Federal Budget 2026-27: What is changing, and what it means for you

On 12 May 2026, the Federal Treasurer delivered the most significant personal and business tax changes in decades. While much of the public debate has focused on housing, the reforms reach much further, affecting business owners, investors, and individuals who hold wealth through discretionary trusts.

This update explains where the law stands today and what it is changing to for each area of change. These measures have been announced, but are not yet legislated. To become official tax laws, the proposed changes must pass through Parliament and may be amended in that process.

Important:  These are proposed changes only. Nothing has passed Parliament yet. Please speak with us before making any decisions based on this update.

  1. Capital Gains Tax (CGT)

Capital Gains Tax is the tax you pay on the profit you make when you sell an asset. CGT is part of your income tax. It is most often mentioned in relation to real property (real estate), however, it applies to the sale of other assets also. These include shares, crypto assets, managed funds, sales of businesses, as well as the sale of business assets like property or goodwill. These changes are among the most significant in the announced Budget. The impact of these changes on these other asset types is discussed further below.

📋  CURRENTLY (Before Budget)

1.       A 50% CGT discount applies to assets held for more than 12 months, meaning only half your capital gain is taxable at your marginal tax rate.

2.       Assets acquired before 19 September 1985 (“pre-CGT assets”) are fully exempt from CGT, meaning no is paid tax regardless of the gain made.

3.       There is no minimum tax rate on capital gains.

 ➡  CHANGING TO (From 1 July 2027)

4.       The 50% discount is abolished and replaced with cost-base indexation. Your purchase price is adjusted for inflation (CPI), so you are only taxed on your “real” gain above inflation.

5.       A minimum 30% tax applies to net capital gains after indexation, even if your marginal rate would otherwise be lower.

6.       Pre-CGT assets lose their full exemption from 1 July 2027. Only gains accruing after 1 July 2027 are taxed; earlier growth remains exempt.

7.       Assets purchased and sold entirely before 1 July 2027 are unaffected, as the old 50% discount will still apply in full.
Comparative Example:  Charlie purchased an investment property in Sydney for $600,000 in August 2027. He sells it in August 2032 for $850,000, making a nominal gain of $250,000. Charlie earns $120,000 per year in salary, putting him in the 37% marginal tax bracket:
📋  Under the CURRENT rules (Before Budget)

Charlie’s capital gain: $250,000

 

Less 50% CGT discount: $125,000

 

Taxable gain added to income: $125,000

 

Tax payable on gain (at 37%): $46,250

 ➡  Under the PROPOSED rules (From 1 July 2027)

Charlie’s capital gain: $250,000

 

Less CPI indexation adjustment (approx. 2.5% per year over 5 years): $79,000

 

Real gain after indexation: $171,000

 

Tax payable on gain (at 37%, above the 30% minimum): $63,270
The difference: Charlie pays approximately $17,000 more in tax under the new rules.
Transitional Rule:  If you own an asset bought before 1 July 2027 and sell it after that date, a split system applies: gains up to 1 July 2027 receive the existing 50% discount; gains after that date are taxed under the new indexation rules.
Pre-CGT Asset Holders:  If you hold assets acquired before September 1985, this is an urgent matter. Contact us to understand your exposure before 1 July 2027.

 

2. CGT changes apply to all asset classes, not just property

This is critical for our business and commercial clients. Despite the housing focus in media coverage, the new CGT rules are not limited to real estate. The changes also apply to shares and sales of businesses, including goodwill.

📋  CURRENTLY (Before Budget)

1.       The 50% CGT discount applies to all assets held for 12+ months, including shares, business goodwill, partnership interests, cryptocurrency, managed funds, and property alike.

2.       The same rules apply regardless of what type of asset is sold.

 ➡  CHANGING TO (From 1 July 2027)

3.       The new indexation and 30% minimum tax rules (set out above) apply to all CGT assets sold by individuals, trusts and partnerships, including:

o      Shares in private and public companies

o      Sale of a business or business goodwill

o      Partnership interests

o      Managed funds and ETFs

o      Cryptocurrency and digital assets

o      Startup equity and employee share schemes

o      Commercial real estate (note: negative gearing on commercial property is unchanged)

o      The only residential exception is newly built properties, where investors can choose the more favourable of the old or new rules.
Business Owners:  If you are planning to sell a business, exit a shareholding, or realise any significant capital gain, the tax cost could be materially higher after 1 July 2027. Timing and structure matter enormously.
Comparative Example:  Charlie has operated a small business in Penrith for the past eight years through a family trust. He purchased the business goodwill and assets for $400,000. In September 2029 he sells the business for $750,000, realising a gain of $350,000. Charlie’s marginal tax rate is 37%.

Note: The small business CGT concessions remain available and may reduce or eliminate CGT on eligible business sales. These examples assume Charlie does not qualify for those concessions, or has already used them, for the purpose of illustrating the general CGT change.
📋  CURRENTLY (Before Budget)

Capital gain: $350,000

Less 50% CGT discount: $175,000

Taxable gain added to income: $175,000

Tax payable on gain (at 37%): $64,750

 ➡  CHANGING TO (From 1 July 2027)

Capital gain: $350,000

Less CPI indexation adjustment (approx. 2.5% per year over 8 years): $80,850

Real gain after indexation: $269,150

Tax payable on gain (at 37%, above the 30% minimum): $99,586
Charlie pays approximately $34,836 more in tax on the sale of his business under the new rules.

