Analysis: the 2026-27 Federal Government Budget
13 May 2026
We have reviewed the 26-27 Budget summaries and provide here the analysis of changes most pertinent to our clients.
We have also prepared a separate opinion piece on the budget.
Please note that the budget announcement last night is just that, an announcement. While we consider that many of the measures will be introduced as announced, it will take time for the tax lawyers and accountants to get their heads around the implication of some measures, including the impact on our recommended structures for PrincipleFocus’ business clients. We are also conscious that previous announcements have taken an eternity to become law and that in the legislation process, some changes have been made, delivering different outcomes to that announced.
Capital gains tax changes
The Government announced it will reform CGT arrangements from 1 July 2027.
The measure will replace the 50% CGT discount with cost base indexation for assets held for more than 12 months and introduce a minimum tax of 30% on net capital gains. These changes will apply to individuals, trusts and partnerships. Transitional arrangements will ensure that the current CGT discount continues to apply to gains arising prior to 1 July 2027. Investors in new residential property will be able to choose between the existing CGT discount and the new indexation and minimum tax approach.
As part of this measure, the Government has also announced that from 1 July 2027, the new CGT rules will also apply to pre CGT assets. Gains that accrue on pre-1985 assets from 1 July 2027 will now be subject to CGT.
Income support payment recipients, including Age Pension recipients, will be exempt from the 30% minimum tax on capital gains.
Insight The measure represents a significant change to Australia’s CGT system and is likely to alter investment behaviour. While transitional arrangements provide some limited protection for existing investments, the introduction of a minimum tax, removal of the 50% CGT discount, and tax on prospective gains on pre-CGT assets are likely to reduce the relative attractiveness of capital investment.
Limiting negative gearing to new housing
The Government announced it will limit negative gearing for residential property to new housing with the intention of supporting additional supply. From 1 July 2027, losses from established residential properties will only be deductible against rental income or future capital gains from residential property. Excess losses will be carried forward and able to be offset against residential property income in future years. The changes will apply to established residential properties acquired from 7:30PM (AEST) on 12 May 2026. Existing investments will be grandfathered until disposed of.
Insight The measure is designed to redirect investment toward new housing supply and is likely to reduce the after-tax returns for investors in established properties. The indefinite grandfathering of existing investments minimises the impact on pre-existing investment decisions but introduces a dual system where there will be ongoing discrepancies between the tax treatment of investments depending on the acquisition date of the relevant asset.
Minimum tax on discretionary trusts
The Government announced it will introduce a 30% minimum tax on discretionary trusts to improve the fairness of the tax system.
From 1 July 2028, trustees will be subject to a minimum tax rate of 30% on the taxable income of discretionary trusts. Individual beneficiaries will receive non-refundable credits for tax paid at the trustee level. The measure will not apply to other trusts, including fixed and widely held trusts, complying superannuation funds, deceased estates, charitable trusts, and certain testamentary trusts. Specific categories of income, including primary production income and certain income relating to vulnerable individuals, will also be excluded.
The Government will provide expanded rollover relief for three years from 1 July 2027 to facilitate restructuring from discretionary trusts into alternative entity structures.
Insight This measure represents a significant change to the taxation of discretionary trusts and is likely to affect long standing distribution and planning strategies, particularly distributions to low income individuals e.g. children at university. While transitional rollover relief is intended to facilitate restructuring, the complexity and cost of moving to alternative structures may present practical challenges.
Instant Asset Write-Off
The Government announced it will permanently extend the $20,000 instant asset write-off (IAWO) from 1 July 2026 for small businesses with turnover up to $10 million. Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation pool. The provisions that prevent small businesses from re-entering the simplified depreciation regime for five years after opting out will continue to be suspended until 30 June 2027.
Insight The measure provides greater certainty for small and medium sized businesses by moving away from a cycle of temporary extensions that has created ongoing uncertainty and compliance complexity. Making the instant asset write off permanent is expected to support business investment, improve cash flow planning and reduce administrative burden, although further refinements to thresholds would be desirable over time to ensure the measure remains fit for purpose and achieves its policy intent of encouraging investment.
