The 2026–27 Federal Budget, released on 12 May 2026, has received more attention than most budgets in recent years.
With proposed changes to negative gearing, the CGT discount, and the taxation of trusts, this budget has the potential to materially impact property investors, business owners, and families using discretionary trusts.
However, it is important to remember that the proposed changes are not yet law, and we might see further developments on some of these key proposals. For example, even though legislation has been introduced in Parliament regarding some of the measures, there is no guarantee that the Bills will be passed in their current form.
While we don’t yet have certainty about how this will all play out, we understand that the proposals are causing some confusion and concern, so we have set out below some comments on what we know so far.
Negative gearing – changes to apply from 1 July 2027
The Government is planning to tighten up negative gearing on established residential properties. For properties purchased after 7:30 pm AEST on 12 May 2026:
- Rental losses can only be offset against rental income or capital gains from other residential properties.
- Any remaining losses must be carried forward and applied only against future residential rental income or capital gains from residential property.
Grandfathering applies. If you already own an established property—or had exchanged contracts before Budget night—nothing changes in terms of negative gearing. You can continue to deduct losses against salary, business profits and other income sources until you sell the property.
The explanatory memorandum released with the legislation indicates that existing negative gearing rules will apply to properties that were acquired before Budget night, even if they weren’t used as rental properties at that time. For example, if you own a property that is currently used as your private residence, but you later move out and start using it to generate rental income, then the Government is indicating that existing negative gearing rules can still be available. However, the position is more complex than this, and there is a technical issue that could potentially change this outcome. Please contact us to discuss this further if you are thinking about converting your private home into a rental property.
The new restrictions apply only to residential property, so losses relating to commercial property, shares, and other asset classes should not be affected. There are also carve-outs for commercial residential properties such as hotels, motels and boarding houses.
‘New builds’ remain fully eligible for current negative-gearing rules both before and after 1 July 2027, but final details of what will qualify as a ‘new build’ haven’t been released yet. Additional carve-outs apply to build-to-rent projects and certain government-supported housing.
CGT discount – changes to apply from 1 July 2027
Individuals who hold an asset for more than 12 months often qualify for a 50% discount to reduce the taxable gain made on the sale of the asset. A similar outcome can arise when a trust realises a capital gain and distributes it to an individual beneficiary.
However, from 1 July 2027, the CGT discount will be replaced for individuals and trusts with:
- Cost base indexation (inflation adjustment), and
- A 30% minimum tax on capital gains.
This change will apply across all CGT asset categories—including residential and commercial property, shares, business assets and even pre-CGT assets.
Importantly, gains that accrue up to 1 July 2027 will still receive the existing CGT discount or benefit from the existing exemption for pre-CGT assets. It will be necessary to determine the market value of the assets as at that date to perform CGT calculations.
For new residential properties, investors can choose either the existing CGT discount or the new indexation / minimum tax method.
Companies won’t have access to indexation, and complying super funds will continue to enjoy the benefit of the existing 1/3 CGT discount. Indexation won’t be available to individuals who have been classified as a foreign or temporary resident for tax purposes during the asset’s ownership period.
Example
Michael owns an investment property purchased before Budget night that is currently negatively geared. He can continue offsetting rental losses against his salary. When he sells:
- The portion of the gain attributable to ownership before 1 July 2027 receives the 50% CGT discount.
- The portion accruing after that date is subject to indexation plus the 30% minimum tax.
Michael’s overall tax outcome will depend on his marginal rate and how long he holds the property. Still, in a situation like this, we would typically expect Michael to pay more tax overall as a result of these changes compared with the current rules.
Practical issues
While it isn’t time to panic, a review of your investment portfolio is essential.
Existing assets bought before Budget night will typically receive more favourable tax treatment compared with newer assets. Still, the overall impact of the proposed changes will vary depending on your situation.
Discretionary trusts – changes to apply from 1 July 2028
The introduction of a 30% minimum tax rate on the taxable income of discretionary trusts would represent a fundamental change to the way the tax system operates at the moment.
The Government is indicating that the 30% tax would initially be paid by the trustee, with beneficiaries (other than companies) receiving a non-refundable tax credit for the tax paid at the trust level.
This measure is aimed at curbing income splitting to lower-taxed family members and corporate beneficiaries (often known as bucket companies).
Some exemptions would apply, including for fixed and widely held trusts, superannuation funds, special disability trusts, deceased estates, charitable trusts, primary production income and some other specific trust types.
While the Government has indicated that existing discretionary testamentary trusts would be exempt from these changes, concerns have been raised about how the changes would apply to testamentary trusts that come into existence after Budget night. However, media reports suggest the Government is open to reconsidering this aspect of the changes, but we will have to wait and see how this plays out.
To assist with transitions, three years of rollover relief will be available for restructures into companies or fixed trusts.
Example (adapted from budget materials)
Kurt operates his business through a discretionary trust and makes a profit of $300,000. Kurt pays himself a salary of $100,000 and distributes the remaining $200,000 to four family members who have no other income. In total, Kurt and his family members pay around $42,000 in tax on this income.
If the 30% minimum tax rate rules are introduced, then Kurt and his family members would pay around $86,000 in tax on this income. This is a significant increase in the total tax paid at the same level of profit.
In situations like this, there might be scope to restructure the business into a company to potentially access a lower 25% tax rate or pay salary/wages to some family members who are genuinely working in the business.
Practical issues
Many business and investment structures will face higher effective tax rates under the proposed changes, although the Government plans to conduct a consultation to refine the rules. The final version of the rules may look a bit different to the proposals announced in the Budget.
While the start date for this measure isn’t until 1 July 2028, now is the time to model scenarios and compare the pros and cons of other options. In some cases, the overall impact of the changes might be minimal, and no material changes will be required. In some cases, it might still make sense to continue utilising discretionary trust structures, but with some alternative distribution strategies in place. In other cases, it will make sense to explore whether a restructure might provide better long-term outcomes.
Other measures worth noting
- $250 Working Australians Tax Offset (from 2027–28) – increases the effective tax-free threshold for wage earners and sole traders.
- $1,000 standard deduction for work-related expenses (from 2026–27) – simplifies tax time for many employees.
- Small business measures – a permanent $20,000 instant asset write-off for plant and equipment.
What to do next
The proposed reforms are significant, but the practical impact will depend on your situation.
While we are still waiting to see how this all plays out, if you have concerns in the meantime, feel free to contact us. We can review your situation, run tailored projections and help you make informed decisions. We will also keep you up to date as further details emerge and legislation progresses.