Federal Budget 2026 – Tax changes

Tax Law: 13 May 2026

Author: Marco Saccotelli - Our People

As expected, the Federal Budget announced some major changes in the areas of capital gains tax, negative gearing and the taxation of trusts.

Capital Gains Tax

From 1 July 2027, CPI indexation of the cost base of a CGT asset will replace the general 50% CGT discount rules and a minimum tax of 30% on capital gains will apply. This will apply to individuals, partnerships and trusts. For assets held prior to the start date of this change, a market valuation will occur as at 30 June 2027 so that the change is ‘grandfathered’ in that the 50% discount will apply to the notional gain accrued up until 30 June 2027 and then after that point any further capital gain will be subject to indexation of the cost base.

Indexation of the cost base is the system that applied up until 1999, when former Treasurer Peter Costello introduced the general 50% CGT discount for assets held longer than 12 months. The stated policy was to encourage investment in companies but as we all know, significant investment occurred in passive assets such as existing residential housing in quality suburbs.

One issue which is of concern to ‘start up companies’ is that they often have a nominal cost base for their shares and relied on building up the value of their technology/innovative concept to then sell out and apply the general 50% CGT discount. Indexation of a $100 cost base for shares will lead to a very low cost base on sale – meaning a much higher assessable capital gain.

A dramatic change and in our opinion, retrospective ‘bad law’, is to make pre-CGT assets (acquired prior to 20 September 1985) subject to CGT. Pre-CGT status will apply for the notional gain up to 30 June 2027, but for any further capital growth post 1 July 2027, CGT will apply. Whilst the number of pre-CGT homes and apartments is quite small in proportion to all CGT assets currently held by taxpayers – this change may well see taxpayers seeking to sell these prior to the transitional date, so as to entirely preserve their tax-free value.

Similar to the impetus under the negative gearing changes relating to ‘new residential premises’ (outlined below) – a purchaser of new residential premises will be able to choose between indexation and minimum 30% tax rate or elect to continue to use the 50% discount approach.

As the main residence remains wholly exempt from CGT (where the tax rules for a full exemption are satisfied) – expect people to make even further unproductive investments in improving their homes to maximise tax free proceeds on a sale. True reform would have introduced some type of shaded in CGT on homes which sell above a certain value so as to discourage the unproductive investment of capital in this area.

Negative Gearing

Negative gearing is simply where a tax loss is made on holding a CGT asset (e.g. rental income is exceeded by loan interest payments, land tax, depreciation, insurance, owners corporation fees, agent’s management fees, etc.) that loss can then be used to reduce tax payable on other income such as high salaries. Or in the case of the asset being held in a trust, the negative gearing can reduce the net income of the trust available for distribution. In some countries, a negative gearing loss on real estate is quarantined and can only be deducted when the asset becomes ‘positively’ geared.

Due to the Budget changes, negative gearing will now only be available for purchases of ‘new residential premises’ so as to encourage investment in new supply of housing. Existing residential properties however, which were acquired prior to 7.30pm AEST on 12 May 2026 (Budget date) will continue to be able to be negatively geared with losses offset against other income until they are disposed of (or become positively geared).

For established properties acquired after the Budget date of 12 May 2026 – from 1 July 2027 onwards, losses will only be deductible against rental income or future capital gains from disposal of the property. Importantly, ‘new residential premises’ will not apply to an existing house that is extended and improved. The new property must be a new house build, a builder’s house that is less than 12 months old or a new apartment/flat. Properties held in widely held unit trusts, superannuation funds, certain build-to-rent developments and government supported housing developments will not be subject to this change and so existing residential premises acquired in these entities can still enjoy negative gearing tax treatment.

Taxation of Discretionary Trusts

Discretionary trusts will be subject to a 30% tax rate and then beneficiaries who become presently entitled to a share of trust income will be able to apply a non-refundable credit for the tax paid by the trustee.

Being ‘non-refundable’ means that if a beneficiary is on a tax rate lower than 30% they will not receive a cash refund of the excess tax paid by the trustee. This makes moving to a proprietary limited company taxed at 25% (where it satisfies the minimum 20% active income test for a base entity’ with turnover below $50m) even more attractive – because there has been no change to the refund of unused franking credit rules.

Carve outs from the minimum entity tax of 30% will be made for fixed (rarely is a trust fixed however under existing tax law rules) trusts, widely held unit trusts, complying superannuation funds, deceased estates, charitable trusts and certain testamentary trusts. We will need to await the devil in the detail for what testamentary trusts will be exempt from the minimum tax.

Further, in a win for farmers who use trading discretionary trusts – primary production income will not be subject to the 30% minimum tax. Further, it appears that special disability trusts and other trusts for vulnerable individuals will be exempt from the minimum 30% tax at the trustee level.

Unfortunately, despite a further announcement of expanded rollover relief for 1 July 2027 to 30 June 2030 for discretionary trusts restructuring to a company – it is still the case that Western Australia and Queensland charge duty on the transfer of goodwill and other ‘business assets’. That will be a financial impediment to moving to a proprietary limited company.

In view of these changes, estate planning will be more important than ever to preserve family wealth and manage tax obligations. You can read more in this budget article from Caroline Harley, Principal Lawyer in our Wills & Estates team here: Estate Planning After the Budget

Other Business Tax Changes

The instant asset write off of $20,000 per capital asset has been permanently extended so taxpayers don’t have to hope that it is extended every year as has occurred in the last few years and can plan their purchases of business equipment with more certainty.

The loss carry back rules (a current year revenue loss can be carried back against tax profits in the earlier two years and a refund can be obtained) will apply from 1 July 2026 for companies with aggregated annual turnover of less than $1Billion. The refund will be limited to the company’s franking account balance.

Further changes to the investee business value caps applicable to venture capital investments in Venture Capital Limited Partnerships (VCLPs) ($250m to $480m) and Early Stage Venture Capital Limited Partnerships (ESVCLPs) ($50m to $80m) are welcome changes.

A Good Budget?

The Australian tax system is still overly complicated, piecemeal, subject to many announced but unenacted changes and various cynical and whimsical administrative practices of the Commissioner of Taxation.

True ‘reform’ would involve:

• an increase to the GST rate and less exemptions to GST;
• lower marginal tax rates – for example the highest rate kicking in at say income over $300K rather than the current $190K
• a broad-based Commonwealth land tax where revenue can be directed to the States so that they can repeal regressive and productivity stifling taxes such as payroll tax, land tax, duties and vacant residential land tax (Victoria)
• wealth taxes for deceased estates above a certain threshold;
• capital gains tax (to some degree) of main residences which are either sold above a certain threshold such as $3m (indexed) or held for a relatively short period of time such as less than 5 years with a view to renovation and sale for profit.

As it stands however, we feel that some important changes to the fairness of the system have been introduced as regards the taxation of labour versus capital. With a view to signalling to the younger voters who have been priced out of home ownership and don’t have access to the Bank of Mum and Dad (that the Government is finally trying to help them) this Budget is likely to be palatable to a large proportion of the public.