Australian federal budget 2026–27 :- Tax impact guide.

On 12 May 2026, Treasurer Jim Chalmers tabled the Federal Budget 2026–27, which was deemed to be the most comprehensive proposed reform of Australia’s taxation system in over two and a half decades. Introduced in response to continued cost-of-living concerns, housing affordability issues, low productivity and limited fiscal flexibility, the Budget proposes a balance between stimulus and revenue and fiscal reform.

As many of these changes offer temporary relief or support to taxpayers and businesses, there are equally far-reaching and complex changes relating to capital gains, discretionary trusts, negative gearing and innovation. In combination, these changes create a structural change to taxation policy related to family wealth and private capital.

While it is important for individuals and entities to become aware of these proposed changes, an even greater challenge is understanding the implications of the changes and how they will affect current structures, investments and future transactions. Those who model the effects will be best placed to manage risks, protect themselves and take advantage of new opportunities.

Set out below are some of the key tax measures proposed in the 2026–27 Federal Budget:

1. Personal Income Tax

Prior's marginal tax rate on income lying between $18,201 and $45,000 stood at 16%, in light of the newly implemented Stage 3 changes in tax system. There was no single employment tax offset available, and it was imperative that workers substantiate their claims related to the deductibles incurred in the course of employment.

In relation to the reduced tax rate, the Government has proposed a phased approach to reduce the 16% tax bracket from:

• 15% from 1 July 2026

• 14% from 1 July 2027

Other features are:

• $250 working Australians tax offset (WATO) starting from the financial year 2027-28;

• A $1,000 instant work-related deduction without needing any substantiations from 2026-27;

The changes are definitely favourable but will necessitate the need for all the employees and entrepreneurs to re-examine their strategy going forward. The tax policies introduced are set to improve the disposable income and encourage expenditure by households, resulting in more attention from the workers towards their net income. 

2. Capital Gain Tax

This is arguably the most structurally significant change in the Budget, and one of the most consequential reforms to Australia’s CGT regime since its introduction in 1999.

Since 1999, individual taxpayers, trusts, and certain other entities holding a capital asset for more than 12 months have been entitled to discount 50% of the capital gain before calculating tax. In practice, this meant a top-rate individual investor paid an effective rate of approximately 23.5% on long-term gains. The discount has been central to Australian investment economics for a generation.

From 1 July 2027, the regime changes materially:

• The 50% CGT discount will be abolished for gains arising after 1 July 2027.

• In its place, the cost base of assets will be indexed to the Consumer Price Index, so that only real (inflation-adjusted) gains are subject to tax.

• A Minimum Effective Tax Rate of 30% will apply to indexed capital gains.

• Gains on assets held before 1 July 2027 remain eligible for the 50% discount — the transition is fully prospective.

• Gains on pre-CGT assets (acquired before 20 September 1985) arising after 1 July 2027 will be brought within the income tax base; gains prior to 2027 on those assets remain exempt.

• Investors in new residential builds will have the option to apply either the existing or new methodology.

The shift in effective tax rates is material:

The indexation mechanism softens the impact for assets held through inflationary periods, but for assets acquired in lower-inflation environments, the net result is a higher tax cost on disposal. Investment committees and boards should already be revisiting post-tax return assumptions. 

3. Negative Gearing - Ring-Fencing for Established Residential Property

Previously, under the old policy, net rental losses (interest and deductions that were greater than the rental income) were able to be used to reduce all types of taxable income, such as salaries and wages, as well as business income.

From 1 July 2027, negative gearing losses on established residential investment properties acquired after 7:30 PM AEST on 12 May 2026 will be ring-fenced. Losses from these properties can only be offset against residential rental income or capital gains, they can no longer reduce wage or business income.

Key design features of the reform:

• Properties acquired (including by exchange of contracts) before Budget night are fully grandfathered. Existing portfolios are unaffected.

• Investors who purchase new residential builds after Budget night retain full negative gearing, losses remain deductible against all income. The restriction is deliberately targeted at established dwellings to support new housing supply.

• Unabsorbed rental losses that cannot be immediately deducted may be carried forward to future income years.

The policy will create a two-level property investment landscape where existing investments will continue to enjoy the full benefit of negative gearing but new investments made after July 2027 will be required to comply with ring-fencing. Tax changes may encourage a more strategic approach to property investment and improve the focus on sustainable investment terms. The measures may lead to higher after-tax costs of holding for future investments and change the investment dynamics. 

4. Discretionary Trusts

Discretionary  trusts have been an integral framework for the Australian private sector, as well as for family business and estate planning in Australia. Under the old system, any net income of the trust was taxed according to each beneficiary’s marginal rate depending on how much income that beneficiary was receiving from the trust. This provided an opportunity to pass income payments through the trust to lower-taxed beneficiaries, which allowed trusts to maintain low effective tax rates.

From 1 July 2028, a minimum tax rate of 30% will apply to taxable income distributed by most discretionary trusts. The key features of the new regime:

• The trust pays 30% tax on income subject to the minimum rate before distribution to beneficiaries.

• Beneficiaries who are not corporations receive a non-refundable tax credit equal to the tax paid by the trust. Those in higher tax brackets pay incremental tax; those in lower brackets receive no refund of the credit.

