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Capital gains tax

Overview

This is the centrepiece of the Budget. From 1 July 2027, the 50% Capital Gains Tax (CGT) discount, which has been in place since 1999, will be replaced by cost base indexation and a 30% minimum tax on net capital gains. The change applies to individuals, trusts and partnerships. Companies and superannuation funds are not affected.

What is changing

The 50% discount is being removed for all CGT assets held by individuals, trusts and partnerships. In its place, the cost base of a CGT asset will be adjusted upward by the Australian consumer price index (CPI) over the holding period, so that only the real gain (above inflation) is taxed. This is essentially a return to how CGT worked between 1985 and 1999.

On top of that, a 30% minimum tax will apply to net capital gains. This is a floor, not a cap - it means capital gains cannot be taxed at less than 30%, regardless of the taxpayer's marginal rate. If a taxpayer's marginal rate is above 30%, they continue to pay at that higher rate. The minimum is designed to prevent the practice of realising gains in low-income years or distributing them to low-income trust beneficiaries to reduce the effective tax rate.

Investors in new residential property are treated differently. They can choose between the existing 50% CGT discount or the new indexation and minimum tax method. This choice is not available for any other asset class, it is specifically designed to preserve incentives for new housing supply.

Key exemptions and transitional rules

The main residence exemption and the small business CGT concessions are unchanged. Income support recipients, including Age Pensioners, are exempt from the 30% minimum tax. The 1/3 CGT discount for complying superannuation entities (including Self-Managed Super Funds (SMSFs) is preserved; super funds are outside the scope of these changes entirely.

The transitional rules split gains on assets held across the 1 July 2027 boundary. The portion of a gain accruing up to 1 July 2027 retains the 50% discount. The portion from 1 July 2027 onward is subject to cost base indexation and the 30% minimum tax. Taxpayers can establish the 1 July 2027 value either through a formal market valuation or by using a specified ATO apportionment formula.

Pre-1985 CGT assets, which have been fully exempt from CGT since the regime was introduced, are being brought into the system. Gains accruing before 1 July 2027 remain exempt, but any growth from that date forward will be taxable. The cost base resets to market value at 1 July 2027. This is a significant change for families holding intergenerational property, shares or business interests, many of whom may not have cost base records because the law never required them to keep any.

How you may be impacted

The practical impact depends on the type of asset, the holding period, the taxpayer's marginal rate, and whether the asset is held personally, in a trust, or in super.

Clients with unrealised gains on assets acquired before 1 July 2027 will be subject to a split calculation if those assets are sold after that date. The pre-1 July 2027 portion retains the 50% discount; the post-1 July 2027 portion is subject to indexation and the minimum tax. Obtaining a reliable market valuation at 1 July 2027 will be important in determining the split.

The 30% minimum tax changes the outcome for taxpayers whose marginal rate is below 30%. This includes trust beneficiaries on low or nil incomes, retirees below the tax-free threshold (unless receiving income support), and anyone who would otherwise have realised gains in a low-income year. For taxpayers already above the 30% marginal rate, the minimum tax has no additional effect - they continue to pay at their marginal rate.

Assets held in super are not affected by these changes. The 1/3 CGT discount continues to apply, and the 30% minimum tax does not extend to super funds.

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Negative gearing

Overview

The Government has moved to restrict negative gearing on established residential investment properties. From 1 July 2027, net rental losses on established residential properties acquired after Budget night (7:30pm AEST, 12 May 2026) can no longer be deducted against other income such as wages or business income. Losses are quarantined - they can only be offset against residential rental income or residential capital gains, with any excess carried forward.

Commercial property, shares and all other asset classes are completely unaffected. This is a residential-only measure.

What is changing

The cut-off date is 7:30pm AEST on 12 May 2026. Properties held before that time, including contracts exchanged but not yet settled, are fully grandfathered and continue under existing rules for as long as the owner holds them.

For established residential properties acquired after that time, rental losses will be quarantined from 1 July 2027. Interest, depreciation, repairs, management fees and all other deductions can still be claimed, but the net loss can only be offset against income or gains from residential property. It cannot reduce taxable income from wages, business, dividends or any other source. Unused losses carry forward indefinitely.

New residential builds are exempt. Investors in new housing continue to access negative gearing without restriction, which is the Government's mechanism for directing investment toward new supply. Superannuation funds, including Self-Managed Super Funds (SMSFs), are also excluded, as are widely held trusts, build-to-rent projects and certain government-supported housing investments.

