News and Insights

After weeks of whispers emanating from Canberra, the 2026-27 Federal Budget contained tax reforms with the magnitude and flavour of the Howard government’s indirect tax reforms of the late 1990s.

While it must be acknowledged that the Government must be able to pass the Appropriation Bill through the Senate, which it does not control, there is an expectation that a sufficient number of Senate cross-benchers will support the reforms and that they will become law largely in the forms announced.

The reforms need to be carefully unpacked, particularly with respect to the date from which they apply, as follows:

 

1.      Capital gains tax changes – commencing 1 July 2027

 

The 50 percent CGT discount for individuals and trusts will be replaced by cost base indexation for assets held for more than 12 months, with a 30 percent minimum tax on net capital gains.

This change is to apply from 1 July 2027 to all CGT assets, including pre-1985 CGT assets. Existing investments will be subject to transitional arrangements such that the changes only apply to gains arising on or after 1 July 2027 – the 50 percent CGT discount will continue to apply to gains arising prior to that date and the gains arising on pre-1985 CGT assets will remain exempt from CGT until 1 July 2027.

These new rules apply to all assets, not just investment properties. However, to incentivise investment in new residential properties, investors in these properties will be entitled to choose either the 50 per cent CGT discount or cost base indexation and the minimum 30 percent tax. A further exemption will apply to income support payment recipients, including Age Pension recipients, who will be exempt from the minimum 30 percent tax on net capital gains.

 

2.      Negative gearing changes for investment properties – commencing 1 July 2027 but applying only to properties acquired from 7:30pm on 12 May 2026 (i.e. contract of sale entered into from that time)

 

From 1 July 2027, negative gearing for existing residential property investments will be limited to new builds. For all other residential property investments (excluding those held in widely held trusts, superannuation funds, build-to-rent developments and by private investors supporting government housing programs, for whom separate rules will be announced), losses incurred will only be deductible against rental income or capital gains from residential properties. Where investors make a loss, that loss will be carried forward and can be offset against residential property income in future years.

It should be noted that these changes apply to established residential properties acquired (e.g. where the contract is entered into) on or after 7:30pm on 12 May 2026, with effect from 1 July 2027. All residential properties acquired before that time are not affected by the changes until they are disposed of.

 

3.      Minimum tax on trust distributions – commencing 1 July 2028

 

The Government has announced the introduction of a 30 per cent minimum tax on the taxable income of discretionary trusts, to be paid by the trustees of those trusts from 1 July 2028. Non-corporate beneficiaries will receive non-refundable credits for the tax paid be the trustee, which will be credited towards the tax they pay on the distribution to avoid double taxation. There is an expectation that the credit corporate beneficiaries will receive will be different, but this is yet to be announced.

The minimum tax is not intended to apply to various other types of trusts such as fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts. Certain types of income such as primary production income, income relating to vulnerable minors, income subject to non-resident withholding tax, and income from existing discretionary testamentary trusts are also expected to be excluded.

The Government also announced that it would provide expanded roll-over relief for three years from 1 July 2027 to support those with trust structures, and in particular, small businesses, to restructure out of discretionary trust structure into another entity type, such as a company or a fixed trust. However, details have not yet been provided as to the nature of that roll-over relief or how it can be practically implemented.

 

4.      Loss carry-back measure – commencing 1 July 2026

 

For tax years commencing on or after 1 July 2026, companies will be able to carry back a revenue loss and offset it against tax paid up to two years earlier, provided that their aggregated annual global turnover is less than $1 billion. However, the amount of the loss that can be carried back will be limited by the company’s franking account balance.

 

5.      Start-up measures – commencing 1 July 2028

 

A loss refundability measure will be introduced from 1 July 2028 for start-up companies that generate a tax loss in their first two years of operation and whose aggregated annual turnover is less than $10 million. The refund will be available for fringe benefits tax and withholding tax on wages paid in respect of Australian employees in the relevant loss year.

 

Further comments

 

In addition to the above measures, the Government has also proposed to reduce the fuel excise, expand venture capital incentives, reduce the fringe benefits tax concession on electric vehicles, modestly reduce personal income tax rates and introduce a $1,000 instant tax deduction for individuals and a $20,000 instant asset write-off for businesses, amongst several other tax measures.

Given the differing starting dates and the differing application to various asset types and acquisition dates, some may benefit from acting now to restructure and others may be better off waiting for a short period of time. Contrary to the government’s stated policy intention, others may actually be better off holding onto assets for as long as possible.

Crucially, what is yet to be announced is the nature of the expanded roll-over relief that the Government intends to provide discretionary trusts to restructure, and how that roll-over relief will work in practice.

If you are uncertain as to the best approach for you, your business or trust, please feel free to get in touch with Kathleen Jess to discuss your long term goals and whether restructure, divestment or retaining assets in their current structure will best serve you, your business and/or your family. Hint: selling up and moving to the Bahamas is probably not the answer for most, and may create a whole new tax headache.

By Kathleen Jess