Significant changes announced
Treasurer Jim Chalmers handed down the 2026-27 Federal Budget last night. It contained some of the most significant changes for tax and business in recent memory. Many of the measures announced had already been flagged in advance, but there were still a few surprises. Here are some of the highlights from our perspective.
Capital Gains Tax Discount replaced
As expected, the current 50% discount on capital gains will be replaced with a cost-based indexation system from 1st July 2027. In a broad sense this is a return to the way capital gains were taxed before the introduction of this discount. But there are a couple of stings in the tail.
The tax on capital gains will be broadened to apply for the first time to assets acquired before September 1985. These assets have always been exempt from Capital Gains Tax (this being the date when CGT was first introduced).These assets will be re-valued on 1st July 2027, and future gains calculated from that new value.
The 50% discount will continue to apply to any gains made up to 30th June 2027. That is, if you sell an asset after 1st July 2027 that is subject to CGT, but acquired it before that date, the proportion of the gain made up to 30th June 2027 will still be discounted by 50%. The new indexation rules will only apply to any additional gain made above that revaluation amount after 1st July 2027. More information is to come from the Tax Office as to the precise way in which gains will be apportioned and whether a revaluation will be required.
In addition, capital gains will be taxed at a minimum rate of 30%. There isn’t a lot of detail available at the moment as to exactly how this would work, but it’s worth noting that those receiving income support payments, as well as Age Pension recipients, will be exempted from the minimum tax. We understand that it will only apply to the proportion of the capital gain made after 1st July 2027.
Owners of new residential builds will be able to choose between continuing to receive the 50% discount on future gains, with no minimum tax, or to use cost-based indexation and apply the minimum tax rate.
Complying superannuation funds will continue to receive a one third discount on future capital gains, preserving the status quo.
Minimum 30% tax rate on the taxable income of discretionary trusts
From 1st July 2028 trustees of discretionary trusts will pay a minimum tax of 30% on the taxable income of the trust. The individual beneficiaries of that trust will then receive a non-refundable credit for the tax paid by the trustee(s). Significantly, it appears that a beneficiary that is a company does not receive a credit for the tax paid by the trustee, but the details available are limited at this stage.
This measure will affect anyone who uses a discretionary trust as a part of their structuring. While framed as a way to ‘even things up’ and prevent the wealthy accessing tax benefits that regular wage earners are not entitled to, the reality is that trusts are used by many business owners, small and large, and not all of them ‘high-wealth’. This will require a significant re-think of tax planning strategies and is almost certain to result in inequitable outcomes for some.
Fixed trusts, superannuation funds and deceased estates will be exempt from the minimum tax, as will certain categories of income such as primary production.
Rollover relief will be available for three years from 1st July 2027, to allow existing arrangements to be restructured where necessary. This effectively means that capital gains tax would not be payable where trust assets need to be transferred to other entities, such as companies. It is worth noting though that any applicable State taxes would still apply.
Negative gearing limited to new houses
Negative gearing – the ability to deduct losses on investment assets against other income – will be limited to newly constructed dwellings from 1st July 2027.
After that date, any loss on established properties will only be deductible up to the amount of the income of that property. Any additional losses can be carried forward to offset future income from that property and capital gains on the sale of that asset.
This measure applies from Budget night (12th May 2026) however existing investments will be ‘grandfathered’, such that they can continue to be negatively geared until they are disposed of.
While this initiative is designed to redirect housing investment towards new builds and thereby provide relieve for those struggling to afford – or even find – a place to live, it remains to be seen how these new properties will be built when the country is also in the midst of a significant skills shortage. These conditions have the potential to drive up the cost of building and blow out construction times.
Loss carry-back provisions return
This announcement was a surprising, and welcome, one. From 1st July 2026 companies with turnover of less than $1 billion will be able to ‘carry back’ a loss and offset it against tax paid up to 2 years earlier.
In brief, tax losses can ordinarily be carried forward, which means they can be offset against taxable income in future years. A loss carry-back means that an immediate benefit may be available by way of a refund for tax already paid in prior years.
A similar measure applied during the COVID years. It’s effectively relief for companies that might have otherwise been profitable if not for a challenging economic environment, because it brings forward the tax benefit of that loss to the current year.