Key exemptions and transitional rules

Existing holdings are protected. Any property held (or under contract) before 7:30pm AEST on 12 May 2026 retains full negative gearing for the life of the ownership. There is no time limit on this grandfathering - it only ends when the property is sold.

For established residential properties acquired between Budget night and 30 June 2027, existing negative gearing continues until 30 June 2027. From 1 July 2027, losses on these properties become subject to quarantining.

The exemption for new builds, SMSFs, widely held trusts and commercial property means the quarantining rules are narrowly targeted at one specific combination: individuals (or discretionary trusts) and companies acquiring established residential property after Budget night.

How you may be impacted

The impact depends on when the property was acquired and what type of property it is. Clients who already hold established residential investment property are unaffected, the grandfathering is unconditional and ongoing.

For new acquisitions of established residential property after Budget night, the inability to offset rental losses against salary, wages or business income changes the after-tax cash flow position. The losses are not denied; they are deferred until there is residential property income or gains to offset them against.

Commercial property is not affected by the negative gearing changes. Losses from commercial investments continue to be fully deductible against any income, without quarantining. The Capital Gains Tax (CGT) changes (indexation and 30% minimum tax) do apply to commercial property from 1 July 2027, but the negative gearing treatment is unchanged.

SMSFs are excluded from the negative gearing changes entirely - both residential and commercial property held in super continue under existing rules.

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Discretionary trusts

Overview

From 1 July 2028, the Government will introduce a 30% minimum tax on the taxable income of most discretionary trusts. The trustee pays the tax, and non-corporate beneficiaries receive a non-refundable credit for the amount paid. This is directly targeted at the practice of distributing trust income to beneficiaries on lower marginal tax rates.

What is changing

The trustee of a discretionary trust will be liable for a 30% minimum tax on the trust's taxable income. Beneficiaries who are presently entitled to that income receive a non-refundable tax credit. If a beneficiary's marginal rate is above 30%, they pay additional tax on their share, no change in outcome. If their marginal rate is below 30%, the credit is non-refundable, meaning they cannot get the difference back. The effective floor on trust-sourced income becomes 30%.

Corporate beneficiaries are treated differently and less favourably. They do not receive credits for the trust-level tax. This is designed to shut down the use of so-called 'bucket companies' (taxed at 25%) as a way to receive trust distributions below the 30% minimum. The result is potential double taxation: 30% at the trust level and 25% at the company level, with no offset.

Franking credits received by the trust must be applied toward the minimum tax. They cannot be accumulated to generate refundable credits that would effectively circumvent the 30% floor.

Key exemptions and transitional rules

Several types of trusts are excluded entirely: fixed trusts (with defined, indefeasible entitlements), widely held trusts, complying superannuation funds, special disability trusts, deceased estates, charitable trusts and fixed testamentary trusts.

Certain types of income are also excluded from the minimum tax: primary production income, income of vulnerable minors, and amounts subject to non-resident withholding tax. There is also a limited carve-out for discretionary testamentary trusts, where both the trust and the asset existed at Budget night (12 May 2026), income from that asset remains outside the scope of the 30% minimum. Income from assets acquired by the trust after that date would fall under the new rules.

To support those who may wish to restructure, the Government is providing time-bound rollover relief for three years from 1 July 2027 to 30 June 2030. This is intended to facilitate the transfer of assets from discretionary trusts into companies, fixed trusts or other entities, with Capital Gains Tax (CGT) relief for genuine restructures.

How you may be impacted

The impact on discretionary trusts centres on distribution strategies. Where trust income is currently distributed to beneficiaries whose marginal rate is below 30% - including adult children on low incomes, non-working spouses, or retirees below the tax-free threshold - the effective tax rate on that income will increase to 30% from 1 July 2028.

For beneficiaries whose marginal rate is already at or above 30%, the minimum tax does not change their position. The trust pays 30% and the beneficiary receives a credit, with any shortfall assessed to them as usual.

Distributions to corporate beneficiaries (bucket companies) are affected differently. The company does not receive a credit for the trust-level tax, which creates a risk of double taxation. The economics of distributing to a company taxed at 25% change materially under this measure.

The 3-year rollover relief window (1 July 2027 to 30 June 2030) provides a path for restructuring with CGT and stamp duty concessions. Whether restructuring is appropriate depends on the specific circumstances of each trust and professional advice is required.

