Summary

This year’s Federal Budget includes a mix of measures that impact tax, housing, investments and everyday costs. While some changes may create opportunities, others may mean that we will need to review existing strategies and underlying portfolios.

At first glance, the proposals are a reversal of prior election promises. In short, they increase taxation, albeit to subsidise other proposals such as the Working Australian Tax Offset (WATO).

It is hard to see how these changes will help younger Australians purchase a property given that was a key goal of the budget. Future negative gearing benefits will be restricted to new properties only. It wouldn’t be hard to see a bubble forming in that part of the property market as younger investors all target the same new properties and not existing stock. In reality, the ‘Bank of mum and dad’ may be better off helping their children purchase ‘tax-free’ homes. Again, a basis for an increase in property values, not making property more affordable for the young.

We will work with our clients individually to assess the impact of the changes and to restructure entities and portfolios as required. None of the proposals create a need for immediate change. Therefore, we will do this as part of our normal annual review process. Some of the key proposals, which have most impact on our clients, are outlined below.

Negative Gearing Changes

The Government is reforming negative gearing affecting residential property investments. From 1 July 2027, the Government will limit negative gearing for residential property investments to new builds.

Under current tax settings, losses from a rental property can be used to reduce other forms of taxable income such as salary and wages.

From 1 July 2027, losses related to existing residential investment properties purchased from 7:30pm AEST 12 May 2026 will only be deductible against other income from residential properties, including capital gains.

However, when an investor has excess losses, they will be able to carry forward that excess to offset residential property income in future years.

These changes will apply to individuals, partnerships, companies and most trusts. Widely held trusts (for example, most managed investment trusts) and superannuation funds (including SMSFs) will be excluded.

Transitional arrangements for negative gearing

New builds can continue to be negatively geared before and after 1 July 2027.

For established residential properties:

• Held at announcement (including where a contract has been entered into but not yet settled) will be allowed to be negatively geared in future years until sold. This ensures that arrangements for taxpayers who have already made investment decisions based on the existing negative gearing rules will not change.
• Purchased between 7:30pm AEST 12 May 2026 and 30 June 2027 may be negatively geared during this period but not from 1 July 2027. 2 • Purchased from 1 July 2027 will not be able to be negatively geared.

Capital Gains Tax (CGT) Changes

From 1 July 2027, the Government will replace the 50% CGT discount for individuals, trusts and partnerships with cost base indexation and a 30% minimum tax rate on capital gains. The CGT reforms will only apply to gains accruing from 1 July 2027 and will apply to all CGT assets (including property and shares) held by individuals, partnerships and trusts for at least 12 months. These reforms do not impact assets held by superannuation funds.

Cost base indexation

The current 50% CGT discount was introduced in 1999, allowing certain taxpayers to reduce their taxable capital gain for assets held for at least 12 months by half rather than adjusting for inflation. Indexation will be calculated using CPI in a similar manner to arrangements previously in place between 1985 and 1999. The ATO will provide guidance and tools to support calculation of this adjustment.

Example: Zoe purchases shares in a company for $100 on 1 July 2027. She then sells her shares on 1 July 2032 for $125, having made a gain from this investment of $25. As the shares were purchased on or after 1 July 2027, Zoe’s capital gains are subject to cost base indexation. Assuming inflation is 2.5% each year Zoe holds the assets, Zoe can work out that the indexed cost base of the shares is $113. Zoe’s taxable capital gain is reduced from $25 to $12 under cost base indexation. This is slightly less than the taxable capital gain of $12.50 under the 50% discount.

Minimum tax on capital gains.

A minimum tax rate of 30% will apply to real capital gains accruing from 1 July 2027 (with no impact until the gain is realised). The introduction of the minimum tax rate reduces the benefit of taxpayers deferring capital gains realisation to years where their marginal tax rates are low. Recipients of means-tested income support payments, such as the Age Pension or JobSeeker, will be exempt from the minimum tax if they receive any payment in the financial year in which they realise the capital gain.

Example: Minimum tax on capital gains Jack has taxable income before capital gains of $25,000 in 2029–30 and realises a capital gain of $10,000 on an asset that he purchased in 2027–28. Jack does not receive an income support payment so is not exempt from the minimum tax. The tax on Jack’s capital gain of $10,000 is $1,400, or a tax rate of 14% (excluding the Medicare levy). As this is lower than 30%, Jack pays an additional $1,600 in tax to bring the tax rate on his capital gain up to 30%. Jack may have tax offsets available to reduce the minimum tax and would be exempt from the minimum tax if he received an income support payment in that year.

Transitional arrangements for capital gains tax.

For eligible CGT assets other than new residential properties:

• There will be no changes in arrangements for assets purchased and sold prior to 1 July 2027.
• Assets purchased on or after 1 July 2027 will be treated wholly under the new arrangements.
• Assets owned prior to 1 July 2027 and sold on or after 1 July 2027 will be treated under current arrangements on gains made prior to 1 July 2027, and under the new arrangements for gains made on or after 1 July 2027 (with no impact until gains are realised).

The 50% CGT discount will apply to the difference between the asset’s cost base and its value at 1 July 2027. Indexation and the minimum tax will be used to calculate the CGT on gains accruing from 1 July 2027 (using the asset’s value on 1 July 2027 as the asset’s cost base).

An asset’s value on 1 July 2027 will be determined by taxpayers as part of their tax return in the year the asset is realised. Taxpayers can either:

• seek a valuation of the asset as of 1 July 2027, which will include using quoted prices for assets such as listed shares; or
• use a specified apportionment formula that estimates the asset’s value on 1 July 2027, based on its growth rate over the asset’s holding period. The ATO will provide tools to estimate this value for taxpayers.

These transitional arrangements also apply to legacy assets, including those purchased before 20 September 1985. Gains on pre-1985 assets accrued before 1 July 2027 will continue to be exempt.

New residential property build exemption.

Investors who buy new builds will be able to choose either the 50% CGT discount or indexation and the minimum tax when they sell the property. New builds are residential properties which genuinely add to supply. This will include:

• dwellings constructed on vacant land, or
• where existing properties are demolished and replaced with a greater number of dwellings.

Knock-down rebuilds or substantial renovations that do not increase supply will not be eligible.

A new build cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months.

Subsequent purchasers of the dwelling will not be able to access the 50% CGT discount or negative gearing in relation to that property. This is similar to how stamp duty exemptions apply to new builds under some state-based arrangements.

Other exemptions.

The main residence will continue to be exempt for CGT purposes. The four small business CGT concessions will also be unchanged.

The existing 60% CGT discount applying to qualifying affordable housing will be fully retained to preserve incentives to invest in those assets.

The Government will consult on the interaction of the capital gains tax reforms and incentives for investment in early-stage and start-up businesses.

30% Minimum Tax on Discretionary Trusts

From 1 July 2028, trustees of discretionary trusts will pay a minimum of 30% on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for the tax payable by the trustee.

This minimum tax will not apply to certain trusts such as:

• Fixed and widely held trusts, including testamentary trusts
• Complying superannuation funds
• Special disability trusts
• Deceased estates
• Charitable trusts

Some types of income such as primary production income, certain income related to vulnerable minors, amounts to which non-resident withholding tax applies, salary or wages paid to employees and income from assets of discretionary testamentary trusts existing at announcement will also be excluded from these changes.

Rollover relief will be expanded for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another type of entity, such as a company or a fixed trust. The rollover relief will assist with income tax consequences, including capital gains tax for those who choose to restructure.

It is anticipated that key aspects of these changes will be finalised following consultation with stakeholders.

Source of information: Challenger Tech