Let me cut to the chase… this budget is meaty and includes a few surprises!

There’s not a lot of good news in this one for business owners and investors, whether investing in property or other capital appreciating assets.

There is no doubt this budget is looking to the long term with changes to CGT, negative gearing and trusts bringing very real changes to the tax system.

These are the meatiest bits of the budget you need to know about. 

 

1. the 50% CGT discount is cut 

 

The Government has confirmed that from 1 July 2027, the current 50% CGT discount [for most assets held for more than 12 months] for individuals, partnerships and trusts will effectively be replaced. 

Under the proposed model: 

  • Existing unrealised gains up to 30 June 2027 will continue to receive the current 50% discount. 
  • Future gains after 1 July 2027 move to a new indexed cost-base system [same as the system was pre-1999]. 
  • A 30% minimum effective tax rate on real capital gains will apply [this bit was not announced before budget night]. 

Importantly, investors who buy new residential properties will be able to choose between applying the 50% discount or indexation and the minimum tax when they sell the property. 

The family home exemption will continue, as will the existing super fund discounts remaining untouched. 

The changes apply to all CGT assets, including shares, properties and cryptocurrency. 

If all CGT assets are going to be taxed based on indexation from 1 July 2027, we need to set a value for all CGT assets as at 30 June 2027.  To determine this value, taxpayers will be able to either get an external valuation or use a ‘specified apportionment formula’ which will be provided by the ATO.

and for a surprise…

The hidden feature in this budget is that this change also applies to pre-CGT assets, those bought before 1985 which until now have never been subject to capital gains tax. 

Any gains on pre-CGT assets from 1 July 2027 are going to be taxed with a minimum tax of 30%. 

 

food for thought

Do not underestimate the impact of the 30% minimum tax component of this change to CGT. A retiree who has no other income will pay at least 30% tax on a capital gain even if they have no other income. 

Another reason to hold investments in companies going forward. 

 

further food for thought

What about business assets like goodwill which may not be held in a company? Do we need a goodwill valuation as at 30 June 2027?

 

2. negative gearing narrowed

 

As was widely speculated, the Government’s Budget has introduced changes to “negative gearing” for residential properties.

Negative gearing occurs when a rental property makes a tax loss that is utilised against other income in the same entity with the effect of reducing overall tax paid.

Instead, from 1 July 2027 negative gearing will only be allowed on properties that were purchased prior to 7.30pm 12 May 2026 [i.e. grandfathered] and new builds. 

Importantly it is contract date that is the relevant date.

For all other residential properties, any rental losses will only be utilised against: 

  • rental income from other residential properties either in the same year; or
  • be carried forward to be used against residential rental income in future years; or
  • the capital gain on the eventual sale of the property

These changes apply to all structures that own rental properties, such as individuals, trusts, companies and partnerships.

Negative gearing is still available for commercial properties, shares and other existing arrangements. 

what this actually means…

For years, the negative gearing has been one of very few effective tax planning strategies. It has been built around three assumptions: 

  1. leverage your equity 
  2. claim losses against other income 
  3. rely on long-term capital growth 

With two of these assumptions weakened in this budget, it does not mean property investment disappears, but it may mean: 

  • less appetite for investors to buy established apartments and houses 
  • stronger investor demand for new developments 
  • greater focus on rental income [yield] over capital growth 
  • more use of company structures to invest 
  • increased importance of debt strategy 
  • portfolios of rental properties with some positively geared properties offsetting negatively geared properties 
  • more attention on commercial properties
  • rents may go up

The impact on the economy of removing negative gearing has been debated for decades. In 20 years’ time, this is going to be a great case study for economics students because I don’t believe anyone really knows what is going to happen. 

 

food for thought

A new purchaser buying a property after 12 May 2026 next to a same or similar property bought before the budget [such as two adjacent apartments], may need to charge more rent to cover the tax benefit they will no longer receive. 

 

3. minimum tax discretionary trust

 

From 1 July 2028, discretionary trusts will face a 30% minimum tax on taxable income with the tax being paid by the trustee. 

Beneficiaries will still include the income in their own tax returns, with a non-refundable credit for the tax already paid by the trustee [other than for corporate beneficiaries]. Emphasis here on ‘non-refundable’ because this means, irrespective of who you distribute the income to, even if their individual tax rate is nil, their effective tax rate will be 30%. 

The measure is designed to reduce income splitting advantages and what Treasury views as excessive flexibility within trust structures. 

There are exclusions for fixed trusts [including fixed testamentary trusts], widely held trusts, complying super funds, special disability trusts, deceased estates, existing Testamentary Discretionary Trusts and charitable trusts.

Some types of income will also be excluded, such as primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at the time of the announcement. 

We need to understand how they propose for corporate beneficiaries to not get a credit for tax paid by the trustee.  Our early view of things is that it looks like it could eliminate corporate beneficiaries as a viable option.  Therefore use of the transitional rollover provisions will become even more important.

 

food for thought 

What will be the best type of entity to invest from in the future? 

We have already seen a shift to investing from companies [especially corporate beneficiaries] rather than trusts, this is likely to encourage this even further. 

