Australian Budget 2026-27: sweeping tax changes to…

The Treasurer has delivered the most significant Federal Budget Australia has seen since the days of Paul Keating. In last night’s Budget, the Treasurer unveiled a series of major revenue measures that will reshape the investment landscape in Australia. Chief among these are:

• the abolition of the capital gains tax (CGT) discount for investments held for >12 months (except for investments in new residential dwellings);

• the effective removal of negative gearing for residential properties (except for investments in new residential dwellings and pre-existing investments); and

• the end of tax-efficient streaming of distributions from discretionary trusts, which will now be subject to a minimum tax rate of 30%.

While the Government has framed these changes as a step towards improving intergenerational equity and addressing housing affordability for younger Australians, the measures have sparked widespread debate in the recent weeks as they were progressively leaked to the public. Commentators have queried the effectiveness of the key revenue measures in meaningfully addressing the real cost of living pressures experienced by Australians (such as building and energy costs).

The economic implications of the Government’s proposed measures are expected to be far-reaching. The proposed changes to the tax burden on capital investments may result in behavioural changes in sectors such as property. Rents might be increased by landlords to offset the additional tax obligations on their investments, and some caution may be exercised by existing property owners in relation to the disposal of properties. Additionally, the grandfathering of negative gearing for existing investors will result in different investment outcomes for those already invested and new market entrants.

Ultimately, we are likely to see a shift in investment strategies, with individuals turning to their superannuation funds or corporate structures to access lower tax rates. However, these measures may have unintended consequences, including risk of capital flight and re-domiciling offshore by wealthier and younger Australians, and a dampening of entrepreneurial activity. For the time being, tax advisers (including us) will be busy assisting clients to understand and utilise any available transitional rules to restructure their affairs.

No more CGT discount

Much of the pre-Budget discourse centred on the impact of the CGT discount in the residential property market – the Government itself acknowledging that the combination of the 50% discount and negative gearing favour “highly leveraged investment in existing housing” and “distort investment away from higher income-generating assets”.

The stated ambition was to redirect capital toward more productive uses and to address intergenerational inequity by levelling the playing field for younger Australians locked out of home ownership. The Government acknowledges that replacing the CGT discount with cost base indexation would “encourage investment to flow to where it’s most productive”.

The Government has not confined its reform to the residential housing asset class. From 1 July 2027, the 50% CGT discount will be replaced by cost base indexation and a 30% minimum tax on real capital gains across all CGT assets held by individuals, trusts and partnerships. In effect, it sweeps other asset classes, such as shares into the same net.

The CGT changes in more detail

• Abolition of the 50% CGT discount and replacement with indexation: From 1 July 2027, the Government will replace the existing 50% CGT discount for individuals, trusts and partnerships with cost base indexation (for all assets held for at least 12 months). This returns the CGT system to its pre-1999 approach, ensuring that only real (inflation-adjusted) capital gains are subject to tax, rather than applying a flat 50% discount to nominal gains.

• Introduction of a 30% minimum tax on real capital gains: Alongside indexation, the Government is introducing a 30% minimum tax on real capital gains from 1 July 2027. Income support recipients, including Age Pension recipients, will be exempt from the minimum tax.

• Transitional arrangements: The reforms are prospective, noting that:

• For assets held prior to 1 July 2027 but sold thereafter, the 50% CGT discount will apply to gains accrued up to 1 July 2027. Indexation and the minimum tax will apply only to gains accruing from 1 July 2027 onwards.

• Pre-1985 assets (currently exempt from CGT) will also be brought into the new arrangements for gains accruing from 1 July 2027 onwards, while gains earned before that date remain exempt.

• Taxpayers can either seek a valuation or use a specified apportionment formula (supported by ATO tools) to determine the asset’s value as at 1 July 2027.

• Concession for new residential builds: Investors who acquire new residential builds will be able to choose either the 50% CGT discount or the new indexation-plus-minimum-tax arrangements when they sell. This is intended to support investment in additional housing supply.

What should be done?

• Portfolio and timing review: The minimum tax reduces the benefit of timing sales to low-income years (eg. retirement), so strategies that rely on a lower marginal rate at the point of sale will be less effective.

• Structural considerations: Consider if the structural benefits of structures that allow flow-through of capital gains tax treatment (eg. trust structures) outweigh the benefits of alternative structures.

