Australian Federal Tax Budget 2026-27

Introduction

The Australian Treasurer, the Hon. Jim Chalmers, stated that the 2026/27 Federal Budget (Budget) was his most responsible and reform driven budget. Some years the budget can be a non-event for tax reform. This year is ‘wow’. Significant changes across the whole economy will reshape the way both non-residents and Australians invest.

True tax reform involves examining principles such as neutrality, incentivising productive capital, equity and sustainability. Australia now marches to the top of the OECD pile for its reliance on salary and wage earners as well as tax on capital gains. The broad-based GST has been ignored in substitution for easy changes that penalise non-resident investors, wage earners attempting to save for a property and patient capital investing in capital intensive industries. On the plus side, simplification of small business concessions, expansion of early stage venture capital investment concessions, increasing usability (but not abuse) of R&D concessions are a good nod to encouraging innovation. In addition, the loss carry back rules will align Australian corporate tax with many of international trade partners and will be a surprisingly useful addition for companies with variable profits.

Still, the reinforcement of non-resident capital gains tax reform with a mere four-year transitional period for renewables assets is unlikely to provide long term investors with the certainty to invest.

The key tax related initiatives from the Budget include:

• removal of negative gearing for residential properties (excluding eligible new properties)
• abolition of discount capital gains for all assets (excluding eligible new properties)
• minimum tax on discretionary (non-fixed) trusts
• expansion of venture capital limited partnership tax concessions
• refinements and increases to the Research and Development (R&D) tax incentive

 

Negative Gearing

As widely forecast in the lead-up to the Budget, the Government has introduced measures designed to tighten the negative gearing regime for residential properties. The Government has announced a one-year grace period before this rule change comes into effect on 1 July 2027. Practically, that means that:

• All properties negatively geared prior to 19:30 AEST 12 May 2026 may continue to claim that concession up to and beyond 1 July 2027;
• Existing properties acquired after 19:30 AEST 12 May 2026 can be negatively geared up until 30 June 2027, but not beyond; and
• New build properties acquired after 19:30 AEST 12 May 2026 can be negatively geared up to and beyond July 2027.

For taxpayers where the negative gearing concession has been removed, losses will only be deductible against other income from residential properties, including capital gains. When a taxpayer has excess residential losses, they will be able to carry forward and that excess can be offset against residential property income in future years (including gains on disposal).

These changes will apply to individuals, partnerships, companies and most trusts. Widely held trusts and superannuation funds (including self-managed superannuation funds) will be excluded as income in these entities are naturally quarantined.

With this legislation, the Government seeks to temper investor demand for existing housing stock, while encouraging new housing development. Whilst that may be the first order impact, we expect that the second order impacts will be more difficult to predict including on short term rental accommodation. Various experts have predicted that house prices could fall based on these announcements, but they could also rise with existing investors incentivised to hold onto existing investments, therefore reducing the available stock on market. This could also lead to a reduction in stamp duty collections for State Governments in the short term at a time east coast State Governments are in large deficits. Rents could also rise if there are less rental stock available. Many economists will watch on with intrigue while the Australian public will be left to feel the impacts of this ever-changing tax landscape.

 

Abolition of the CGT Discount

For over twenty years, Australians have been accustomed to the 50% CGT discount but from 1 July 2027, the 50% CGT discount will be replaced with a cost base indexation method. Under the proposed measures, the cost base of a CGT asset will be adjusted upwards in line with CPI, resulting in only 'real gains' that exceed inflation being subject to tax. 

This indexation method will only apply to individuals, partnerships and trusts where the asset has been held for at least 12 months and it appears that superannuation funds are the big winners as the new CGT rules should not apply to superannuation funds and they are expected to retain the current 33.33% CGT discount.

Capital gains will also be subject to a minimum tax rate of 30%. This is intended to combat circumstances where taxpayers realise a gain in an income year in which they are on low marginal individual tax rate. 

