2026 Budget Summary – Taxation Measures

Federal Budget 2026 — Key Tax Changes

The Federal Government has announced what it describes as the most significant transformation of Australia's tax system in more than a quarter of a century. The measures span capital gains tax, negative gearing, discretionary trust taxation, personal tax offsets, business concessions, and fringe benefits tax for electric vehicles. Most changes take effect from 1 July 2027.

The major tax issues addressed in the Budget are as follows:

1. Capital Gains Tax Changes

1.1 CGT 50% General Discount to be replaced by Cost Base Indexation

Under the Budget proposal the Government will replace the 50% CGT General Discount with cost base indexation for all CGT assets from 1 July 2027 that are held for more than 12 months. This means that any capital gain realised on an asset sold on or after 1 July 2027 but acquired before 1 July 2027 will be calculated as follows:

• The difference between the asset’s market value on 1 July and the asset’s cost base will still be eligible for the 50% CGT General Discount; and

• The increase in value of the asset from 1 July 2027 will be subject to cost base indexation with the cost base being a deemed cost base equal to the market value of the asset at 1 July 2027.

This will require taxpayers to obtain a valuation of the asset at 30 June 2027 to provide substantiation for the determination of the taxable capital gain.

1.2 No more Pre-CGT Assets

The major surprise in the announcement is that pre-capital gains tax assets (i.e. assets owned before 20 September 1985) will lose their pre-CGT status with effect from 1 July 2027.

If you were to dispose of a pre-CGT asset before 1 July 2027 no tax will apply as the asset will remain a pre-CGT asset. However, if you continue to hold that pre-CGT asset on 1 July 2027 the asset will become a post CGT asset and you will be taxed on the increase in value from 1 July 2027 under the cost base indexation method. Your deemed cost base for the old “pre-CGT” asset will be its market value on 30 June 2027.

1.3 30% Minimum Tax on Real Capital Gains

With effect from 1 July 2027 the Government is introducing a 30% minimum tax on capital gains income derived after 30 June 2027. The logic, if there is one, is to remove incentives for taxpayers to defer the sale of assets until they are on a lower average tax rate.

There is little detail in the Budget around this measure and how it will work in practice. One wonders whether personal superannuation contributions as an allowable tax deduction will be able to reduce the taxpayer’s taxable income or whether the minimum 30% tax would ignore the allowable deduction. In such circumstances will the taxpayer’s superannuation fund then not be taxed on the portion of the concessional contribution that was ignored in taxing at a minimum tax rate of 30%?

2. Restricting the Use of Negative Gearing

From 1 July 2027 the Government will limit negative gearing for residential property to new dwellings only. Hence, you will still have the ability to negatively gear commercial properties and other assets such as shares, managed funds and exchange traded funds.

While the Government believes these measures appeal to voters by dressing it up as a fight for housing affordability they are missing the fact that State and Federal Governments (together with local councils) have created the problem by not promoting new builds, by State and Local Governments imposing taxes and charges on subdivisions, by redirecting labour away from domestic building to Government infrastructure projects and forcing building costs up to comply with new energy ratings.

2.1 Residential Properties Acquired After 30 June 2027

Where an investor acquires a residential property after 30 June 2027 any net rental losses suffered by the investor will be quarantined and carried forward unless the investor acquires a newly built property. For example, if you acquire a new dwelling after 30 June 2027 and you incur a net rental property loss of $10,000 you will be able to claim that loss and offset the loss against other assessable income. In contrast, if you were to acquire an established house and you suffered a $10,000 net rental loss in the first year you would not be able to claim a deduction for that loss against other assessable income. Rather, that $10,000 loss would be quarantined and carried forward until you had positive net rental income that could recoup some of those prior year losses.

 Where you have quarantined net rental losses that may have accumulated over a number of years we note that if you were to sell the property and derive a capital gain then you could reduce the capital gain by the available carried forward net rental losses.

2.2 Transitional Arrangements

Properties held or purchased before 7.30pm on 12 May 2026 will continue to be able to claim the annual net rental losses (i.e. no change). Importantly, this includes properties where you have entered into a contract to buy before 7.30pm on the 12 May but have not yet settled.

Properties acquired after 7.30pm on 12 May 2026 and before 30 June 2027 may be able to claim the net rental loss as a deduction against other assessable income during that time but will not be able to do so from 1 July 2027.  

3. 30% Minimum Tax on Discretionary Trusts

This has been coming for some time so it is not a real surprise. Effectively the Government is proposing to impose a minimum tax rate of 30% on the annual net income of the Trust. The tax will initially be paid by the trustee of the discretionary trust and the beneficiaries in receipt of the net income or a share of the net income of the Trust will receive a tax credit for the tax paid by the trustee. However, this tax credit will not be a refundable tax credit. Hence, if the beneficiary’s average rate of tax is less than 30% then the beneficiary will have wasted some of the tax credits.  Where the beneficiary’s average tax rate is greater than 30% the beneficiary will be paying top up tax.

