Treasurer Jim Chalmers handed down the 2026-27 Federal Budget last night and boy, this is a whopper!
The Government has announced a fundamental restructuring of capital gains tax, negative gearing, and the taxation of discretionary trusts, alongside a permanent extension of the $20,000 instant asset write-off, modest personal income tax cuts, and a phased wind-back of the electric car FBT exemption. None of the major tax reforms has been legislated so there’s no need to panic or react… yet.
A new framework for capital gains tax
From 1 July 2027, the 50% CGT discount will be replaced by cost base indexation for assets held for more than 12 months, with a 30% minimum tax applied to the real gain that remains after indexation. The changes apply to all CGT assets, including pre-1985 assets, held by individuals, trusts, and partnerships.
Transitional arrangements limit the impact on existing investments. Gains accruing before 1 July 2027 continue to receive the 50% discount. Capital gains on pre-1985 assets accruing before 1 July 2027 remain exempt. Only gains accruing on or after 1 July 2027 fall under the new regime.
For an asset owned before 1 July 2027 and sold after, the asset’s value at 1 July 2027 must be determined. Taxpayers can either obtain a valuation or use an ATO-provided apportionment formula based on the asset’s growth rate over its holding period. The 50 per CGT discount applies to the gain up to 1 July 2027, and indexation plus the 30% minimum tax apply to the gain accruing from that date forward.
For new residential builds, investors can choose either the 50% CGT discount, or cost base indexation combined with the 30% minimum tax, when they sell.
The main residence exemption is retained.
The four small business CGT concessions are unchanged.
This is a fundamental change to the way capital gains tax has worked for individuals and trusts. It affects directly held shares and ETFs, residential and commercial investment property held outside super, and other CGT assets held by an individual, trust, or partnership. Assets held in superannuation funds, including SMSFs, and in widely held trusts are not affected.
The outcome under the new regime depends on the rate of return relative to inflation. My modelling estimates that the effective CGT tax rate will increase from 20%-23% to 30%-35% for high growth assets.
The 30% minimum tax means investor can no longer stream gains to lower-income beneficiaries, or defer selling assets until retirement to minimise tax.
Negative gearing limited to new builds
From 1 July 2027, losses from established residential properties will only be deductible against rental income or capital gains from residential properties. Excess losses will carry forward and can be offset against residential property income in future years. The change applies to established residential properties acquired from 7:30 PM (AEST) on 12 May 2026, but the timing of when the new treatment takes effect runs in three tiers.
Properties held at announcement, including where a contract has been entered into but not yet settled, can continue to be negatively geared against other income for as long as they are held. There is no time limit on this grandfathering.
Properties acquired between 7:30 PM (AEST) on 12 May 2026 and 30 June 2027 can continue to be negatively geared in the usual way until 30 June 2027. From 1 July 2027 the new rules apply, and rental losses can only be deducted against residential property income.
Properties acquired from 1 July 2027 fall under the new rules from the date of acquisition.
The changes apply to individuals, partnerships, companies, and most trusts.
Commercial property and other asset classes such as shares are not affected by the negative gearing changes, though they are affected by the CGT changes above.
The new build exemption applies only to dwellings that genuinely add to housing supply. This includes apartments built off the plan, construction on previously vacant land, and knock-down rebuilds that replace one dwelling with several. Knock-down rebuilds that replace a dwelling with the same number of dwellings, and substantial renovations of existing properties, are not eligible.
A new build cannot have been previously sold, with a narrow exception where the builder owned it and it was not occupied for more than 12 months. Subsequent purchasers of a new build lose the benefit, including the option to choose the 50% CGT discount on resale.
For existing landlords with established residential property acquired before 7:30 PM on 12 May 2026, nothing changes for those assets. For investors acquiring established residential property from that point onward, the loss of the ability to use rental losses against other income from 1 July 2027 raises the after-tax holding cost from that date.
The new build distinction will also work into market pricing over time. A first-owner investor in a genuine new build gets both negative gearing and a choice of CGT method. The second owner of the same building loses those benefits. Expect new builds to attract a tax premium in the first transaction that does not survive resale.
