In delivering the 2026 Federal Budget, the Albanese Government is seeking to introduce generational reforms to Australia’s income tax system. The announced changes appear consistent with their underlying wealth redistribution policies.

The well-telegraphed changes to Capital Gains Tax (CGT) and negative gearing have been formally announced. These changes are coupled with, in this writer’s opinion, far more significant changes to the laws relating to the taxation of discretionary trusts.

If legislated as announced on Budget night, this will require the vast majority of trusts in Australia to reconsider their utility beyond the announced effective date of 1 July 2028.

With the Federal opposition in a historical malaise, the Government has taken the opportunity to introduce changes to taxation laws of the like not seen since 1985 (cue Back to the Future music, Doc…).

As the changes do not take effect for a couple of years, and with the proposed ability to restructure available in the interim, it may be that the announced changes practically result in less revenue in the long run, but a 30% take collected along the journey. At least for a short period.

In good news(?) for NRL fans though, the PNG Chiefs Rugby League players have been provided an income tax exemption. So not everybody loses on Budget night.

Pilot’s summary of the key tax and business announcements follows.

Quicklinks

• Major Tax Reform
• Personal Taxation
• Business Taxation
• International Taxation
• Superannuation
• Other Measures

Major Tax Reform

R.I.P. Discretionary Trusts

The Labor Government has launched a full-scale attack on discretionary trusts in this Budget to “improve the fairness of the tax system and help fund new tax cuts for workers”, whilst raising $4.5 billion over the forward estimates. Make no mistake about it, this is a raid on the perceived wealthier members of our society, but its impact will be far greater than the Government is saying, especially for small business owners.

This is a return to a very similar policy that Bill Shorten took to the 2019 election.  In that case, the Australian Labor Party proposed to tax distributions at an average rate of 30%.  They have now dropped the references to average with this policy change.

From 1 July 2028, trustees will pay a minimum tax of 30% on the taxable income of discretionary trusts.  The mathematicians in the audience will note the significant difference here.

Beneficiaries (apart from corporate beneficiaries) will then receive non-refundable credits for the tax payable by the trustee of the trust.  The Budget papers lack detail, so we will need to wait to find out the specifics of this.

This is a massive change that will impact the more than 800,000 discretionary trusts in Australia.  Whilst the Government is dressing this change up as a matter of fairness for workers, the significant numbers of small business owners who run their businesses through a discretionary trust will be seriously disadvantaged by these changes.  These business owners often go without wages, and usually rely on the business profits generated by the trust in the good times. No longer will the income of the trust be able to be distributed to business owners with it being taxable in accordance with the marginal tax rates – instead they are subject to a minimum tax rate of 30%.

We have illustrated below the impact of these changes on a trust with $60,000 taxable profit, which makes one beneficiary entitled to the income:

*Not including the Medicare Levy.

These changes will not apply to the following trusts:

• Fixed and widely held trusts (including fixed testamentary trusts);
• Complying superannuation funds;
• Special disability trusts;
• Deceased estates; and
• Charitable trusts.

Some types of income, such as primary production income, and income of existing discretionary testamentary trusts (as at Budget night) will be excluded from these changes.

Whilst the Government has dished out an almighty headache for trustees and beneficiaries, it has announced that there will be expanded CGT rollover relief available for 3 years from 1 July 2027 to support small businesses and others wishing to restructure out of discretionary trusts to companies or fixed trusts.  The specifics of this will need to be run to ground.

We anticipate that this announcement effectively will result in the death of trusts as a structuring option from Budget night.

Welcome to the age of the company.

Capital Gains Tax: The 50% discount phased out and minimum tax Introduced

One of the most significant measures announced in this year’s Federal Budget is a major overhaul of the Capital Gains Tax (CGT) system. At the centre of this reform is the removal of the long-standing 50% CGT discount and introduction of a 30% minimum tax on capital gains for individuals, partnerships and trusts.

The Government has touted that this reform, together with the removal of negative gearing, is aimed at “helping more Australians get into the housing market” and “rebalancing our tax system”. They note that since 1999 (the introduction of the 50% discount), housing prices have risen more than twice as fast as average full time earnings, and that in the 20 years to 2021, home ownership for those 25 to 34 years old has declined by 7%.

Overall, this is a structural shift in the tax system rather than a temporary adjustment. It will have a meaningful impact on long-term investment planning and should be factored into future strategy discussions

Revival of indexation

Under the “new” rules, the Howard Government’s 50% discount will be replaced from 1 July 2027 with an inflation indexation model, similar to the system in place prior to 1999 (introduced by the Keating Government in 1985 when CGT was born). Rather than applying a flat discount, capital gains will now be adjusted to account for inflation over the ownership period.

As an example, on 1 July 2033, Taylor sells her shares in ABC Pty Ltd for $7,000. The shares were originally purchased on 1 July 2027 for $5,000. Indexation applies to uplift the cost base to $5,798 (2.5% annual inflation), resulting in a net capital gain of $1,202.