The proposed CGT measures have been designed to protect current investments, and the new rules will be phased in as follows:

• There will be no changes to the 50% CGT discount rate for assets purchased and sold prior to 1 July 2027.
• Assets purchased after 1 July 2027 will be wholly subject to the new CGT rules.
• For assets purchased before 1 July 2027 but sold after 1 July 2027, the capital gain will be apportioned so that the value of gains attributable to the period before 1 July 2027 will be subject to the 50% CGT discount whilst the gains attributable to the period after 1 July 2027 will be taxed under the new proposed measures. This is a sensible approach as investors would otherwise be incentivised to realise gains on or before 1 July 2027 and potentially purchase it back the next day to lock in the 50% discount. However, the apportionment approach raises concerns and it is unclear whether adoption of a time-based apportionment or valuation approach will lead to significant compliance costs.

Similar to the negative gearing changes, new build properties can still qualify for the CGT discount.  Investors who buy new builds will be able to choose either the 50% CGT discount or indexation and the 30% minimum tax rate when they sell the property.  

The changes to the capital gains regime were portrayed as relating to increasing housing supply and lowering housing prices. However, the CGT changes are far broader and apply to almost every CGT asset, including shares in companies and units in unit trusts.

In addition, pre-CGT assets (those acquired before 20 September 1985) will also become taxable under the CGT regime from 1 July 2027. The transitional approach mentioned above will apply pre-CGT assets. Accretions in value on pre-CGT assets before 1 July 2027 will continue to be exempt but gains from that date onwards will become taxable.

In the weeks leading up to the Budget, there was considerable commentary that the removal of the CGT discount would adversely impact start-up and venture capital investment in Australia. The concern being that the tax reforms would significantly negatively alter the risk-to-reward ratio of investing in a start-up in Australia. It appears the Government has heard these concerns and has stated that it will “consult” on the interaction of the proposed CGT measures relating to the early-stage and start-up businesses.

The effective tax rate on capital gains has now increased significantly in Australia. As neighbouring countries such as Singapore, Hong Kong and New Zealand do not impose any tax on capital gains, the proposed changes may reduce Australia’s ability to attract its fair share of foreign capital and investment.

 

Minimum Tax on Discretionary Trusts

From 1 July 2028, the Government will impose a 30% minimum tax on the taxable income of discretionary trusts, payable by the trustee. Beneficiaries (other than corporate beneficiaries) will receive non-refundable tax credits to offset their individual tax liability, while corporate beneficiaries are excluded from credits to prevent circumvention through "bucket" companies. The measure targets income splitting through discretionary trusts.  

The tax will not apply to “fixed and widely held trusts”, complying superannuation funds, special disability trusts, deceased estates, or charitable trusts, and certain income categories – including primary production income and income of existing discretionary testamentary trusts – are also excluded. Three years of expanded rollover relief from 1 July 2027 will assist those wishing to restructure into companies or fixed trusts.

The exclusion of "fixed” and widely held trusts" from this minimum tax is critical for managed funds, many of which are structured as unit trusts. However, a unit trust is not automatically a fixed trust – the characterisation depends on the terms of the particular trust deed. Trust deeds which contain certain trustee discretions/powers may put at risk a trust’s fixed trust status. Fund managers will need to carefully review trust deeds and may need to amend them to remove or narrow discretionary powers to secure fixed trust status. 

Further, the ATO has historically taken a very strict approach to fixed trust classification. Courts have also confirmed that labelling a trust a “unit trust” does not necessarily mean beneficiaries hold fixed entitlements. Consequently, aside from Attribution Managed Investment Trusts (AMITs) which are deemed to be fixed trusts, trustees and fund managers of all unit trusts face heightened compliance risk and may need to seek private rulings from the ATO to obtain certainty before 1 July 2028.

 

Foreign resident CGT changes

The Government also reaffirmed in relation to the foreign resident CGT changes which were already announced in the form of exposure draft materials in April 2026 that:

• the changes to the meaning of “real property” (which is framed as a clarification) will apply with retrospective effect from 12 December 2006 when the regime was introduced; and
• from enactment of these laws until 30 June 2030, certain renewable infrastructure assets will be eligible for a 50% discount on any gain for foreign residents.

 

The R&D Tax Incentive

The Government announced targeted reforms to the R&D tax incentive as the first stage of its response to the Ambitious Australia: Strategic Examination of Research and Development Final Report (Final Report), which it commissioned in late 2024.