30% minimum tax on discretionary trusts
From 1 July 2028, trustees will pay a minimum tax of 30% on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax paid by the trustee, which reduces their personal income tax payable. Where a non-corporate beneficiary’s marginal rate is already 30% or higher, the credit fully offsets the trustee tax, and no additional tax is paid.
Corporate beneficiaries are treated differently, and this is the most consequential feature of the design. A corporate beneficiary will be assessed on the trust distribution it receives without any credit for tax paid by the trustee. The trustee’s 30% minimum tax stays paid, and the company then pays its own corporate tax on the distribution on top. The combined effective rate on trust income cycled through a bucket company therefore moves toward 55% to 60%, depending on the corporate rate that applies. This is a deliberate Government decision to disrupt the bucket company strategy that many family business groups have historically used to cap the tax rate on retained trust income at 30% and to generate refundable franking credits.
Trustees that receive franked dividends must use the attached franking credits to pay the minimum tax. This prevents franking credits being preserved and passed through to corporate beneficiaries to neutralise the minimum tax.
Some income is excluded, including primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at the time of announcement.
Several key aspects of the design are subject to further consultation, including the precise mechanism for collecting the minimum tax, the treatment of franking credits that exceed the trustee’s minimum tax liability, and the detail of rollover relief.
To support transition, expanded rollover relief will be available for three years from 1 July 2027 for small businesses and others who want to restructure out of a discretionary trust into another entity type, such as a company or a fixed trust. The relief covers income tax consequences including CGT.
For business owners using a family trust to operate a trading business and stream income to lower-income family members, this proposed change is significant. There are some practical solutions that can be considered if this proposal becomes law:
- Restructure your business structure during the three-year rollover relief window from 1 July 2027 to 30 June 2030 including interposing a bucket company between your trading company and the trust; and/or
- Employ family members on a commercial basis and pay them a salary from your business.
- Do nothing – this may be the right answer where retained profits are small, or where distributions are already going to beneficiaries on average rates of 30% or higher
The right answer depends on the underlying assets, your succession plan, and how income flows through the family group. Worth noting that the small business CGT concessions are unchanged, which preserves the most valuable tax shield on a future business sale regardless of which structure you choose.
Personal income tax
$250 Working Australians Tax Offset
From the 2027-28 income tax year, every working Australian taxpayer will receive a new up to $250 Working Australians Tax Offset. The offset applies to income derived from work, including wages, salaries, and the business income of sole traders.
$1,000 instant tax deduction
From the 2026-27 income tax year, Australian tax residents who earn income from work will be eligible for an instant tax deduction of up to $1,000 for work-related expenses. Those claiming less than $1,000 in work-related expenses can take the standard deduction without itemising.
If your work-related expenses exceed $1,000, you can continue to claim deductions in the usual way. Charitable donations, union and professional association fees, and other non-work-related deductions can still be itemised on top of the instant deduction.
Medicare levy low-income thresholds
The Government will increase the Medicare levy low-income thresholds by 2.9% from 1 July 2025. The threshold for singles rises from $27,222 to $28,011. The family threshold rises from $45,907 to $47,238. For single seniors and pensioners, the threshold lifts from $43,020 to $44,268, and for families of seniors and pensioners from $59,886 to $61,623. The family income threshold for each dependent child or student rises by $4,338, up from $4,216.
This is routine indexation.
Private health insurance rebate
From 1 April 2027, the age-based uplift of the Private Health Insurance Rebate will be removed. For people aged 65 and over who currently receive the additional age-based rebate, the practical effect is a higher net premium from 1 April 2027. The change does not affect the income testing of the rebate, only the additional uplift for older age brackets.
Business taxation
$20,000 instant asset write-off made permanent
From 1 July 2026, the $20,000 instant asset write-off for small businesses with turnover up to $10 million is permanently extended. Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation pool. The suspension of the rule preventing small businesses from re-entering the simplified depreciation regime within five years of opting out will continue until 30 June 2027.
