The 'Supply Increase' Test: How Duplex Developments Qualify as New Builds

The supply-increase test sits at the centre of the 2026-27 Budget's new-build carve-out. It determines whether a development project produces dwellings that retain full negative gearing and CGT treatment, or whether the resulting dwellings are taxed as established residential property. The test is conceptually simple does the development add to housing supply? but its application to real-world developments throws up edge cases worth understanding in detail.

What counts as "increasing supply"

The legislation focuses on net dwelling count, measured at the title or development site level. Treasury has indicated several principles for application:

• Each separately titled (or capable of being separately titled) habitable dwelling counts as one
• Granny flats and ancillary structures generally do not count unless treated as separate dwellings under local planning
• Demolished dwellings are subtracted from the pre-count only if they were habitable at acquisition
• Commercial-to-residential conversions count residential dwellings only the pre-count of an office building is zero

The duplex example from the Government factsheet

Treasury's factsheet uses a clean duplex KDR. An investor owns a single-dwelling residential lot with one house (pre-count: 1). The house is demolished and a duplex containing two separately titled half-houses is constructed (post-count: 2). Net increase: 1.

Both halves of the duplex qualify as new builds. Critically, this is true even though only one additional dwelling was added net the test is binary (positive net change vs zero or negative) rather than proportional. All resulting new dwellings benefit from the new-build treatment, not just the "additional" one.

Triplexes, townhouses and apartment blocks

The same logic scales up. One house demolished and replaced by three townhouses: pre-count 1, post-count 3, all three qualify. One house demolished and replaced by a 12-unit apartment building: pre-count 1, post-count 12, all twelve qualify. Two adjacent houses combined and replaced by an eight-unit complex: pre-count 2, post-count 8, all eight qualify.

Larger developments occasionally involve staged demolition and construction. Provided the final state shows a net increase and all new dwellings are first sold or first leased in their new-build status, the test is satisfied.

Mixed developments partial supply increases

Real-world projects sometimes retain part of the original structure. A heritage cottage at the front of a deep lot might be retained while three new townhouses are constructed at the rear. Pre-count: 1 (the heritage cottage). Post-count: 4 (cottage plus three townhouses). Net increase: 3.

The three new townhouses qualify as new builds. The retained heritage cottage does not it is the same dwelling that existed before, simply on a smaller subdivided lot. Its tax treatment depends on whether it was grandfathered, acquired during the transitional window, or acquired post-1 July 2027 as established property.

Planning and council approval considerations

The tax test relies on planning outcomes. Local government decisions on density, dwelling definitions, and dual-occupancy rules directly influence whether a project qualifies. If you are not yet familiar with the underlying framework, start with our explainer on how Australian property zoning works. Key planning considerations for investors:

• Dwelling vs ancillary classification: in many councils, a second structure that exceeds size/separation thresholds is treated as a separate dwelling rather than a granny flat. This matters for the supply test.
• Strata vs Torrens title: both can satisfy the test; what matters is whether the planning approval recognises separate dwellings.
• Dual-occupancy zoning: R2 zoning in NSW (with dual-occ permitted) is the most common pathway to duplex KDR qualification.
• Heritage overlays: may prevent demolition of an existing dwelling, ruling out KDR. Adding new dwellings to the same lot may still satisfy the test.
• Bushfire/flood overlays: may prevent additional dwellings, capping the supply increase.

Documenting the supply increase for the ATO

Investors should retain:

• Pre-development photos and council records showing the original dwelling count
• Development application and approval documentation
• Architect's plans showing the final dwelling count and configuration
• Final occupation certificate or strata plan registration
• First lease agreements and tenant move-in dates for each new dwelling
• Quantity surveyor's depreciation schedule prepared on completion

The ATO's audit focus on new-build claims is expected to intensify post-2027. Clean documentation at completion is far cheaper than reconstruction during an audit. For investors planning a development, see also our analysis of duplex-specific scenarios and general KDR strategy.