 3. Negative gearing on residential property

Negative gearing is when the costs of owning an investment (for example, the cost of any loan interest, maintenance, management fees, etc.) exceed the income the investment produces. Essentially, the investment costs more to maintain than the income it produces for the owner. Under current law, an owner can deduct that loss against their personal taxable income, such as their salary. This is changing for residential property.

📋  CURRENTLY (Before Budget)

1.       Losses from any investment property can be deducted against personal taxable income.

2.       This applies to both established (existing) and newly built properties.

3.       There is no restriction on the type of property or when it was purchased for a property to be eligible for the negative gearing tax concession.

 ➡  CHANGING TO (From 1 July 2027)

4.       Negative gearing on established residential properties purchased after Budget night (12 May 2026) is essentially abolished, from 1 July 2027. This means that losses can only offset other residential property income (such as capital gains), not personal income.

5.       Unused losses can be carried forward to future income years.

6.       Properties owned before Budget night are grandfathered, meaning there will be no change to your existing negative gearing eligibility/arrangements.

7.       Newly built properties remain eligible for negative gearing, meaning that losses from new build investment properties can be offset against personal income.

8.       Negative gearing on commercial property and shares is NOT affected. These remain deductable against personal income.
Comparative Example:  Charlie purchases an established residential investment property in Penrith in October 2026 for $750,000. He takes out a mortgage to fund the purchase. The property generates $30,000 in rental income per year, but Charlie’s total ownership costs (loan interest, rates, maintenance and management fees) come to $45,000 per year — leaving him with a $15,000 annual loss. Charlie earns $120,000 in salary and sits in the 37% marginal tax bracket:
📋  CURRENTLY (Before Budget)

Rental loss: $15,000

This loss is deducted directly from Charlie’s $120,000 salary.

Taxable income reduced to: $105,000

Tax saving from negative gearing (at 37%): $5,550 per year

Over five years, Charlie saves approximately $27,750 in tax through negative gearing.

 ➡  CHANGING TO (From 1 July 2027)

Rental loss: $15,000

This loss cannot be deducted against Charlie’s salary.

Charlie’s taxable income remains: $120,000

Tax saving from negative gearing: $0

The $15,000 loss is carried forward each year and can only be used to offset future residential property income. For example, a capital gain when Charlie eventually sells the property.

Over five years, Charlie accumulates $75,000 in carried-forward losses. He pays no less tax during that time, but those losses may reduce his CGT liability when he sells.

 
The difference: Charlie loses approximately $27,750 in tax savings over five years under the new rules. His after-tax holding costs increase significantly, affecting his cash flow each year he owns the property.

 

  1. Discretionary family trusts: A fundamental change

This is the most significant change for many of our clients who utilise discretionary trusts. Australia has over 900,000 discretionary trusts, and this reform fundamentally alters how trust income is taxed.

How trust distributions are taxed

📋  CURRENTLY (Before Budget)

1.       Discretionary trusts are “flow-through” vehicles. The trust itself pays no tax.

2.       Income is distributed to beneficiaries and taxed at that individual’s marginal tax rate.

3.       Trustees can choose which beneficiaries receive income each year, allowing income to be “split” across family members on lower tax rates.

4.       For example: a $200,000 trust profit could be split between a working spouse and a non-working adult child, with each paying tax at their own lower marginal rate.

 ➡  CHANGING TO (From 1 July 2027)

5.       From 1 July 2028, the trustee must pay a minimum 30% tax on all distributions made from the discretionary trust.

o      Non-corporate beneficiaries receive a non-refundable credit for the tax paid by the trustee.

6.       If a beneficiary’s marginal tax rate is above 30%, they pay top-up tax. If their rate is below 30%, the excess credit is lost and is not refunded.

7.       Income splitting to lower-taxed beneficiaries is effectively eliminated.

8.       There is no grandfathering. All existing discretionary trusts are subject to the new rules from 1 July 2028.

Impact on corporate beneficiaries (“bucket companies”)

📋  CURRENTLY (Before Budget)

9.       Many trust structures distribute income to a company (a “bucket company”) at the end of each year.

10.   The company pays tax at 25–30%, and those profits can later be paid as franked dividends to shareholders.

11.   Franking credits (representing the tax paid by the company) are refundable to shareholders. If the shareholder’s rate is below 30%, they receive a cash refund.

 ➡  CHANGING TO (From 1 July 2027)

12.   Corporate beneficiaries will receive no credit for the 30% minimum tax paid by the trustee.

13.   This means the income is effectively taxed twice. Once at the trustee level (30%) and again when distributed from the company.

14.   The government has deliberately designed this to prevent trust tax credits from being converted into refundable franking credits.