Loss carry back reintroduced
For tax years commencing on or after 1 July 2026, companies with aggregated annual global turnover under $1 billion will be able to carry back a tax loss and offset it against tax paid up to two years earlier. Loss carry back applies to revenue losses only and is capped by the company’s franking account balance.
Loss refundability for start-ups
For income years starting on or after 1 July 2028, eligible start-up companies with aggregated annual turnover of less than $10 million will be able to convert certain early-stage tax losses into a refundable tax offset. This will apply where the company incurs a tax loss in either of its first two years of operation. The amount refunded will be capped by the value of fringe benefits tax and PAYG withholding paid in relation to Australian employees for that loss year.
Monthly PAYG instalments
From 1 July 2027, small and medium businesses will be able to opt in to monthly PAYG instalments, and to use an ATO-approved calculation embedded in their accounting software to calculate and vary instalments dynamically. The ATO has confirmed it will not charge interest where a business varies an instalment incorrectly while using an ATO-approved calculator. Taxpayers with a demonstrated history of non-compliance will be required to pay monthly.
This change should help businesses manage cash flow more effectively by requiring tax liabilities to be paid more regularly. This gives business owners a clearer view of their post-tax cash flow, rather than relying on cash that will ultimately need to be paid to the ATO.
Electric vehicle fringe benefits tax
The current FBT exemption for electric cars is being wound back to a permanent 25% discount from 1 April 2029, applied through a 15% FBT statutory formula rate. The 25% discount applies only to electric cars valued up to the fuel-efficient luxury car tax threshold.
Transitional arrangements favour those who act early. All electric cars valued up to $75,000 that are provided before 1 April 2029 will continue to receive the 100% FBT discount (0% statutory rate). Electric cars valued above $75,000 and up to the fuel-efficient luxury car tax threshold, provided between 1 April 2027 and 1 April 2029, will receive the 25% discount during that window. Eligible electric cars already in arrangements retain the rate that applied at commencement. The existing 20% statutory rate continues for all other cars, including electric cars priced above the fuel-efficient luxury car tax threshold.
If you are considering a novated lease or business car arrangement for an electric vehicle, the total FBT cost over the typical lease term is materially lower if the car is provided before 1 April 2029, and lower again if the car is priced under $75,000.
Do not act before the law passes
None of the major tax reforms announced in this Budget have been enacted yet. The proposed legislation must still pass both houses of Parliament before it becomes law.
It is important to remember that tax measures often change between announcement and enactment, sometimes substantially. Some measures do not become law at all.
In my view, many of the proposed changes are very aggressive. If introduced as announced, they are likely to create significant unintended consequences. I expect these issues will be heavily debated over the coming months. For that reason, I think there is a high probability that some of these measures will not be legislated in their current form.
This is particularly relevant in relation to the proposed changes to trust taxation. These changes appear to alter the very nature of trusts, which is deeply embedded in common law principles.
For that reason, we strongly caution against making any substantive financial or investment decisions based on Budget announcements alone. The prudent approach is to wait until the legislation has been drafted, passed by Parliament and received Royal Assent before making any significant changes. Many of the proposed changes have transitional periods, which means there’s plenty of time to make changes if needed.
It is also worth remembering that tax is only one of many considerations. In practice, many successful investors achieve their financial and lifestyle goals by investing in high-quality assets, using evidence-based strategies, holding those assets for long periods of time, managing their cash flow prudently and reducing the taxation drag as much as possible.
Tax rules will continue to change over time. They always have. However, there are usually ways to navigate those changes, provided decisions are made calmly and strategically.
On Thursday at lunchtime (12:15), Mena and I will host a Q&A session on YouTube Live. Given how substantial the proposed Budget changes are, we may not be able to answer all listener questions live, as there will be a lot for us to cover – we may need to host a second session.
During the session, we will focus on the three major proposed changes, including what the negative gearing changes could mean for investors in established dwellings, the capital gains tax consequences for all (share and property) investors, and the proposed changes to the taxation of trusts.
Click here to register for the event.