Loss refundability reforms for businesses
The Government announced it will reform the treatment of tax losses to provide relief for businesses and start-ups, and support investment.
From 1 July 2026, companies with aggregated annual global turnover of less than $1 billion will be able to carry back tax losses and offset them against tax paid up to two years earlier. The measure will apply to revenue losses only and will be limited by a company’s franking account balance.
Insight The reintroduction of loss carry-back (previously available on a temporary basis as a key COVID-19 measure) is expected to improve cash flow for eligible companies, particularly during periods of economic volatility.
Previously announced measures - Personal income tax
The Government had announced in the Federal Budget 2025–26 that it will deliver new personal income tax cuts for all Australian taxpayers from 1 July 2026.
The measure will reduce the tax rate applying to the $18,200 to $45,000 income bracket: from 16% to 15% from 1 July 2026; and from 15% to 14% from 1 July 2027. These tax cuts are in addition to the tax cuts that commenced from 1 July 2024 and are intended to provide cost-of-living relief and address bracket creep. Most taxpayers are expected to receive an additional tax cut of up to $268 per year in 202627 and up to $536 per year from 2027–28.
Insight The legislated tax cuts, enacted under the Treasury Laws Amendment (More Cost-of-Living Relief) Act 2025, will provide modest relief to low- and middle-income taxpayers and partially address bracket creep. However, as the reductions do not commence until 1 July 2026 (with a further reduction from 1 July 2027), their impact on current cost-of-living pressures will not be immediate. Without structural reform to the personal income tax rate system, efforts to address bracket creep are likely to be diminished over time.
Previously announced measures - $1,000 Instant Tax Deduction
The Government announced it will introduce an instant tax deduction of up to $1,000 for individuals from the 2026–27 income year.
Australian tax resident individuals who derive income from work will be able to claim the deduction without substantiating work-related expenses up to $1,000. Taxpayers with higher work-related expenses may continue to claim deductions under the existing rules. Deductions for non-work-related expenses, such as charitable donations and union or professional association membership fees, will continue to be available in addition to the instant deduction.
Insight The measure is intended to simplify compliance for individuals with lower work-related expenses, but introduces a dual system where taxpayers must assess whether to rely on the standard deduction or retain substantiation for higher claims. This may reduce record-keeping for some taxpayers, but may cause others to miss out on deductions if they fail to keep records where their work expenses ultimately exceed $1,000.
Insight The new $250 Working Australians Tax Offset (WATO) will commence from 1 July 2027 and will not be available until workers lodge their 2028 tax return. Combining the new offset with the earlier stage 3 and pre-election two stage tax cuts, an instant deduction of $1,000 deduction, the benefit for an average employee will be $2,618 in the 2028 year.
Previously announced measures - Temporary reduction of fuel excise and heavy vehicle road user charge
The Government announced it has temporarily reduced the excise and excise-equivalent customs duty rates applying to most fuel products and the road user charge for heavy vehicles, for three months from 1 April 2026. The excise rates have been reduced by a total of 60.9%, equating to a 32 cent per litre reduction for petrol and diesel. The road user charge for heavy vehicles has been reduced from 32.4 cents per litre to zero.
Insight The temporary reduction in fuel excise provides immediate cost of living relief by lowering fuel prices in the short term. However, as the measure is time limited, its impact will be temporary and may create a steep change in fuel costs when excise rates return to normal settings, potentially affecting many households and businesses reliant on transport.
Comment from the Tax Institute
These measures [the changes to Capital Gains Tax, negative gearing and the taxation of Trusts] collectively represent some of the most significant changes to Australia’s tax framework in decades. But they merely deal with symptoms of a broken system, not the root causes.
However, as they have been announced, these measures fall short of amounting to a true reform package. They are, instead, substantial changes to isolated parts of our tax system, that are, in several cases, likely to be impractical, complex and difficult to administer, and may have significant unintended consequences, unless designed appropriately.
The Institute has long held that isolated and piecemeal changes to tax legislation do not constitute reform of the tax system. Regardless of the importance of the measure or its intended or actual impact, a single measure – or a number of disconnected tax measures – does not a reform package make.
Peter Debus is a director of PrincipleFocus, a Chartered Accountant and Chartered Tax Adviser.
