NEGATIVE GEARING AND CAPITAL GAINS TAX REFORM

NEGATIVE GEARING

From 1 July 2027, significant changes are proposed to negative gearing and capital gains tax rules, with the reforms mainly aimed at limiting investor tax concessions and improving housing affordability. Existing property owners are mostly protected, while future tax benefits will mainly be limited to new housing supply.

The biggest change is that negative gearing benefits for future property purchases will generally be limited to newly constructed residential properties.

If an investor purchases an established residential property going forward, any net rental losses can no longer be offset against their salary, wages, or business income. Instead, those losses will need to be carried forward and can only be used against future rental income or future capital gains from residential property investments.

 Important Exemptions & Protection Rules:

• Grandfathering: Properties completely owned or contracted before 7:30pm AEST on 12 May 2026 are fully grandfathered. Existing owners face no changes and can continue to claim deductions exactly as they do now.
• New Supply Incentive: New residential builds continue to qualify for normal negative gearing treatment, as the reforms are intended to encourage additional housing construction.

CGT REFORM

The current 50% CGT discount for future gains is proposed to be replaced with inflation-based cost base indexation together with a 30% minimum tax on capital gains. Instead of automatically reducing the gain by 50%, the asset cost base will be adjusted for inflation so only the “real” gain is taxed.

A new 30% minimum tax will then apply to capital gains accrued after 1 July 2027. This means if someone’s normal tax on the gain works out below 30%, they may need to pay extra tax to bring the effective tax rate up to 30%. The measure mainly targets strategies where capital gains are deferred into lower-income years to reduce overall tax payable.

However, people receiving means-tested government support payments like Age Pension or JobSeeker in the year they realise the gain will be exempt from this minimum tax.

There are also important transitional rules. For assets owned before 1 July 2027, the old 50% discount still applies to gains earned up to that date. Only future gains after 1 July 2027 move into the new indexation system. Taxpayers can either get a valuation at 1 July 2027 or use an ATO formula to split pre- and post-reform gains.

New builds get special treatment. Investors buying qualifying new builds can continue to access both negative gearing and choose between the existing 50% CGT discount or the new indexation method. But later purchasers of that same property will not get those concessions.

Main residences remain fully exempt from CGT and the small business CGT concessions are unchanged. Commercial properties and shares are also unaffected by the negative gearing restrictions.

Budget projections suggest these reforms may modestly slow house price growth, improve access for first home buyers and increase owner-occupier participation in the housing market over time.

MINIMUM TAX ON DISCRETIONARY TRUSTS

The government plans to introduce a 30% minimum tax on discretionary trusts from 1 July 2028 to reduce the tax advantages currently available through income splitting in family trusts.

Right now, trustees can distribute income to family members or related entities on lower tax rates, which can significantly reduce the overall family tax bill compared to someone earning the same income as salary or wages. The proposed reforms are intended to bring trust taxation closer to the tax outcomes applying to ordinary wage earners.

Under the proposed rules, the trustee will pay a minimum 30% tax on the trust’s taxable income before distributions are considered. Beneficiaries will still include their share of trust income in their own tax returns, but non-corporate beneficiaries, such as individuals, will receive non-refundable tax offsets for the tax already paid by the trustee.

The important point is that these offsets are non-refundable. This means beneficiaries can use the credit to reduce their own tax liability, but if the credit is more than their tax payable, they will not receive the excess back as a refund.

Corporate beneficiaries or “bucket companies” will not receive these offsets at all. This change is intended to reduce the use of corporate beneficiaries primarily for tax deferral or lower company tax outcomes.

The proposal also says trustees receiving franked dividends must first use franking credits against the minimum tax liability.

Not all trusts are affected. Fixed trusts, widely held trusts, superannuation funds, deceased estates, charitable trusts and some specific income categories are excluded.

For small businesses, the government will provide rollover relief for 3 years from 1 July 2027 so businesses can restructure into companies or fixed trusts without immediate capital gains tax or other income tax consequences.

NEW TAX CUTS AND DEDUCTIONS FOR AUSTRALIAN WORKERS

Under the proposal, additional tax cuts and deductions will apply for Australian workers from the 2026– 27 and 2027–28 income years as part of its broader cost-of-living and tax reform package.

Broad Personal Income Tax Bracket Relief

The Budget also includes staged reductions to the lowest personal income tax bracket over the next two years.

• From 1 July 2026: The 16% tax rate applying to income between $18,201 and $45,000 will be reduced to 15%.
• From 1 July 2027: This same rate will drop further to 14%.

These changes are expected to reduce income tax payable for most Australian taxpayers of up to $268 in the first year, growing to a permanent saving of up to $536 per year from mid-2027 onwards, compared to previous tax settings. For wage and salary earners, these savings will automatically flow into weekly or fortnightly pay packets via lowered PAYG withholding amounts.

Working Australians Tax Offset (WATO)

A new $250 Working Australians Tax Offset (WATO) will apply from 1 July 2027. The offset will provide up to $250 in annual tax relief for workers and will be automatically applied when individuals lodge their tax returns. The offset is specifically targeted at income earned from work and will also be available to sole traders operating their own businesses.

Budget estimates indicate that the WATO effectively increases the tax-free threshold for workers by almost $1,800, taking the effective threshold to around $19,985, or up to approximately $24,985 for workers also eligible for the Low-Income Tax Offset.