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Superannuation

Overview

There were no new superannuation tax changes in this Budget. That said, the super landscape has already been reshaped by measures legislated earlier this year, most notably Division 296, which received Royal Assent on 13 March 2026 and applies from 1 July 2026.

When read alongside the Capital Gains Tax (CGT), negative gearing and trust changes announced in this Budget, the relative position of superannuation as a structure for holding and growing wealth has shifted. Super retains its 15% earnings tax, the 1/3 CGT discount and 0% tax on pension earnings (for balances below the transfer balance cap), none of which were touched.

What is changing

Division 296 — additional tax on large balances (now law)

Division 296 introduces a tiered additional tax on superannuation earnings for individuals with a Total Super Balance above $3 million:

Only realised earnings are taxed - unrealised capital gains are not included, which was a major concession from the original proposal. Both thresholds are indexed to CPI. Tax is assessed at the individual level by the ATO (not by the super fund), with the first assessment period running from 1 July 2026 to 30 June 2027. A CGT cost base reset election is available for Self-Managed Super Funds (SMSFs), and members can pay the tax personally or through a release authority from their fund.

Key exemptions and transitional rules

The Division 296 cost base reset election allows SMSFs to reset the cost base of assets to market value as at 30 June 2026, ensuring pre-commencement gains are not captured when assets are eventually sold. The election must be made by the due date for lodging the fund's 2026-27 return.

Division 296 thresholds are CPI-indexed ($3M in $150K increments; $10M in $500K increments). The super fund CGT discount and negative gearing treatment are explicitly preserved and unaffected by the Budget reforms.

How you may be impacted

For clients with Total Super Balances ('TSB') below $3 million, the superannuation tax settings are unchanged. The 15% earnings tax, 1/3 CGT discount and 0% pension phase tax all continue as before.

For clients above $3 million, Division 296 introduces an additional layer of tax on earnings. The fact that only realised earnings are captured - and that the thresholds are indexed - moderates the impact compared to earlier proposals. The cost base reset election for SMSFs is relevant for funds holding assets with significant unrealised gains at 30 June 2026.

The broader context matters here. With the CGT discount removed for individuals and trusts, and negative gearing restricted on established residential property, the tax treatment of assets held inside super is now comparatively more favourable than it was before this Budget.

Payday Super creates new operational requirements for business-owner clients who employ staff. The shift from quarterly to payday-aligned contributions changes cash flow timing and payroll processes.

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Individuals

Overview

The Budget includes a package of personal tax measures aimed at working Australians. These are cost-of-living measures - modest rate cuts, a new tax offset and a simplified deduction - rather than structural reform. The structural changes affecting individuals are covered in the Capital Gains Tax (CGT), negative gearing and trust sections above.

What is changing

Personal income tax rates

The lowest marginal rate (applying to income between $18,201 and $45,000) drops from 16% to 15% on 1 July 2026, and then to 14% on 1 July 2027. All other brackets and rates remain unchanged.

$250 Working Australians Tax Offset (WATO)

From the 2027-28 income year, a permanent $250 tax offset will apply to income from employment and sole trader business income. It is automatic, claimed through the tax return with no separate application. Treasury estimates 97% of eligible workers will receive the full amount, benefiting more than 13 million Australians.

$1,000 instant tax deduction

From 1 July 2026, workers can claim up to $1,000 in work-related expenses without receipts or substantiation. It is optional: taxpayers with actual work-related expenses exceeding $1,000 can still claim the higher amount with full substantiation. Charitable donations, union fees and non-work deductions remain separately claimable on top.

Electric vehicle FBT

The FBT exemption for electric vehicles is being phased. EVs up to $75,000 provided before 1 April 2029 retain the full exemption. EVs between $75,000 and the luxury car tax threshold provided between 1 April 2027 and 1 April 2029 receive a 25% discount. From 1 April 2029, a permanent 25% FBT discount applies to all EVs under the luxury car tax threshold. Existing leases remain unaffected.

Salary packaging

The ability to salary package certain work-related items (laptops, phones, tablets) is being removed as an integrity measure to prevent double dipping with the $1,000 instant deduction. Other salary packaging arrangements, including additional super contributions, meal entertainment and car parking, are not affected.

Medicare levy

The Medicare levy low-income thresholds increase by 2.9% from 1 July 2025: singles from $27,222 to $28,011; families from $45,907 to $47,238.