• Record-keeping and valuations: Taxpayers holding assets at 1 July 2027 will need either a valuation at that date or sufficient records to apply the ATO apportionment formula. Early preparation – including obtaining market valuations for property, recording share prices, and documenting cost bases – will reduce compliance risk.

• New build election: Investors acquiring new residential builds should model both options – the retained 50% discount versus indexation plus minimum tax – to determine which is more advantageous given expected holding periods and inflation assumptions.

• Watch this space: It is expected that new business owners and founders will be particularly disadvantaged by the CGT discount changes given the nominal cost base in their businesses. The Government has flagged further consultation on the treatment of early-stage and start-up businesses (flagging the tech sector in particular). Relevant stakeholders in the should monitor these developments closely.

Restricting negative gearing to new builds

From 1 July 2027, the availability of negative gearing concessions for residential property will be limited to newly constructed dwellings. Net rental losses derived from established residential properties will no longer be deductible against other forms of assessable income and may instead only be offset against rental income or capital gains derived from residential property investments.

Key design features

• Excess losses can be carried forward and offset against residential property income in future years.

• The limitation applies only to residential property. Commercial property and other asset classes, such as shares, will remain subject to existing arrangements.

• Investments that support government housing programs (eg. through provision of affordable housing) will also be exempt.

Transitional arrangements

Properties purchased or held prior to 7:30pm (AEST) 12 May 2026: exempt from the new measures until disposed of, meaning existing investors will not be affected (includes properties where a contract has been entered into but not yet settled).

Properties purchased after 7:30pm (AEST) on 12 May 2026 but before 30 June 2027: new investors during this period may negatively gear during this period, but not in subsequent years.

Expected impacts

Housing affordability and home ownership: Considered alongside the proposed CGT reforms, the changes to negative gearing may moderate house price growth by reducing investor demand for established residential properties. This could improve housing affordability and increase opportunities for first home buyers to enter the property market.

Housing supply: Limiting negative gearing concessions to newly constructed dwellings potentially encourage greater investment capital to be directed towards new housing developments.

That said, there is uncertainty as to the longer-term impact on rental housing supply. Investor participation in the rental market may decline due to established residential properties becoming less attractive. If the delivery of new housing supply does not keep pace with demand, this may place upward pressure on rental prices. The effect of the reforms may therefore depend significantly on housing delivery rates and population growth.

Discretionary trusts – Significantly reduced tax-effectiveness

As expected, the Budget includes a minimum tax on trust income. The measures however are far more aggressive than expected and effectively end the use of discretionary (family) trusts as a vehicle for the derivation of income whether by business, investment or otherwise.

In brief, the Budget introduces a minimum tax of 30% on the taxable income of discretionary trusts commencing on 1 July 2028. The tax is levied on the trustee, with beneficiaries receiving non-refundable credits for the tax that is payable by the trustee. Notably, other types of trusts are excluded from the measures, including fixed trusts (ie. unit trusts) and complying superannuation funds (as well as charitable trusts, deceased estates, and special disability trusts). Certain types of income such as primary production income and certain income applied for vulnerable minors will be excluded.

Contrary to certain expectations that it would seek to impose a minimum tax on distributions of trust income, the Government has instead sought to levy a tax on the trustee proper as a way to assimilate the taxation of discretionary trusts to companies.

A feature of particular note is that the refundable offset does not apply to corporate beneficiaries, effectively ending the use of “bucket” companies. This is because trust income that is applied for the benefit of such beneficiaries will now be taxed twice, first at the level of the trust and again at the level of the company. The corollary of this is that trust income will need to be distributed to individual beneficiaries who pay tax at their individual rates at a minimum rate of 30%. That is, trust income will now be taxed at 30% and above. These measures significantly reduce the tax effectiveness of discretionary family trusts.

Small to medium business enterprises are likely to be the largest hit as they have made extensive use of trust structures, and are less mobile than other users of such vehicles (such as high net worth individuals and foreign investors). Special rollover relief will be provided to permit restructures out of discretionary trusts which will probably be extensive but this may have State tax implications.

Tax loss carry back: a permanent lifeline for Australian companies

The Government has confirmed the permanent reintroduction of tax loss carry back for companies with aggregated annual global turnover of less than $1 billion, effective for income years commencing on or after 1 July 2026. The measure permits eligible companies (those with less than $1 billion of annual global turnover) to carry back revenue losses and offset them against tax paid up to two years earlier, limited by the company’s franking account balance.

