The 2026 Budget contains the most dramatic tax changes in 20 years. Draft legislation is available for the proposals dealing with Capital Gains Tax (CGT) and negative gearing, with legislation still pending for proposed changes to taxation of trusts.

CGT changes

As expected the proposed changes include a removal of the 50 per cent CGT discount for individuals, partnerships and trusts, going back to the pre-1999 approach of cost base indexation.  As also expected the changes will be “grandfathered” to retain the CGT discount for capital gains on an apportioned basis.

Calculating capital gains accruing up until 1 July 2027 that will receive the CGT discount will be complex. Taxpayers will generally need to obtain a market value of their assets on 1 July 2027 so they can choose between a market-value based apportionment and a straight-line time-based apportionment on a later sale.

One unexpected change was the removal of pre-CGT status for assets acquired before September 1985, which will be brought into the CGT system with a deemed cost base equal to the 1 July 2027 market value, again requiring asset valuations.

Another key element of the CGT changes is that from 1 July 2027, capital gains will be taxed at a minimum rate of 30 per cent.  This is a major departure from the existing regime and will require a great deal of planning when selling assets.

These proposals have already raised concerns from start-ups and other businesses especially in the tech sector, and the Government has suggested some concessions may be provided, but we don’t yet know what they might look like.

Another group likely to be impacted by these changes are retirees who may been high-paying taxpayers throughout their working lives and realise capital gains at a time when their marginal tax rate could be as low as 14 per cent.   The CGT they will have to pay during retirement could be effectively doubled due to the 30 percent minimum tax rate.  This is clearly a deliberate policy intent but is likely to lead to inequitable outcomes.

Negative gearing changes

With housing affordability such a hot political issue, the Government has moved to limit access to tax benefits from negative gearing residential properties.

From 1 July 2027 taxpayers will have to carry forward net rental losses from residential investment properties to be offset against positive net rental returns or taxable capital gains from such properties in future years.  The changes are “grandfathered” so that properties acquired before 7.30pm on 12 May 2026 will be excluded.

Also excluded are properties that qualify as “new builds”, as well as commercial properties or other investment assets.

There will be much debate as to whether the changes will achieve the aim of increasing residential housing supply for owner occupiers, including first home buyers. Another concern is whether limiting incentives for investors will reduce the supply of rental properties.

New minimum tax on distributions from discretionary trusts

There is a widely-held and often misguided view that trusts are used only for tax minimisation, ignoring a range of commercial, practical and asset-protection considerations, including as part of estate planning.

The key change, which was unexpected, is to impose a 30 per cent minimum tax on all distributions from discretionary trusts from 1 July 2028 at the trustee level, with non-refundable credits available to beneficiaries (other than corporate beneficiaries).

The Budget proposals will hopefully be subject to substantial consultation before the relevant legislation is passed.  The changes will add substantial complexity and a greater administrative burden.

Corporate beneficiaries will become unviable and if the changes are implemented as announced will no longer be used after 1 July 2028.

Discretionary trusts will be much less useful even for individual beneficiaries – while they will receive non-refundable offsets for trustee tax paid, it does not appear that trusts will be able to pass on franking credits and the mechanics of applying the new rules are likely to be extremely complex.

Combined with the changes to the CGT discount, it is likely that many taxpayers will decide to use investment companies instead of trusts.  Companies already have a 30 per cent tax rate and are simpler to operate than a trust while also accumulating franking credits from investment returns and capital gains that can be passed through to shareholders. Investing through superannuation will also become an even more attractive prospect.

On a more positive note, the grandfathering arrangements mean investors have time to plan and adapt, including using expanded rollovers to restructure their affairs if they decide to move away from a trust structure. The devil will be in the detail, however, and we await the details of how such rollovers will operate.  For business structures, in some States stamp duty may arise in restructures for which no relief is available.

Other measures

Other measures to help Australians manage cost-of-living pressures include:

  • The new Working Australians Tax Offset (WATO) which will automatically give all working Australians a tax offset of up to $250 from 1 July 2027
  • An instant tax deduction of $1,000 on work-related expenses, without the need to provide receipts or incur associated expenses
  • An increase in the Medicare levy low-income threshold
  • Tax cuts that reduce the 16 per cent tax rate on income between $18,201 and $45,000 to 15 per cent from 1 July 2026 and to 14 per cent from 1 July 2027

The Budget also proposes doubling ASIC thresholds for large proprietary companies, including lifting the revenue test from $50 million to $100 million, which may require some private companies to be audited.