What does this mean in practice? For long-term investors, the outcome may be more balanced than it initially appears. In higher inflation environments, indexation can deliver comparable—and at times more favourable—results than the previous discount system. To illustrate, consider an initial investment of $500,000 held for ten years in an environment with a constant 2.5% indexation:

Where the asset performs in line with inflation (2.5% rate of return), a tax saving will arise under indexation as it effectively uplifts the cost base to the sale price – indicating the real return to the investor was not better or worse than simple inflation throughout ownership. Under a discount method, just the generic 50% would have still resulted in a taxable gain.

However, the more the rate of return on the investment/asset surpasses inflation, the higher the tax will be as compared to the discount. High-growth assets (particularly held for long-term) will most certainly wish for the days of the discount. For shorter-term investors, the change is also likely to be less forgiving.

Minimum tax rate

As well as indexation, capital gains will also be subject to a minimum tax rate. Broadly, capital gains realised from 1 July 2027 will now be subject to a minimum 30% tax rate (excluding Medicare levy). Thus, if the indexed capital gain is not otherwise taxed at 30%, a top-up tax will be required to be paid by the taxpayer.

As an example, Mrs Chalmers has a net capital gain of $10,000 on an asset purchased in 2027–28:

• Assume the tax on this capital gain is $1,400, being an average tax rate of 14% (excluding the Medicare levy). As this is lower than the new minimum tax rate, she pays an additional $1,600 in tax to bring the tax rate up to 30%.
• Assume the tax on the capital gain is instead $4,000, or a tax rate of 40% (excluding the Medicare levy). As this is higher than 30%, there will be no additional tax payable.

This will have a significant impact on taxpayers managing their tax affairs with the view to deferring capital gains to years where marginal tax rates are low – largely removing the benefits of such tax planning strategies. The Government has noted that the 30% tax rate is “commensurate with the tax rate paid by most workers”, and thus seemingly taxing non-wage earning investors as if they had been working when they realise their long-standing assets.

Pre-CGT assets targeted too

Perhaps one of the most shocking revelations is the announcement that pre-CGT assets will also be included in the changes. That is, pre-CGT assets will be brought into the CGT net – transitionally of course.

Having enjoyed CGT-free benefits for over 40 years now, it is clear the Government considers it is time for these assets to join the regular taxing pool once again. And whilst it is a shocking change, it might not impact many taxpayers anymore, as more and more assets lose their pre-CGT status each year through ongoing changes in any case.

Transitional period

Importantly, the changes apply on a partially grandfathered basis – gains accrued up to the date of implementation will still be eligible for the existing 50% discount, while gains moving forward will be taxed under the new indexed approach.

What does this look like?

*including pre-CGT assets, being assets acquired by the taxpayer before 20 September 1985.

Assets sold prior to 1 July 2027 will be grandfathered under the current regime, and no changes will apply.

Assets purchased after 1 July 2027 will be fully within the new system – indexation will apply (for assets held more than 12 months) and taxpayers will need to consider the 30% minimum tax rate thereon.

The transitional period then applies for assets purchased prior to 1 July 2027, but sold afterwards. Broadly, the eventual realised gains will need to be apportioned for gains before and after that date (let’s call it pre- and post-indexation for simplicity). The gains that are attributable to the pre-indexation period will still be subject to the old rules: so 50% discount still applies and no minimum tax will be imposed. Any post-indexation gains will be subject to indexation and a minimum 30% tax rate. We can just see the headaches coming out of this now!

So how do taxpayers mark that line on 1 July 2027? Whilst valuations (of course!) can be key here, the Government has also alluded to an alternative “specified apportionment formula” (and it appears the taxpayer will have a choice as to which method to adopt). Budget documents note that this formula will estimate the asset’s value on 1 July 2027 based on its growth rate during ownership. “The ATO will provide tools to estimate this value for taxpayers” says the Government fact sheet on this – watch this space.

To illustrate for an asset with pre- and post-indexation gains:

When Lucy sells the asset she will calculate her taxable gain of $750,000 as follows:

• Pre-indexation gain: gross capital gain of $700,000 ($1,300,000 – $600,000) with 50% CGT discount applied = $350,000 taxable net gain; PLUS
• Post-indexation gain: asset value indexed from $1,300,000 to $1,400,000, resulting net capital gain (1,800,000 – 1,400,000) = $400,000. The minimum tax rate would also need to be considered on this portion, and top-up tax would apply if less than 30%.

And what about pre-CGT assets? Yes, these transitional arrangements will apply to assets purchased before 20 September 1985. Broadly, gains up until 1 July 2027 will continue to be exempt, and then post-indexation gains will be brought back into the CGT tax net same as for all other assets.

From a compliance perspective, record-keeping requirements will certainly increase. Taxpayers will need to carefully track and apportion gains between pre- and post-indexation periods, and consider how the 1 July 2027 valuation will be calculated. This adds an extra layer of complexity and potentially risk, especially for long-held investments.

It is also unclear at this stage how other specific CGT rules may interact with the new changes, such as those for applying capital losses incurred in prior years, changes in tax residency (non-residents have not been eligible for the existing 50% CGT discount since May 2012), or partial/apportioned main residence exemption situations.

What?

