15 May 2026
The 2026–27 Federal Budget has been delivered amid a challenging macroeconomic environment, characterised by persistent inflation, elevated interest rates and ongoing cost-of-living pressures.
The Budget includes several significant initiatives, including a plan to save $37.8 billion from the NDIS and measures aimed at strengthening Australia’s energy and fuel security, an issue brought into sharper focus by the Iran conflict.
This note focuses on the tax-related announcements in the Budget. The Government has foreshadowed many of these measures in the lead-up, so few will come as a surprise.
Many of the measures have a redistributive focus, directed toward housing affordability and intergenerational equity.
For many business owners and investors, the policy direction reflected in the Budget is toward higher effective tax outcomes, particularly in relation to capital gains and trust structures.
As is always the case, caution is appropriate. Budget announcements are necessarily light on detail, and measures must proceed through consultation on exposure drafts and then through Parliament before becoming law.
Many measures will take time to be settled in legislation, and some may be altered or not proceed. There is also the devil in the detail that is yet to come.
Accordingly, there is risk in implementing pre-emptive strategies while key rules remain unsettled.
CAPITAL GAINS TAX (CGT) DISCOUNT
The removal of the 50% CGT discount from 1 July 2027 represents a material change to the Australian tax system. It is proposed to be replaced with cost base indexation and a minimum effective tax rate of 30% on capital gains (subject to limited carve-outs).
Transitional rules will preserve the 50% CGT discount for gains that accrue up to 30 June 2027. On the current proposal, only post-1 July 2027 growth would be taxed under the new regime.
The Government also proposes to bring pre-CGT assets into the regime as part of the broader reform.
Exactly how this will operate is unclear and, based on what has been released to date, it may be complex to implement.
It is worth recalling the rationale for the existing discount. Capital gains do not arise evenly over time; they typically accrue across many years but crystallise in a single income year.
Without adjustment, the entire gain may be taxed at marginal rates in that year, which can produce a less favourable outcome than if the same economic gain were realised progressively.
The proposed indexation model addresses inflation. However, it does not resolve the timing distortion that arises when long-term gains are taxed in a single income year.
Practically, the change is likely to increase the importance of structure. In particular, company ownership of investment assets may become relatively more attractive, as a corporate tax rate can offer greater consistency and reduce exposure to marginal-rate volatility at the point of realisation.
NEGATIVE GEARING
Changes to negative gearing, effective from 1 July 2027, draw a clear distinction by asset type.
Negative gearing would continue to apply to new residential construction, as well as commercial property and other asset classes such as shares and managed funds.
The changes are confined to established residential property acquired after Budget night (7:30 pm on 12 May 2026).
For affected properties, rental deductions would only be available against residential rental income. Any excess deductions would be quarantined and carried forward.
Existing (pre-Budget) residential investment properties would be protected under grandfathering provisions.
The policy objective is to reduce upward pressure on housing prices while continuing to support new supply. Whether this is achieved will depend on a range of factors, including the relative weight investors place on tax outcomes compared with other drivers (interest rates, rents, and expectations of capital growth).
DISCRETIONARY TRUSTS
The proposed 30% minimum tax on discretionary trust income from 1 July 2028 is one of the more significant structural measures in the Budget. Broadly, it would reduce the benefit of distributing income to lower-taxed beneficiaries and shift part of the tax impost to the trustee level.
Several technical issues remain unclear, particularly the treatment of corporate beneficiaries.
As currently described, corporate beneficiaries (often referred to as “bucket companies”) may not receive a credit for tax paid at the trustee level.
If that is the case, there is a risk of economic double taxation and a materially higher effective tax rate, depending on the final design.
Regardless of the final design, the measure is likely to change the economics of discretionary trust distributions. Between now and commencement in the 2028–29 income year, many groups may need to review existing structures.
In particular, we expect to see:
· Increased use of trading companies in place of trading trusts
· Reconsideration of existing distribution models involving corporate beneficiaries
· Greater use of holding and investment company structures
The Budget also foreshadows an expansion of rollover relief to facilitate restructuring ahead of commencement in the 2028–29 income year.
INDIVIDUALS & BUSINESS MEASURES
The measures directed at individuals are modest. The Government proposes staged reductions to the 16% marginal tax rate: to 15% from 2026–27, and to 14% from 2027–28.
Most taxpayers are expected to receive an additional tax cut of up to $268 per year in 2026–27, increasing to up to $536 per year from 2027–28.
The introduction of a $250 Working Australians Tax Offset (WATO) and a $1,000 standard deduction from 2026–27 will also provide some simplification and limited relief.
By contrast, the business measures are more practical. The permanent extension of the $20,000 instant asset write-off for businesses with aggregated turnover of up to $10 million provides greater certainty.
The Budget also includes the reintroduction of loss carry-back, similar to the COVID-19 period.
Where a company incurs a tax loss, it would be able to carry that loss back to the two prior income years and offset tax previously paid. A separate start-up loss refundability mechanism is also proposed, which may support early-stage businesses.
Adjustments to the R&D regime are more targeted, with benefits more tightly focused on core R&D activities rather than supporting expenditure.
OBSERVATIONS
Viewed as a whole, the Budget does not amount to comprehensive tax reform. Instead, it introduces a series of targeted adjustments, most notably to the taxation of investment properties and the use of discretionary trusts.
These changes may have flow-on impacts as businesses and investors reassess structures and investment decisions.
Notably, the Budget does not adopt several commonly cited recommendations for broader tax reform, such as broadening the GST base, simplifying aspects of the superannuation system, and reducing regulatory complexity.
On balance, these measures are unlikely to materially lift productivity and may increase compliance complexity (and red-tape) for some taxpayers.
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