Key 2026–27 Federal Budget Tax Reforms: What They Mean for You
The 2026–27 Federal Budget, released on 12 May 2026, has attracted significant attention due to a number of proposed tax reforms that could have a substantial impact on property investors, business owners, and families using discretionary trusts.
Key measures include changes to negative gearing, the capital gains tax (CGT) discount, and the taxation of discretionary trusts. While some legislation has already been introduced into Parliament, it is important to remember that these measures are not yet law and may be amended before being passed.
Although there is still uncertainty surrounding the final outcome, we understand that these proposals are causing concern and confusion for many taxpayers.
Below is a summary of what we know so far and the potential implications.
Negative Gearing Changes – Proposed from 1 July 2027
The Government intends to restrict negative gearing on established residential properties purchased after 7:30pm AEST on 12 May 2026.
Under the proposed rules:
- Rental losses will only be able to offset rental income or capital gains from other residential properties.
- Any excess losses must be carried forward and applied against future residential rental income or residential property capital gains.
Grandfathering Provisions
Existing property owners will be protected by grandfathering rules. If you owned an established residential property before Budget night or had exchanged contracts before that time, your current negative gearing arrangements will remain unchanged. You can continue to offset rental losses against salary, business income, and other assessable income until the property is sold.
What Assets Are Impacted?
The proposed restrictions apply only to residential property. Losses relating to commercial property, shares, and other investment assets are not expected to be affected.
There are also specific exclusions for:
- Commercial residential properties such as hotels, motels, and boarding houses.
- Build-to-rent developments.
- Certain government-supported housing projects.
Importantly, newly constructed residential properties will continue to qualify for the existing negative gearing rules both before and after 1 July 2027, although final guidance on what constitutes a “new build” has not yet been released.
Capital Gains Tax (CGT) Discount Changes – Proposed from 1 July 2027
Currently, individuals who hold a CGT asset for more than 12 months are generally entitled to a 50% CGT discount. Similar outcomes can apply where a trust distributes a discounted capital gain to an individual beneficiary.
From 1 July 2027, the Government proposes replacing the CGT discount for individuals and trusts with:
- Cost base indexation (inflation adjustment); and
- A 30% minimum tax on capital gains.
These changes would apply to all CGT asset classes, including:
- Residential property
- Commercial property
- Shares
- Business assets
Transitional Arrangements
Importantly, gains accrued up to 1 July 2027 will continue to receive the benefit of the existing CGT discount or pre-CGT exemption. As a result, taxpayers will need to determine the market value of affected assets as at 1 July 2027 to facilitate future CGT calculations.
Investors in newly constructed residential properties will have the option of choosing between:
- The existing CGT discount rules; or
- The new indexation and minimum tax regime.
Other Key Points
- Companies will not be entitled to cost base indexation.
- Complying superannuation funds will continue to access the existing 1/3 CGT discount.
- Individuals classified as foreign residents or temporary residents during the ownership period will not be eligible for indexation.
Example
Michael owns an investment property purchased before Budget night that is currently negatively geared.
Under the proposed rules:
- He can continue offsetting rental losses against his salary.
- The portion of any capital gain attributable to ownership before 1 July 2027 will receive the existing 50% CGT discount.
- The portion of the gain accruing after 1 July 2027 will be subject to the new indexation and 30% minimum tax rules.
While the final outcome will depend on Michael’s circumstances, marginal tax rate, and ownership period, taxpayers in similar situations would generally be expected to pay more tax under the proposed regime than under the current rules.
Practical Considerations
There is no need for immediate action, but now is an appropriate time to review your investment portfolio.
Assets acquired before Budget night will generally receive more favourable tax treatment than assets acquired after that date. However, the overall impact will vary depending on your individual circumstances.
Discretionary Trust Changes – Proposed from 1 July 2028
The proposed introduction of a 30% minimum tax rate on discretionary trust income would represent one of the most significant changes to trust taxation in decades.
Under the proposal:
- The trustee would initially pay tax at 30%.
- Beneficiaries (other than companies) would receive a non-refundable tax credit for tax already paid by the trust.
The Government’s stated objective is to reduce income-splitting opportunities involving lower-taxed family members and corporate beneficiaries (commonly referred to as “bucket companies”).
Proposed Exemptions
Certain entities would be exempt, including:
- Fixed trusts
- Widely held trusts
- Superannuation funds
- Special disability trusts
- Deceased estates
- Charitable trusts
- Primary production income
- Certain other prescribed trust arrangements
The Government has also indicated that existing discretionary testamentary trusts will be exempt.
Transition Relief
To facilitate restructuring, taxpayers will have access to three years of roll-over relief where discretionary trust structures are converted into companies or fixed trusts.
Example (Adapted from Budget Materials)
Kurt operates a business through a discretionary trust that generates annual profits of $300,000.
He:
- Pays himself a salary of $100,000.
- Distributes the remaining $200,000 equally among four family members who have no other income.
Under the current rules, the family pays approximately $42,000 in total tax.
Under the proposed 30% minimum tax regime, total tax would increase to approximately $86,000.
This represents a substantial increase in tax on the same level of business profit.
In situations like this, alternative structures may become more attractive, such as:
- Restructuring into a company to access the 25% corporate tax rate; or
- Paying salaries and wages to family members who are genuinely employed in the business.
Practical Considerations
Many existing business and investment structures could face higher effective tax rates if these measures proceed.
The Government has committed to a consultation process, and it is possible that the final legislation will differ from the Budget announcement.
Although the proposed commencement date is still some time away, now is the ideal time to model different scenarios and assess alternative structures.
In some cases, the impact may be minimal and no action may be required. In others, discretionary trusts may remain appropriate with revised distribution strategies. For some taxpayers, however, a restructuring may provide more favourable long-term outcomes.
What Should You Do Next?
These proposed reforms have the potential to significantly affect investment, business, and wealth-building strategies.
However, the practical impact will depend on your individual circumstances and, importantly, the final form of the legislation.
If you have concerns about how these proposals may affect you, please contact us. We can review your circumstances, model the potential outcomes, and help you make informed decisions as further details emerge.
We will continue to keep clients updated as legislation progresses and additional guidance becomes available.