In a complementary measure targeted at start-ups, small companies with aggregated annual turnover of less than $10 million that generate a tax loss in their first two years of operation will, from 1 July 2028, be able to convert those losses into a refundable tax offset limited to the value of FBT and withholding tax on wages paid in respect of Australian employees in the loss year.

The primary beneficiaries of this reform are mid-market and smaller companies that experience volatile or cyclical earnings. By allowing losses to be carried back against prior year profits, the measure provides immediate cash flow relief in the form of a tax refund rather than requiring companies to wait until future profitable years to utilise those losses. This is particularly significant for businesses navigating economic downturns, supply chain disruptions or investment-heavy growth phases where short-term losses are followed by a return to profitability.

The start-up refundability component goes further still, recognising that early-stage businesses often have no prior year tax paid against which to offset losses; by converting losses into a refundable credit (capped by reference to employment costs), it rewards businesses that are investing in Australian jobs during their formative years and is expected to support up to 25,000 new businesses each year.

R&D tax incentive (R&DTI) reforms aimed to simplify and refocus the R&D scheme

The R&D reforms boost support for some businesses while quietly pulling it back from others. Winners are young firms under 10 years of age.

This measure forms part of the first stage of the Government’s response to the Ambitious Australia: Strategic Examination of Research and Development Final Report. That report, completed in December 2025 by an independent expert panel, presented 20 recommendations to overhaul Australia’s R&D system, including a recommendation to simplify and refocus the scheme on core experimental R&D and better supporting young, high-growth firms.

From 1 July 2028 the Budget proposes to:

• Increase the offset for core R&D expenditure by around 25-50%. Eligibility of supporting R&D expenditure for the R&DTI will be removed.

• Reduce the intensity threshold from 2% to 1.5%, enabling more firms that engage in substantial core R&D to qualify for higher offset rates.

• Increase the refundable offset turnover threshold from $20 million to $50 million, allowing growing firms to retain access to the higher offset for longer as they scale.

• Maintain older firms’ eligibility for the higher offset rate while limiting refundability to firms under 10 years of age.

• Increase the maximum expenditure threshold to $200 million (from $150 million), encouraging Australia’s largest R&D businesses to keep their R&D onshore.

• Increase the minimum expenditure threshold to $50,000 (from $20,000), with research activities below this amount required to be undertaken with a registered Research Service Provider or Cooperative Research Centre.

The reforms are estimated to deliver $650 million in savings over five years from 2025-26, while unlocking an estimated $400 million increase in R&D by young firms each year.

Businesses currently claiming the R&DTI should, ahead of the 1 July 2028 commencement, identify what proportion of current R&D expenditure relates to core activities versus supporting activities, as expenditure solely classified as supporting (eg. literature reviews, equipment maintenance) will no longer be eligible.

Venture capital tax incentives become more accessible for growth investors

Investors in startups and high growth businesses will benefit from the Federal Government’s increase of asset and fund size caps to access tax incentives. The proposed adjustments are to compensate for inflation since they were last set, helping to ensure the incentives align with modern company valuations.

Currently, investors in qualifying venture capital limited partnerships (VCLPs) benefit from flow-through treatment, while eligible foreign investors can access CGT exemptions. Similarly, investors in qualifying early-stage venture capital limited partnerships (ESVCLPs) are exempt from tax on income and gains from eligible investments and can access a 10% non-refundable tax offset for new capital invested.

From 1 July 2027, more investments in early-stage and expanding businesses will be eligible:

• VCLP eligibility will apply to investments in businesses with assets up to $480 million at the time of the initial investment, up from $250 million.

• ESVCLP eligibility will apply to investments in businesses with assets up to $80 million at the time of the initial investment, up from $50 million.

• ESVCLP investors will retain full access to incentives as businesses grow their assets up to $420 million, up from $250 million.

• The maximum committed capital for ESVCLPs will increase to $270 million, up from $200 million.

Considering the separately announced removal of the CGT discount and significant broadening of the CGT base for foreign residents, the VCLP and ESVCLP tax concessions are particularly attractive and this will be helped by the higher caps. As a result, growth and early stage investors are likely to be closely examining these vehicles, and the venture capital industry may benefit from capital inflows originally destined for more traditional investments. The higher caps will also allow investors to hold investments for longer to the benefit of more capital-intensive sectors like biotechnology, clean energy and artificial intelligence.