• Excluded from the minimum rate: primary production income, foreign withholding tax income, income derived for the benefit of vulnerable minors, and income from assets held by a discretionary testamentary trust as at 12 May 2026.

• A three-year rollover relief window commencing 1 July 2027 allows trust restructuring without triggering CGT or stamp duty consequences, subject to conditions.

This is one of the most significant trust tax reforms in a generation. 

Corporate beneficiaries (“bucket companies”) may remain viable in some arrangements, but the removal of franking credit flow-through means the effective combined rate could exceed 30% when distributions from the corporate beneficiary are eventually taxed. Each structure requires specific modelling.

While the three-year rollover relief period provides an opportunity to review existing structures, any restructuring requires careful consideration, particularly given potential stamp duty implications. 

5. Small Business & Corporate Measures - Loss Carry-Back, Instant Write- & R&D

An $20,000 instant asset write-off scheme was legislated on an annual temporary basis from 2023; this resulted in annual uncertainty for small businesses with regards to capital investment. Two-year loss carry-back rules applied only during the COVID-19 period (2020-22), and there was no further provision post-COVID-19. Only the provision of carrying the loss forward was available. The R&D tax incentive allowed a refundable offset of 43.5% for eligible SMEs while allowing for a non-refundable offset of 38.5% for all other entities. There was a minimum expenditure threshold of $20,000 along with R&D activities offset.

The Budget includes:

• Permanent $20,000 instant asset write-off.

• Permanent reinstatement of two-year loss carry-back restricted to companies with aggregated global turnover up to 1 billion which is down from 5 billion under COVID rules) 

• Venture capital thresholds expansion.

• R&D offset rates enhancement.

• Increase in R&D expenditure thresholds.

• Cancellation of R&D activities offset.

• Introduction of start-up loss refundability provisions.

The changes to R&D are broadly positive, though they will affect businesses differently. The companies that rely heavily on supporting activity R&D credits may need to adjust, as eligibility rules shift even where headline rates improve. The clarity offered by permanent allowance and loss carry-back provisions offer a great improvement to the investment climate of Australia-based companies. Companies ought to take advantage of the certainty of capital allowances and losses to restart some of the delayed investments and automation plans. 

6. Electric Vehicles - Phase-Out of FBT Exemption

Since 1 July 2022, BEVs and PHEVs with a cost of acquisition that is less than the LCT threshold and which are provided to an employee under a salary packaging arrangement, have been completely exempt from FBT. The exemption was a big factor behind the increase in the use of electric cars through novated leasing schemes and forms part of remuneration packaging plans.

Effective from 1 April 2029:

• The current FBT exemption for eligible electric vehicles will be replaced with a permanent 25% FBT discount for EVs valued up to the fuel-efficient luxury car tax threshold.

• From 1 April 2027, the current full FBT exemption will be phased out to allow only EVs with a value of up to $75,000 to qualify for exemption. The 25% FBT discount will then replace the exemption for all qualifying EVs below the fuel-efficient LCT threshold from 1 April 2029.

• The discount will not be included in the Reportable Fringe Benefits Amount for income testing purposes.

A lower level of concession will greatly affect the costs incurred in arranging for the salary packaging of the EVs. Organisations planning to add electric vehicles to their fleets may accelerate procurement ahead of the new regulation reflecting a broader shift from temporary incentives to long term policy measures.

7. What Should You Do Now?

The 2026–27 Federal Budget is a structural inflection point, not an incremental adjustment. The interaction between CGT reform, negative gearing ring-fencing, the discretionary trust minimum rate, and changes to the small business and R&D incentives creates a complex planning environment where decisions made in the next 12 to 18 months will have long-term consequences.

A practical starting point for individuals, investors, and businesses would be:

1. Review existing investment structures and model post-tax return assumptions under the new CGT regime, particularly for assets where exit may be considered in the medium term.

2. Assess any planned acquisitions of established residential property against the ring-fenced negative gearing rules before transacting.

3. Engage a review of discretionary trust arrangements before the rollover window opens in July 2027, restructuring takes time and carries its own tax and stamp duty implications.

4. Lock in capital expenditure and automation investment decisions that have been deferred, now that the permanent instant asset write-off provides a stable basis.

5. Review R&D claims against the revised eligibility criteria before the next tax period.

6. If you operate a start-up in its early years, model whether the loss refundability measure from 2028–29 changes your funding strategy, it may reduce reliance on external capital at the most critical stage.

7. Assess EV fleet and salary packaging strategy ahead of the April 2027 transition.

The 2026-27 Federal Budget has brought forth one of the most profound packages of tax reforms seen in recent times. Although some of the reforms bring about immediate relief, others like changes in capital gains tax, negative gearing, discretionary trusts and business incentives will have far-reaching effects that will continue into the future.

It is essential to understand these reforms and how they might impact your investment and financial planning going forward. Those who assess and plan their approach early will be in the best place to manage risks and capitalize on opportunities while preserving their assets. Here at Water & Shark, we assist our clients in navigating through the complexities of the changes in tax laws. We offer practical and tailored solutions to ensure that you protect your interests, safeguard your assets and secure your legacy for generations to come.

Author’s Name

Oshin Viegas

(Tax and Regulatory Associate at Water & Shark)

Disclaimer 

The views and opinions expressed in this article are solely those of the author. They do not necessarily reflect the official position, policy or perspective of Water & Shark.