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 is a budget that has the potential to materially impact on property investors, business owners and families using discretionary trusts.
However, it is important to remember that the proposed changes are not yet law. The proposals continue to evolve, and recent developments – including an increase to the small business CGT concessional turnover threshold to $10 million and confirmation that testamentary trusts will be excluded from the proposed 30% minimum tax on trusts – further highlight that further refinement is likely.
While we don’t yet have certainty on how this will all play out, we understand that the proposals are causing some confusion and concern. We have therefore set out below a summary of 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 7:30pm 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 residential property capital gains.
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. As a result, please contact us to discuss this further if you are thinking about converting your private home into a rental property.
The new restrictions only apply to residential property, so losses relating to commercial property, shares and other asset classes should not be impacted. 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 sale of the asset. A similar outcome can arise when a trust makes a capital gain 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 would apply across all CGT asset categories—including residential and commercial property, shares, and business assets.
Importantly, gains that accrue up to 1 July 2027 will still receive the existing CGT discount (or pre-CGT treatment where applicable). This will require assets to be valued as at that date.
For new residential properties, investors may have the option to choose between the existing CGT discount and the new indexation/minimum tax regime.
Companies won’t have access to indexation, while complying super funds will retain access to the existing one-third CGT discount.
Update – small business CGT concessions
Encouragingly, recent announcements suggest that the aggregated turnover threshold for access to the small business CGT concessions will increase to $10 million. This would expand access to these valuable concessions for a broader group of business owners and may help offset some of the broader CGT changes in appropriate circumstances.
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, but 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, but 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 shift in how the tax system currently operates.
The Government has indicated that this tax would initially be paid by the trustee, with the beneficiaries (other than companies) receiving a non-refundable tax credit.
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, and certain primary production activities.
To assist with transitions, three years of roll-over relief is proposed for restructures into companies or fixed trusts.
Update – testamentary trusts
Importantly, the Government recently announced that they intend to exclude testamentary trusts from the proposed 30% minimum tax regime. This removes earlier concerns about unintended ‘death tax’ implications for estate planning structures and provides greater certainty in this area.
This is a significant and welcome development, particularly for families relying on testamentary trusts as part of their long-term planning.
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 amount of tax paid on 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 is planning to undertake a consultation process to refine the rules. It is possible that the final version of the rules will 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 start modelling scenarios and comparing 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)
- $1,000 standard deduction for work-related expenses (from 2026–27)
- Small business measures, including 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 individual circumstances.
Recent updates demonstrate that these measures are still evolving, and further changes are possible as legislation progresses.
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.