In line with what had been foreshadowed in the media over the last few days, the Government has committed that, from 1 July 2028, it will:

• lift the core R&D offset rates by 4.5 percentage points (which should increase the refundable tax offset to the company tax rate plus 23%, and the non-refundable tax offset up to the company tax rate plus 21%);
• lift the maximum R&D Tax Incentive expenditure threshold from AUD150 million to AUD200 million; and
• lift the minimum expenditure threshold from AUD20,000 to AUD50,000 (research activities below the threshold may still be eligible for the incentive if the research is undertaken with a registered Research Service Provider or Cooperative Research Centre).

These primary measures will have an impact at both ends of the market – with the larger taxpayers in this space hoping that the cap would be removed altogether (as recommended by the Final Report) to increase Australia's competitiveness as a high-value R&D destination, while at the other end of the market, the incentive will be harder to access with a higher minimum expenditure threshold.

In addition, there will be a raft of other reform measures, including:

• an increase to the turnover threshold for the highest offset rate under the regime from AUD20 million to AUD50 million (and associated eligibility rules);
• the intensity threshold for the higher tier non-refundable tax offset rate being reduced from 2% to 1.5%; and
• removal of eligibility of supporting R&D expenditure from the R&D Tax Incentive.

Taxpayers in the R&D space will be keen to see the Government's further reform package in response to the Final Report in the years to come.

 

Venture Capital and Start-ups

Venture capital and start-up businesses will see a substantial increase to existing asset thresholds.

From 1 July 2027:

• venture capital limited partnerships cap on the assets size will be increased from AUD250 million to AUD480 million;
• early stage venture capital limited partnerships (ESVCLP) cap on the asset size will be increased from AUD50 million to AUD80 million;
• the fully tax exempt investment return for ESVCLPs will be increased from AUD250 million to AUD420 million; and
• the maximum fund size of ESVCLPs will be increased from AUD200 million to AUD270 million.

Whilst these increases are welcome, we are hoping to one day see other existing regulatory thresholds within the ESVCLP rules increased, such as the monetary threshold requiring investee businesses to be audited, so that compliance burdens for these investee businesses will be aligned to the Corporations Act.

 

Other

Pillar Two: Side-by-side package implementation

The Government will amend Australia’s domestic Pillar Two tax legislation to implement the OECD/G20 Inclusive Framework’s side-by-side package from 1 January 2026. The purpose of this measure is to keep Australia’s domestic Pillar Two rules consistent with those of other implementing jurisdictions.

The OECD's side-by-side package introduced new, and simplified existing, safe harbours to reduce the compliance burden associated with the Pillar Two measures. As a result of these safe harbours, US headquartered multinationals should generally be exempt from the application of the Income Inclusion Rule (IIR) and Undertaxed Profits Rule (UTPR) regimes, on the basis that the US has equivalent regimes in its domestic tax law.

Loss refundability reforms for businesses and start ups

Companies with aggregated annual global turnover of less than AUD1 billion will be able to carry back tax losses up to two years for tax years commencing after 1 July 2026. However, carry back will only apply to revenue losses and be limited by a company's franking account balance.
 
In addition, start‑ups with aggregated annual turnover of less than AUD10 million that generate tax losses in their first two years will be able to use the losses to generate a refundable tax offset. However, the offset will be limited to the value of fringe benefits tax (FBT) and withholding tax on wages for Australian employees in the relevant loss year.

Standardised tax deduction and annual tax offset

From 1 July 2026, a new standardised deduction of up to AUD1,000 will apply for Australian individual tax residents who earn income from work. These changes will not impact those who incur more than AUD1,000 in work-related expenses or earn only business or investment income. There will also be a new AUD250 annual tax offset from 1 July 2027.

FBT exemption for electric vehicles

The Government will tighten the FBT exemption for electric vehicles from 1 April 2027. From 1 April 2029, the only FBT exemption that will be available for EVs will be a 25% discount for EVs below the luxury car tax threshold.

Instant Asset Write-Off

From 1 July 2026, the AUD20,000 instant asset write‑off for small businesses with turnover up to AUD10 million which was due to expire on 30 June 2026 will be permanently extended.

Increased funding to protect against tax fraud

Unsurprisingly, the Government will provide significant resources to detect and prevent tax fraud. AUD86.3 million will be provided over four years from 1 July 2026 and AUD9.7 million per year ongoing from 2030-31 to deliver Phase 2 of the Counter Fraud Strategy. Additionally, the ATO will be provided with additional powers to recover debts from tax agents and other intermediaries.