Over the next few years, we are likely to see: 

  • more businesses moving into company structures 
  • greater use of fixed/unit trusts 
  • review of bucket company arrangements 
  • more formal family office style investment structures 
  • increased focus on Division 7A and retained earnings strategies 

This will become an important tax planning and estate planning conversations over the next couple of years. 

See the proposed rollover relief below. 

 

4. transitional rollover relief 

 

Given the changes in the rules to discretionary trusts, the government has flagged transitional rollover relief [income tax and capital gains tax] for 3 years from 1 July 2027 for taxpayers who want to restructure out of discretionary trusts [for example, to a company or fixed trust].

This could be a good opportunity to roll into a company structure, which is often considered the best structure for trading entities and even more so with the changes to the CGT discount.

State government transfer duty is often a handbrake to rolling from a trust to a company, so for these rollovers to be effective, we will need to overlay state government rollover exemptions. 

 

5. permanent instant asset write-off

 

Finally, the $20,000 instant asset write-off is to be permanently locked into legislation from 1 July 2026.

Honestly, this should have happened years ago. 

 

6. loss carry back rules are back

 

The Government is bringing back the Loss Carry Back rules that were first introduced during COVID for businesses with less than $1 billion in turnover.

From the 2027 financial year onwards, businesses that make tax losses will be able to apply those losses against income tax paid in the prior two income years and receive a refund for the taxes paid in those prior years.

For example, a company that makes a loss in the 2028 income year, can apply those losses against the profits made in either or both of the 2026 and 2027 income years and receive a cash refund of the tax already paid in those earlier years. 

 

food for thought

I struggle to get too excited about this rule, but they can come in handy if a business has had a major change in performance.

 

7. startup loss refunds [what the?!] 

 

Startups are one of the big losers with the changes to the CGT discount. High-risk, high-return investors were incentivised by knowing the tax rate would be more appealing on an eventual exit. 

To somewhat appease the startup community [I would suggest], the Government is introducing a refund of PAYG Withholding on wages and fringe benefits tax paid for companies that make tax losses in their first two years of trading.

It is proposed that these measures will apply from 1 July 2028 to startups with a turnover under $10m. 

 

food for thought

I don’t quite understand the logic of refunding PAYG Withholding and FBT, but I guess it’s the only tax they remit [other than GST which goes to the States], so I am not going to look a gift horse in the mouth. 

 

8. Working Australians Tax Offset [WATO] 

 

The Government also announced a new tax offset for Australian ‘Workers’ of $250 from 2027/28. The offset will only be available to offset tax on income derived from ‘work’, such as wages and business income of sole traders. 

The offset has the effect of increasing the tax–free threshold from $18,200 to $19,985 for workers [before the Low Income Tax Offset]. 

 

9. instant tax deduction for workers 

 

From 2026/27, taxpayers can claim a $1,000 instant deduction for work‑related expenses to reduce their taxable income without being required to provide receipts when they lodge their tax returns.

This replaces the $300 limit that previously existed [about time].

 

food for thought 

I am a big fan of anything that simplifies the tax system – especially for individuals. This may make it easier for individuals to lodge more of their own returns. 

 

10. changes to FBT on electric vehicles 

 

The Government is adjusting settings of the electric car discount to maintain incentives for the shift to electric vehicles while transitioning to more sustainable settings for the longer term.

The Government will transition the arrangements to support electric cars to a permanent 25 per cent fringe benefits tax [FBT] discount, for eligible electric cars over $75,000 from 1 April 2027 and for all eligible electric cars from 1 April 2029.

Electric cars costing up to $75,000 will continue to receive a full FBT exemption provided the fringe benefit arrangement commences before 1 April 2029. 

 

residential property [a summary]

There is a lot going on in this budget for residential property.  Following is a summarised of the property CGT negative gearing rules based on when assets where purchased [contract date].

 

the big picture 

 

Some of the broader economic forecasts in this budget include that inflation is going to continue, deficits are going to continue and wage growth is going to continue. They are talking of productivity improvements – that is a good thing, the country needs them! 

They positioned the budget around making it easier for the younger generation to get into the housing market – that may be true, but for me, it does nothing to encourage the younger generations to take risk on investments or in business. 

What do people do when they are uncertain? Nothing! My prediction is that there is going to be a whole lot of nothing done by investors and business owners in the next little while. 

Remember, the devil is in the detail, and until we see the actual legislation passed, there is a whole stack of things that could change. 

One thing is for sure though, if all these changes become legislation, there is a stack of complexity around tracking different cost bases, different types of income and different types of deductions and offset only application to specific types of income.

I am sorry to say this, but with this level of complexity, the biggest winners are probably the accountants and the valuers!

 

we’re here to help

The Federal Budget 2026-27 brings plenty of change and plenty of questions.

If you’d like to understand how these updates may impact you or your business, our team is here to help.

Reach out to your usual contact at businessDEPOT, email oneplace@businessdepot.com.au or give us a buzz on 1300 BDEPOT.

As more information comes to light, we will update this blog some come back when you need to check where things end up. 

 

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