Australians who lose a husband or wife and inherit their share of a rental property will not be slugged with an unfair tax bill after the government backed down on a flaw in its own reforms.
The mix-up had been dubbed the “widow tax” and threatened to punish grieving spouses, divorcees and even domestic violence victims at the worst possible time.
The Albanese government has now proposed changes to fix the problem, meaning people who inherit an investment property from a partner will keep the negative gearing treatment that already applied before their partner died.
The trouble began with Labor’s decision to limit negative gearing to newly built homes, with older investment properties bought before budget night on 12 May grandfathered under the old rules.
But anyone who bought an established home after that date was set to lose the ability to use rental losses to reduce tax on their other income from July 2027.
The catch came for couples who jointly owned a property. If one partner died, the surviving spouse inheriting their share could be treated as having acquired the property after the cut-off date, stripping away benefits that had applied for years.
The same unfair treatment could hit people going through a divorce or separation.
It was independent ACT senator David Pocock who first sounded the alarm, warning the flaw would “disproportionately negatively impact women”.
Under the draft legislation released for public consultation on Tuesday, the negative gearing treatment will now simply follow the inheritance, whether it comes through the death of a spouse or as part of a divorce settlement.
For older Australians who may be navigating the loss of a partner after decades together, it means one less financial shock landing on top of an already heavy grief.
Treasurer Jim Chalmers said the proposed legislation was designed to make sure the tax changes worked fairly for people “in a range of circumstances”.
The government is not stopping there. It is also consulting on further carve-outs covering newly built homes, affordable housing, disability housing and its new capital gains tax arrangements.
The public has until 21 August to have their say, with Labor flagging more tranches of legislation still to come as it works through the detail of its broader tax overhaul.
For families who feared losing a loved one might also mean losing ground with the tax office, the message from Canberra is simple: that particular sting has been taken out of an already difficult day.
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