Key exemptions and transitional rules

The $250 WATO does not start until 2027-28, and there is no benefit in the 2026-27 year. The $1,000 instant deduction is optional and does not replace the existing substantiation rules for claims above $1,000. EV FBT changes are phased, with existing arrangements locked in at the rate that applied when the lease commenced.

How you may be impacted

The rate cuts and WATO provide a modest increase in take-home pay. The estimated combined annual benefit (rate cut plus WATO) is approximately $518, concentrated in the lower bracket. For clients on higher incomes, the impact is marginal.

The $1,000 instant deduction simplifies tax time for workers with routine work-related expenses. For clients with larger or more complex claims - tools, uniforms, travel, home office - the existing substantiation-based system continues to apply.

Clients with novated EV leases under $75,000 are protected until 1 April 2029. The transition to a 25% discount (rather than full exemption) from that date changes the after-tax cost of EV salary packaging for new arrangements entered into after that point.

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Business

Overview

The Budget includes a package of business tax measures focused on cash flow, investment incentives and reducing compliance burden. The standout items are making permanent the $20,000 instant asset write-off and the two-year loss carry-back, ending years of temporary extensions.

What is changing

$20,000 instant asset write-off ('IAWO') — now permanent

Small businesses with aggregated turnover up to $10 million can immediately deduct the cost of eligible depreciating assets costing less than $20,000 each. This has been extended on a temporary basis for several years - from 1 July 2026, it becomes a permanent feature of the tax law. Assets costing $20,000 or more continue to go into the simplified depreciation pool.

Two-year loss carry-back — permanent

Companies with aggregated global turnover under $1 billion can carry back current-year tax losses to offset tax paid in the previous two income years, subject to franking account limits. This was temporarily available during COVID and has now been reintroduced on a permanent basis from the 2026-27 income year.

Loss refundability for start-ups

From 1 July 2028, eligible start-up companies (turnover under $10 million, in their first two years of operation) can convert tax losses into a refundable tax offset. The offset is capped at the amount of FBT and wage withholding tax paid on Australian employees in the loss year.

PAYG instalment reform

From 1 July 2027, small and medium businesses can opt in to monthly PAYG instalments calculated through ATO-approved software, allowing instalments to fluctuate with actual business activity rather than being based on prior-year income.

R&D Tax Incentive overhaul

From 1 July 2028, the R&D Tax Incentive is being significantly restructured. Offset rates are increasing (up to 48% for SMEs under $50 million turnover), but only core experimental R&D activities will be eligible, supporting activities are being removed. The refundable offset will be restricted to entities less than 10 years old, the SME turnover threshold increases from $20 million to $50 million, and the minimum expenditure threshold rises to $50,000.

Venture capital

From 1 July 2027, the investee asset caps for venture capital limited partnerships increase to $480 million (VCLPs) and $80 million (ESVCLPs), with the ESVCLP fund size cap increasing to $270 million.

Corporate reporting relief

The large proprietary company reporting thresholds are being doubled - revenue from $50 million to $100 million and gross assets from $25 million to $50 million. Businesses below these thresholds will no longer need to lodge audited financial statements, directors' reports or sustainability reports.

Other measures

497 nuisance tariffs are being abolished from 1 July 2026. The ATO receives $86.3 million in additional compliance and counter-fraud funding over four years. The temporary ban on foreign purchases of established residential dwellings is extended to 30 June 2029.

Key exemptions and transitional rules

The $20,000 IAWO is now permanent with no sunset clause. Loss carry-back is available from the 2026-27 income year, meaning companies can carry back losses against tax paid in 2024-25 and 2025-26. The R&D changes do not take effect until 1 July 2028 and existing claims under the current regime are unaffected until then.

The ATO's Tax Avoidance Taskforce funding was not renewed in this Budget - a departure from recent years. The compliance focus appears to be shifting toward fraud prevention, which received dedicated new funding.

How you may be impacted

Small business clients benefit from the certainty of a permanent IAWO - asset purchases can now be planned without waiting for annual legislative extensions. The permanent loss carry-back provides a mechanism for companies that have paid tax in recent years to recover some of that tax if they incur losses in 2026-27 or later years.

Clients who claim the R&D Tax Incentive should be aware that the 1 July 2028 overhaul will narrow eligibility (removal of supporting activities, higher minimum spend) while increasing the offset rate for those who do qualify.

The corporate reporting threshold changes may reduce compliance obligations for some clients, particularly those with revenue between $50 million and $100 million who currently prepare audited financials.