, owners who used their property privately for part of the year could still claim a proportional deduction on holding costs. Under the new interpretation, if a property is used privately for personal holidays, even occasionally, the ATO may classify it as a “leisure facility” rather than an income-producing investment.
The changes to the deductions rules come on top of the introduction the Victorian Vacant Residential Land Tax. Properties on the short term rental market that rent out for less than six months a year attract a significant tax burden for owners. For the many Daylesford operators who treat their cottage as both a business and a personal retreat, the changes to deductions and the VRLT could substantially change the financial case for holding the property.
The second blow came in the budget itself. From 1 July 2027, negative gearing will be abolished for established residential properties purchased after 7:30pm on 12 May 2026. Rental losses on those properties will no longer be deductible against wage income or other earnings. They can only be offset against income from other residential properties, with any remaining losses carried forward to future years. At the same time, the longstanding 50 per cent capital gains tax discount will be replaced from 1 July 2027 by a cost-base indexation system, with a minimum 30 per cent tax applying to net capital gains.
Existing Owners Are Protected — For Now
Properties purchased before Budget night — including those already under contract but not yet settled — are grandparents under the existing rules. Negative gearing remains available for those properties until they are sold, and the CGT arrangements that applied at purchase continue to apply to gains accrued before 1 July 2027.
That means the majority of current Daylesford and Hepburn Springs short-stay operators will not face immediate change to their tax treatment, at least on the negative gearing front. They can, in theory, carry on as before.
But the grandparenting creates its own dynamic: existing investors now have a strong incentive to hold rather than sell. On the one hand selling would mean losing the accumulated tax advantages of negative gearing and the CGT. On the other, current owners will be faced with a calculation of the benefits of the existing negative gearing and CGT rules versus the changes in deductions rules and the risk of the VRLT.
New Investors Face a Much Harder Sum
For anyone considering purchasing an established property in the area as a short-term rental investment from this point forward, the numbers look considerably less attractive. Without negative gearing against personal income, a loss-making property in the early years of ownership offers no immediate tax benefit. And when it comes time to sell, the 50 per cent CGT discount that has historically sweetened the deal on a property that has grown strongly in value — as Daylesford properties typically have — will be less attractive.
The combined effect may reduce investor demand for established properties, leading to lower prices, which is precisely the government’s intention. Whether it reduces demand from short-stay investors specifically — rather than long-term rental investors — is another question, and one the legislation does not directly address. But the Daylesford market has already seen a significant increase in the number of owners putting their properties on the market.
The Housing Question
For local residents who have struggled to find affordable long-term rental housing in a market increasingly dominated by visitor accommodation, the reforms are welcome in principle but limited in practice.
The changes make new Airbnb investment significantly less tax-advantaged. Over time, as grandparented properties are eventually sold or converted, there may be some gradual easing of short-stay supply. But the lock-in effect means that shift could take a number years.
There is also a window before 1 July 2027 during which some existing investors — particularly those holding properties with substantial capital gains — may choose to sell and lock in the full 50 per cent CGT discount on gains to date. If a portion of those properties re-enter the long-term rental or owner-occupier market, that would be a genuine benefit to local housing affordability.
This article contains general information only and does not constitute financial or taxation advice. Readers should seek professional advice for their individual circumstances.