The $1,000 Instant Work-Related Expense Deduction

To simplify smaller work-related deduction claims, eligible employees can claim an upfront, instant tax deduction of up to $1,000 for work-related expenses without needing to retain or itemize receipts.

The measure is intended to reduce compliance and record-keeping requirements for employees with relatively small work-related expenses.

How the Threshold Works:

• If your total work-related expenses are under $1,000, you simply claim the amount instantly without providing receipts.
• If your expenses exceed $1,000, you cannot use this instant shortcut. You must instead fall back on normal substantiation rules and possess valid receipts or logbooks for the entire amount claimed.
• Additional Claims: Additional claims such as charitable donations, union dues and professional membership fees remain separately claimable on top of the $1,000 instant deduction.

Budget estimates indicate around 6.2 million workers may benefit from the instant deduction with an average tax saving of approximately $205. Around 13 million workers are expected to benefit from the Working Australians Tax Offset, with most receiving the full offset amount.

The measures are in addition to the earlier stage tax cuts already legislated in previous Budgets. Budget projections indicate an employee on average earnings could receive combined tax relief of up to approximately $2,816 annually from 2027–28 when the previous tax cuts, the new offset and the instant deduction are combined.

The package also includes an increase in Medicare levy low-income thresholds from 1 July 2025. This is intended to ensure more than one million lower-income Australians either remain exempt from the Medicare levy or continue paying a reduced levy rate.

The package is intended to reduce bracket creep, improve workforce participation and provide additional relief for low- and middle-income earners. Budget projections indicate the combined tax changes may modestly reduce average tax rates and encourage additional workforce participation, particularly among part-time workers and secondary earners.

Illustrative examples in the budget paper suggest:

• workers earning around $75,000 could receive total annual tax savings of approximately $2,660 from 2027–28 compared to 2023–24 tax settings,
• workers earning around $90,000 may receive combined annual savings exceeding $3,000 including the instant deduction, and
• average full-time earners may receive annual benefits exceeding $3,400 under the combined measures.

The package is intended to be broadly revenue neutral over the forward estimates and therefore not expected to significantly increase inflationary pressures.

OTHER MAJOR HIGHLIGHTS

The reforms also confirm that the existing small business CGT concessions will continue to remain available even after the proposed changes commence. Eligible businesses may still be able to reduce, defer or completely eliminate CGT on active business assets depending on their circumstances.

The four existing concessions remain unchanged:

• 15-year exemption
• 50% active asset reduction
• retirement exemption
• active asset rollover concession

This means many small businesses may still achieve very low or even nil effective tax on the sale of active business assets if they satisfy the eligibility conditions.

The budget also highlights that ordinary business assets such as trading stock, tools, work vehicles, computers and equipment are generally not affected by CGT because they continue to be treated under normal business income and depreciation rules.

For discretionary trust businesses, the reforms may lead some businesses to consider alternative structures such as companies or fixed trusts. Companies may become more attractive because they can access the lower 25% small business company tax rate, dividend imputation benefits and simpler profit retention arrangements. Fixed trusts may still provide asset protection and flow-through treatment while avoiding the discretionary trust minimum tax rules.

To assist businesses wanting to change structure, rollover relief is proposed for 3 years from 1 July 2027. This is intended to allow restructuring into companies or fixed trusts without triggering immediate CGT or income tax consequences.

Further consultation is expected before the legislation is introduced, particularly around how the reforms will operate in practice for small businesses, start-ups and existing trust structures.

Apart from the CGT and trust reforms, the Budget also includes several measures aimed at supporting business cash flow, investment and growth.

The $20,000 instant asset write-off is proposed to become permanent from 1 July 2026 for eligible small businesses with turnover up to $10 million. This means businesses can immediately claim deductions for eligible assets costing less than $20,000 instead of depreciating them over several years.

The threshold applies on a per asset basis, allowing multiple eligible asset purchases to be claimed.

A permanent 2-year loss carry back regime is also proposed from 1 July 2026 for companies with aggregated annual turnover below $1 billion. Under this system, eligible companies can carry current year tax losses back and offset them against taxes paid in earlier profitable years, helping improve cash flow during difficult periods.

For start-up companies, refundable tax support is proposed from 1 July 2028. Eligible start-ups with turnover below $10 million may be able to convert early-stage tax losses into refundable tax offsets during their first two years of operation. The refund will generally be linked to PAYG withholding and fringe benefits tax paid for Australian employees.

Additional venture capital tax concessions are also proposed from 1 July 2027. Investment caps for venture capital structures such as VCLPs and ESVCLPs are proposed to increase significantly, allowing larger businesses and investors to access concessional tax treatment and encouraging additional funding into growing Australian businesses and start-ups.

Research and development support is also expected to increase. From 1 July 2028, eligible businesses with turnover up to $50 million may access higher R&D tax incentive rates. Refundable offsets are proposed to continue for younger businesses, while older businesses may receive non-refundable offsets.

Overall, the measures are aimed at improving business cash flow, encouraging investment and supporting start-up and innovation activity alongside the broader tax reform package.

SUMMARY OF KEY PROPOSED CHANGES

“Disclaimer: These measures represent announcements from the 2026–27 Federal Budget and are subject to the passage of legislation. The information provided is general in nature and does not constitute formal tax advice.”