Interestingly, there will be expanded roll-over relief available for a period of 3 years from 1 July 2027 to assist small businesses and other taxpayers to restructure out of discretionary trusts into companies or fixed trusts. These roll-over provisions will supposedly provide relief from income tax consequences including capital gains tax.

There will also be some carve outs and as stated in the Budget papers the measure is not likely to apply to primary production income of farms, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies and income from assets of testamentary trusts existing at 7.30pm on the 12 May 2026.

4. Personal Taxes

4.1 Working Australians Tax Offset

Despite the Government stating that they would like to simplify taxes they continue to do the opposite. They have also had their marketing department busy coming up with a name for the newly proposed tax offset. Not surprisingly, the Government has called its new tax offset the Working Australian Tax Offset (WATO).

The WATO is a $250 tax offset for every working Australian. If you are a sole trader/business owner deriving business income then you do not qualify for the rebate but the people you employ will. Go figure!

A simpler solution would have been to merely alter the tax free threshold and increase the threshold by the equivalent amount of the $250 tax offset. This would have seen the tax free threshold increase to $19,985.

The WATO will come into effect from 1 July 2027.

4.2 Instant Tax Deduction for Work Related Expenses

The Government will introduce an instant tax deduction of up to $1,000 from the 2026–27 income tax year. Australian tax residents who earn income from work will be eligible for the instant tax deduction and will not need to itemise and claim work related expenses if claiming less than $1,000.

Individuals who incur work related expenses greater than the instant tax deduction can continue to claim their deductions in the usual way.

Charitable donations, union and professional association membership fees and other non work related deductions can still be itemised separately and claimed on top of the instant tax deduction.

4.3 Increasing the Medicare Levy Low Income Thresholds

The Medicare Levy low income thresholds will increase with effect from 1 July 2025.  The new thresholds are:

• Family Threshold increases to $47,238

• Singles Threshold increases to $28,011

• Single Seniors/Pensioners increases to $44,268

• Family Seniors/Pensioners increases to $61,623

Further, the family income threshold will increase by $4,338 for each dependent child or student.

5. Business Tax Reforms

5.1 Carry Back of Tax Losses (companies only)

With effect from 1 July 2026 companies with an aggregated annual global turnover of less than $1.0b will be able to carry back a tax loss and offset it against tax paid up to two years earlier. The carry back of tax losses will only apply to income tax revenue losses (i.e. it will exclude capital losses). The carry back of losses will also be limited by a company’s franking account balance. That is, to be able to carry back the tax losses the company must have a positive franking account balance and the loss carried back must not cause the company to have a franking deficit.

5.2 Loss Refundability for Small Start Up Companies

For tax years commencing on or after 1 July 2028 start up companies with aggregated annual turnover of less than $10.0m that incur a tax loss in their first two years of trading will be able to utilise the loss to generate a refundable tax offset.

The offset will be limited to the value of Fringe Benefits Tax and PAYG Withholding Tax paid in respect of Australian employees in the loss year.

5.3 $20,000 Instant Asset Write Off

With effect from 1 July 2026 the $20,000 instant asset write off for small businesses with turnover of up to $10.0m will be permanently extended.

In addition, if a small business acquires an asset that is $20,000 or more the business is able to place the asset in its small business simplified depreciation pool.

The provisions that prevent a small business from re-entering the simplified depreciation regime for 5 years after opting out will continue to be suspended until 30 June 2027.

5.4 Small Businesses and PAYG Instalments

From 1 July 2027, small and medium businesses will be able to opt in to reporting and paying PAYG instalments monthly and to using an ATO-approved calculation embedded in accounting software to calculate and vary their instalments. This will support businesses by enabling tax instalments to better reflect real time business activity. Taxpayers with a demonstrated history of non compliance will be required to report and pay PAYG instalments monthly.

6. FBT and Electric Vehicles

From 1 April 2029, a permanent 25% discount on fringe benefits tax (FBT) will be available for all electric cars valued up to and including the fuel efficient luxury car tax threshold, implemented through a 15% rate in the FBT statutory formula.

The following transitional arrangements will also be put in place:

• All eligible electric cars will retain the FBT discount rate that was in place when the arrangement commenced;

• All electric cars valued up to and including $75,000 that are provided before 1 April 2029 will continue to be eligible for a 100 per cent discount on FBT (implemented through a 0% rate in the FBT statutory formula; and

• Electric cars valued above $75,000 and up to and including the fuel efficient luxury car tax threshold that are provided between 1 April 2027 and 1 April 2029 will be eligible for a 25% discount on FBT (implemented through a 15% rate in the FBT statutory formula).

 The existing 20% statutory rate will continue to apply for all other cars, including electric cars costing more than the fuel efficient luxury car tax threshold.

Reportable fringe benefits will continue to be determined for eligible electric cars as if a 20% FBT statutory formula rate or cost basis method applied.