2026/27 Federal Budget — What You Need to Know

Hello and welcome to your 2026/27 Federal Budget update!

Treasurer Jim Chalmers handed down the Federal Budget on Tuesday 12 May 2026. It is one of the more significant budgets in recent years, with major changes to how investment properties and capital gains are taxed, along with a few wins for workers and small businesses. Here is a breakdown of what matters most and how it could affect you.

Capital Gains Tax — How It Actually Works Now, and What Is Changing

When you sell an asset, say a share portfolio or an investment property, the profit you make is called a capital gain. That gain gets added to your taxable income and taxed at your marginal rate. If you have held the asset for more than 12 months, you currently receive a 50% discount. So if you made a $200,000 gain, only $100,000 gets added to your taxable income. That discount has been in place since 1999 and has been one of the most powerful tools in long-term investing and property ownership.

From 1 July 2027, the 50% discount is being replaced with cost base indexation, plus a minimum 30% tax rate on any real gains you make.

Instead of halving your gain, the government will adjust the original price you paid for the asset upward to account for inflation over the time you held it. Only the gain above that inflation-adjusted figure is then taxed at a minimum rate of 30%. For assets that have grown significantly above inflation, the new method will generally result in a higher tax bill than the current 50% discount.

For assets you already own, the 50% discount still applies to gains built up before 1 July 2027. Only growth after that date falls under the new rules. When you eventually sell, you will need to determine what your asset was worth at 1 July 2027, either through a formal valuation or an ATO-approved formula and that figure becomes the starting point for the new calculation.

Investors in newly constructed dwellings can choose between the old 50% discount or the new indexation method. Age pensioners and income support recipients are exempt from the 30% minimum tax. Superannuation funds are not affected and retain their existing one-third CGT discount.

Negative Gearing — How It Works Now, and What Is Changing

Negative gearing is simply what happens when the costs of owning an investment property, mortgage interest, rates, insurance and maintenance, exceed the rent you receive. Under the current rules, that annual loss can be deducted against any other income you earn, such as your salary. This reduces your tax bill today, with the expectation the property grows in value over time.

From 1 July 2027, this is changing for established residential properties purchased from budget night onwards.

If your new established investment property runs at a loss, you can no longer offset that loss against your salary or other income. Instead, losses can only be offset against rental income from other properties, or against capital gains from residential property when you sell. Any leftover losses are carried forward each year until you have property income or gains to absorb them. In plain terms: the tax benefit is deferred until you sell or generate enough rental income, rather than reducing your tax bill each year as it does today.

The key protections are these. Any properties you already own before budget night are completely grandfathered, nothing changes for them. Properties where contracts were signed before budget night but not yet settled are also grandfathered. New build properties remain fully eligible for negative gearing under the old rules. Commercial property, shares, superannuation funds and SMSFs are not affected at all.

Changes to Discretionary Trusts — Including How the Tax Credits Work

If you distribute income to family members through a family discretionary trust, this is one of the most significant changes in the budget.

Currently, a discretionary trust does not pay tax itself. The trustee distributes income to beneficiaries, family members, a company, or others, and each pays tax at their own marginal rate. The strategy works well when some beneficiaries are on lower tax rates, reducing the family's overall tax bill.

From 1 July 2028, a minimum 30% tax rate applies to the taxable income of discretionary trusts, paid by the trustee first. Here is how the process works: the trustee calculates the trust's taxable income, pays 30% to the ATO directly, then distributes income to beneficiaries as usual. Each beneficiary still declares their share of trust income in their own tax return and receives a non-refundable tax credit for the tax already paid on their behalf.

Non-refundable means the credit can reduce or eliminate a beneficiary's personal tax on that income, but cannot generate a cash refund if their personal tax bill is less than 30%. So if a beneficiary would have paid 16% tax on their distribution, the excess credit above that is simply lost. Income splitting to lower-income family members therefore becomes significantly less effective.

The government is offering a three-year restructure window from 1 July 2027, with rollover relief available to move out of a discretionary trust into another structure such as a company or fixed trust. If you hold significant assets through a trust, this window is worth taking seriously.

The new minimum tax does not apply to fixed trusts, superannuation funds, special disability trusts, deceased estates, charitable trusts, or existing discretionary testamentary trusts in place at budget night.

The Good News for Workers

There are some genuine wins for people earning income from work.

Already legislated tax cuts kick in from 1 July 2026, reducing the lowest marginal tax rate from 16% to 15%, with a further reduction to 14% from 2027. This puts up to $268 back in workers' pockets in the first year and up to $536 in the second.

A new $1,000 instant tax deduction for work-related expenses starts from 1 July 2026. No receipts required if your claim is under $1,000, it is automatic.

From the 2027/28 financial year, a new $250 Working Australians Tax Offset (WATO) will also apply, automatically reducing the tax payable on income from work.

Small Business Wins

The $20,000 instant asset write-off has been made permanent for small businesses with turnover under $10 million. Companies under $1 billion in turnover will also be able to carry back tax losses against profits from the prior two years, a useful tool for businesses that had a tough year.

Other Things to Note

From 1 April 2027, the age-based uplift on the private health insurance rebate will be removed. If you are aged 65 or older, your rebate percentage will drop to the same level as younger policyholders, meaning your out-of-pocket costs could rise.

The pension supplement rules are also changing for those travelling or living overseas for extended periods. If you are temporarily absent from Australia for more than 12 weeks, the pension supplement will cease during that time.

Who Benefits?

Wage earners and low-to-middle income households are the clear winners, along with small business owners and investors in new build properties.

Who Doesn't?

Property investors planning to buy more established properties will face restrictions on negative gearing from 2027. Families using discretionary trusts for income splitting will be significantly impacted from 2028. Investors with large capital gains in shares or property will face a higher effective tax rate on gains accruing after July 2027. Older Australians with private health insurance will see their rebate reduced from 2027.

What Should You Do?

The most important thing right now is not to make rushed decisions. Many of these changes do not take effect until July 2027 or later, and the transitional rules are designed to protect existing investments. That said, if you hold assets through a trust, have a large unrealised capital gain, or are planning to buy an investment property, it is worth having a conversation sooner rather than later.

This update is general in nature and does not take your personal situation into account. If you would like to chat through how any of these changes could affect your plan specifically, I am always here to help.

Warmest regards, Josh