15.   The “bucket company” strategy as commonly used is effectively ended.

Which trusts are excluded from the new rules?

  1. Fixed trusts
  2. Complying superannuation funds
  3. Charitable trusts and special disability trusts
  4. Deceased estates
  5. Testamentary trusts that were already in existence on 12 May 2026
  6. Income from primary production and certain income relating to vulnerable minors

  1. Franking Credits: A key difference between trusts vs. companies

Given the changes to trust taxation, it is worth explaining how the credit system for trusts now differs from the franking credit system that applies to companies and their shareholders.

📋  CURRENTLY (Before Budget)

1.       Company pays 30% tax on profits.

2.       Dividends are paid to shareholders with “franking credits” attached, representing the tax already paid.

3.       Shareholders include the dividend and franking credit in their income, then claim a tax offset.

4.       Crucially, if the shareholder’s tax rate is below 30%, the excess franking credit is refunded in cash.

5.       This full refundability has made the company/dividend model highly attractive for lower-income shareholders (e.g. retirees).

 ➡  CHANGING TO (From 1 July 2027)

6.       From 1 July 2028, trustees pay 30% minimum tax on discretionary trust income.

7.       Non-corporate beneficiaries receive a non-refundable credit, NOT a franking credit.

8.       If the beneficiary’s rate is below 30%, the excess is lost. There is no cash refund.

9.       Corporate beneficiaries receive no credit at all.

10.   The trust credit system is therefore materially inferior to the company franking credit system. Structures that relied on converting trust credits into refundable franking credits via a bucket company will no longer work.
Review Your Structure Now:  If your current arrangement involves a discretionary trust distributing to a company, and then drawing franked dividends, this entire model needs urgent review. What has been a tax-efficient strategy may generate a double tax outcome from 2028.

 

  1. Rollover relief: The window to restructure

Recognising the scale of disruption, the Government has announced rollover relief. This is a time-limited window to restructure out of a discretionary trust without triggering immediate tax consequences.

📋  CURRENTLY (Before Budget)

1.       Transferring assets out of a discretionary trust typically triggers CGT and potentially income tax on any gains made.

2.       This has historically made it expensive and complex to restructure away from a trust structure.

 ➡  CHANGING TO (From 1 July 2027)

3.       A three-year rollover relief period will be available from 1 July 2027 to 30 June 2030.

4.       Eligible taxpayers can transfer assets from a discretionary trust into another entity, such as a company or fixed trust, without immediate CGT or income tax consequences.

5.       The Australian Small Business and Family Enterprise Ombudsman will assist small businesses navigating restructure options.

6.       ASIC will introduce specific support measures for small businesses choosing to incorporate.
Act Early. Three Years Is Not Long:  Restructuring a trust takes time. Property transfers involve stamp duty assessments, lenders may need to refinance, and business operations may need to be reorganised. We strongly recommend beginning your planning well before 1 July 2027, not after.

 

  1. Estate planning: Wills and testamentary trusts

The trust changes also have implications for Wills and estate planning. If you have drafted a Will, you may have elected to establish a testamentary trust through your Will. This is a trust established after the will-maker’s death that can provide tax advantages and asset protection benefits to beneficiaries.

📋  CURRENTLY (Before Budget)

1.       Testamentary trusts established on death are discretionary trusts that currently receive favourable tax treatment, including allowing income to be taxed at marginal rates even for minor beneficiaries.

2.       Some Wills are drafted to include a testamentary trust as a standard estate planning tool.

 ➡  CHANGING TO (From 1 July 2027)

3.       Testamentary trusts that were NOT in existence on 12 May 2026 will be subject to the new 30% minimum tax rules.

4.       Only testamentary trusts already operating on Budget night are excluded.

5.       This changes the tax benefit calculus for including a testamentary trust in a new Will.

6.       Existing Wills that provide for testamentary trusts should be reviewed to assess whether they remain fit for purpose.
Review Your Will:  If your Will contemplates a testamentary trust, or if you are considering updating your estate plan, contact our firm. The desirability of a testamentary trust has changed under these proposals and your plan may need to be reconsidered.

  1. What you should do now

The transition windows provided in these reforms are a genuine opportunity, but only for those who act promptly. We recommend the following steps:

  1. Review your trust structure. If you hold a discretionary trust, review whether it remains appropriate given the 30% minimum tax and the loss of income-splitting flexibility from July 2028.
  2. Assess the timing of any asset sales. If you are considering selling a business, shares, or any significant asset, understand the difference in CGT treatment before versus after 1 July 2027.
  3. Review pre-CGT assets. If you hold pre-CGT assets (acquired before September 1985), assess what gains may arise after 1 July 2027 and begin planning now.
  4. Model the impact of corporate beneficiary changes. If your trust distributes to a company, model the impact of the proposed changes. The bucket company strategy is at serious risk of double taxation.
  5. Update your estate planning documents. Review your Will and estate plan, particularly if it provides for a testamentary trust or if your circumstances have changed.
  6. Plan for the restructure window. Take advantage of the rollover relief window to restructure trust arrangements, but begin planning well before the window opens in 2027.