The measure only applies to those who operate their businesses through a company structure. It provides no benefit to those who made losses in both of the preceding financial years, and the amount of the benefit is limited to the franking account balance of the company (i.e. the amount available to pay franking credits on dividends).
Other measures
$20,000 Instant Asset Write-Off made permanent – The Government announced that the Instant Asset Write-Off threshold of $20,000 will finally be made permanent for small businesses from 1st July 2026. This has existed at various levels for years, but has always been a ‘temporary’ lifting of the legislated limit of $1,000 that needs to be extended every year. It allows small businesses (those with annual turnover of up to $10 million) to claim the entire amount of the cost of an asset in the year of purchase, rather than depreciating it over a number of years.
FBT exemption for electric vehicles to be phased out – As the law currently stands, electric vehicles (EVs) have been exempted from Fringe Benefits Tax (FBT). The intention was to incentivise the take-up of zero or low emissions vehicles by allowing employees to salary package these cars and, in effect, get tax deductibility for the private use component of the purchase price and running costs. This is provided the cost of the vehicle is below the applicable Luxury Car Tax threshold (LCT).
For the 2027-28 and 2028-29 FBT years, eligible vehicles costing less than $75,000 will continue to receive the full benefit. Those costing more than $75,000 (but less than the LCT) will receive a 25% discount on the FBT payable. From the 2029-30 FBT year all EVs costing less than $75,000 will receive a 25% FBT discount.
The exemption for vehicle purchases put in place prior to these years will continue to apply for the duration of the arrangement with the employee.
Personal tax – As a supposed cost of living relief measure, a ‘Working Australians Tax Offset’ (WATO) will be introduced from 1st July 2027. It will be available to all workers and paid as a reduction in tax payable when an income tax return is lodged. Effectively then, for most taxpayers, that ‘relief’ for current economic duress won’t actually be available for another two years, and may well be consumed in the meantime by further inflation.
In addition, a standard deduction of $1,000 for work-related expenses will be made available for all individual employee taxpayers from the 2026-27 income tax year onwards. In practice this will mean that taxpayers who have work-related deductions of less than $1,000 can claim the full amount of this deduction without having to itemise the expenses or provide substantiation.
Our take…
The Federal Government has framed these changes in the context of ‘fairness’ and ‘reform’. There is no question that Labor has a once-in-a-generation opportunity to enact genuine, visionary transformation of Australia’s bloated and often unfair Income Tax system. For the most part however, this is not that.
Uncertain international circumstances, coupled with stubbornly high inflation, a housing crisis and a skills shortage have all presented challenges that the Government must respond to. These conditions have understandably necessitated an expansion of the revenue base and the end of some concessions.
It may well even be argued that measures such the 50% CGT discount have been overly generous for too long, and have disproportionately benefitted the wealthy. It was great while it lasted, but for many, maybe it is time for a rethink? Overall however, this is much less about reform and more about change. Not only is it simply more tax, but it’s more tinkering, and that’s inevitably more costly for business and taxpayers.
These changes are almost certain to add more complication and red tape to the already excessively convoluted (and expensive) process of managing taxation and business affairs. Practices like ‘grandfathering’ are not abstract. In real-world practice they involve detailed management, calculations, record-keeping and advisory work. Having two separate methods for calculating CGT on the same asset is just one example of a compliance nightmare, added on top of decades of similar tweaks and adjustments.
Furthermore, there’s a strong case to be made that, far from making things fairer for the next generation, younger people are now going to be denied the benefits that those before them have been able to take advantage of. For some, this will come right at the time when they are starting their own businesses, investing, buying property and so on. They would be forgiven for seeing those before them as making the most of the system while they could and then denying future generations the same advantages.
There is little doubt that CGT discounting and negative gearing have played at least some role in super-heating the housing market. Further, the total cost of such benefits has more than likely been disproportionately enjoyed by those who need them less. This Budget may be a good start in addressing some of those issues.
But with such a significant majority in Parliament, the opportunity for long term, generational change that will increase productivity and reduce the costs of doing business in Australia seems to have been missed.