Protecting the tax system against fraud

The 2026 Budget has promised an additional $86.3 million of funding for the Australian Taxation Office over the next four years, and a further $9.7 million in the 2030 and 2031 years, to deliver Phase 2 of the ATO’s Counter Fraud Strategy.

Enhanced fraud detection and protection for victims

This funding is intended to enhance the ATO’s capacity to detect and prevent fraud in real time, provide further protections to individual taxpayers, and expand the ATO’s existing live monitoring of fraudulent behaviour. Consistent with the ATO’s Fraud and Corruption Control Plan issued earlier in 2026, the ATO’s monitoring activities will extend to individuals, tax agents, and businesses who dishonestly obtain financial gains, benefits, or information.

To increase fairness for vulnerable taxpayers, the Budget also proposes to strengthen the ATO’s powers to assist taxpayers who are the victims of fraud. These measures include pausing recovery action for taxpayers who have been defrauded by tax intermediaries and, in appropriate circumstances, waiving the resulting debts and instead pursuing the fraudsters themselves for the recovery of their victims’ outstanding tax liabilities.

Extension of debt recovery powers and information-gathering

Separately, the Government has flagged an expansion of the ATO’s ability to recover tax debts unilaterally by extending the ATO’s existing garnishee powers to include assets jointly held by tax debtors, where those jointly held assets are used to frustrate recovery actions. While it remains unclear in what circumstances a jointly held asset will be deemed to specifically frustrate a recovery action, the extension of these unilateral revenue collection powers will necessarily result in some erosion of the judicial intervention currently available to taxpayers. Those who jointly hold assets, such as bank accounts, with tax debtors should be alert to this expansion of the ATO’s administrative authority.

The Budget further indicates that the Government will progress exceptions to Australia’s tax secrecy provisions, which protect the disclosure of specific, protected tax related information except in limited circumstances. These provisions have been the subject of significant debate and testing in recent years, and were recently amended to allow for the regulator and Tax Practitioners Board to disclose information on tax avoidance behaviour.

Further enhancements to the ATO’s existing powers of information collection – which are already extensive and comprehensive and include the issuance of formal information notices to taxpayers and third parties in Australia and overseas, power to access with or without notice of taxpayer premises and compelling taxpayers to attend formal interviews with tax office representatives – have also been flagged as part of the Budget’s fraud prevention measures.

Tax advisers and taxpayers should familiarise themselves with the existing tax secrecy framework and the Government’s proposed amendments, and consider any risks that may arise if information provided to the ATO is shared with other Commonwealth agencies or regulators.

Foreign resident Capital Gains Tax

The Budget confirms the Government is proceeding with its previously announced reforms to the foreign resident CGT regime. As we flagged last month following the release of draft legislation on 10 April, the proposed changes materially widen the Australian tax base and will affect any foreign resident (including offshore holding companies and funds) that holds or disposes of interests in Australian tangible assets or entities with significant Australian real property. Importantly, the reforms introduce a broad new legislative definition of “real property” which would apply retrospectively from 12 December 2006, replace the point-in-time principal asset test with a 365-day testing period, and impose higher due diligence obligations on purchasers. The Budget also confirms a time-limited 50% CGT discount for foreign residents disposing of certain Australian renewable energy assets until 30 June 2030, which is estimated to decrease receipts by $425 million over the five years.

Foreign investors currently holding, or who have previously disposed of, interests in Australian tangible assets since December 2006 should urgently reassess their tax positions and consider whether historical transactions may be affected if the proposed legislation is enacted.

Fringe benefits tax discount for electric vehicles

The Government has confirmed plans to phase out the fringe benefits tax (FBT) exemption for electric vehicles (EVs). The measure is expected to increase receipts by $1.9 billion and payments by $200 million over five years from 2025-26.

Existing measure

Amendments to the Fringe Benefits Tax Assessment Act 1986 (effective from 1 July 2022) introduced a full FBT exemption for zero or low emissions vehicles provided by employers. This measure aimed to encourage EV adoption by reducing costs for employers and employees through company-owned cars, fleets and salary packaging arrangements. However, the exemption did not reduce employees’ reportable fringe benefits amounts (RFBAs), which are included in taxable income for purposes like the Medicare Levy Surcharge and means-tested benefits and liabilities.

From 1 April 2025, plug-in hybrid vehicles became ineligible for the FBT exemption for new arrangements, while no end date was set for battery EVs.

Revised measure