These changes will broadly apply to all eligible CGT assets, including properties and shares.

However, taxpayers who buy new residential properties will be able to choose either the 50% discount, or indexation and the minimum tax rate, on the eventual sale. It has been proposed that the “new residential property” definition will align with that of the negative gearing changes.

Who?

The proposal will currently apply to individuals, partnerships and trusts who have held the relevant assets for at least 12 months.

It is currently understood that no changes will apply to superannuation funds and companies, who will retain their 33 1/3% and 0% discounts respectively, and no indexation or minimum taxes will apply.

There are also carve-outs for the 30% minimum tax rate for recipients of means-tested income support payments (e.g. the Age Pension or JobSeeker). No such similar carve-outs appear to apply to the move to indexation.

Carve-outs

Whilst this is a major reform to CGT, there have been no mentions (yet) of touching the main residence exemption, nor changing any of the small business CGT concessions. We expect access to these concessions to become even more valuable under the new CGT regime.

Negative Gearing: Curtailed, not scrapped

The Budget has also introduced changes to negative gearing on residential property, although the measures stop short of abolishing it altogether. The Government has adopted a more targeted approach, designed to direct investment towards new builds. Other than a short hiatus during the Hawke/Keating Government (1985 – 1987), this is the most significant reform to negative gearing since … forever.

From 1 July 2027, losses from established residential properties will only be deductible against rental income or capital gains resulting from the sale of residential properties. Any excess rental losses will be carried forward and will be able to be offset against residential property income in future years. These changes will apply to established residential properties acquired from 7:30pm (AEST) on 12 May 2026.  However, eligible new builds will not be subject to these restrictions. All existing investments (as at Budget night) have been fully grandfathered meaning owners can continue to access negative gearing benefits under the existing rules until the property is disposed of.

Widely held trusts and superannuation funds have been specifically excluded from the new rules, alongside targeted exemptions for build-to-rent developments and private investors supporting government housing programs.

Those with existing property portfolios have been protected with this change, at least in the short term. However, the ability to expand those portfolios using negatively geared strategies is now significantly reduced.

Coupled with the revised CGT rules, the landscape for property investment has significantly changed.  Negative gearing of rental properties is now more focused, more selective, and will be far less central to investment strategies into the future.

Personal Taxation

Personal Tax Changes: Modest and familiar

The Federal Budget has targeted Australian tax resident workers with trivial tax relief measures. This comes on the heels of the recent announcement of fuel excise relief aimed at lessening the ongoing cost-of-living crisis.

Personal tax cuts remain unchanged

The personal income tax cuts announced last year are unchanged. From 1 July 2026, the lowest tax bracket (income between $18,201 and $45,000) will drop from 16% to 15%. Further illustration of the impacts of these tax cuts can be found here.

$250 tax offset…eventually

The Government has announced a new Working Australians Tax Offset (WATO), pitched as cost-of-living relief for all working taxpayers. The permanent, annual offset will apply from 1 July 2027 and cover income from employment and sole trader business income.

In effect, the WATO is an indirect increase to the tax-free threshold, described as “the largest permanent increase in the effective tax-free threshold since 2013”. The offset lifts the effective threshold by almost $1,800 to $19,985 (or up to $24,986 for those eligible for the low-income tax offset).

Changes to Medicare Levy exemption thresholds

For the second year in a row, the Government has announced that the Medicare Levy exemption thresholds (below which the Medicare Levy does not apply to a taxpayer) will be increased retrospectively from 1 July 2025.

For singles who are not pensioners, the threshold has increased to $28,011 (previously $27,222) and for non-pensioner families, the threshold has increased to $47,328 (previously $45,907), plus $4,338 for each dependent child (previously $4,216).

$1,000 instant tax deduction

Delivering on an election promise, the Budget confirms a $1,000 standard deduction for work-related expenses. Eligible individuals can claim the deduction without incurring or substantiating expenses, provided they derive “assessable labour income” (including income subject to PAYG withholding, even if no tax is withheld).

Taxpayers with work‑related expenses above $1,000 can still claim deductions under the usual rules. Other deductions—such as charitable donations and union or professional fees—remain claimable on top of the standard deduction.

Business Taxation

Loss carry-back rules

After rumours arrived late on the scene in the countdown to Budget night, the Treasurer has confirmed the return of a loss carry-back scheme. From 1 July 2026, companies with an aggregated global annual turnover below $1 billion may carry back current year losses to apply against tax paid up to two years earlier. The loss carry back will apply to revenue losses and will be limited by a company’s franking account balance. This will provide many with access to significant refunds on past taxes paid, a very welcome boost to cash flow for businesses.

The scheme was originally introduced as a relief measure for businesses during the COVID-19 pandemic. It is yet to be seen how this expansionary measure will reconcile with inflationary pressures facing the nation.

Deduction Certainty for Small and Medium Businesses, but is the ATO looking over your shoulder?

Instant Asset Write-Off (IAWO)

Under the IAWO, small business entities (SBEs) with an aggregated turnover of less than $10 million can claim an immediate deduction for the business use portion of new depreciating assets acquired and improvements to existing assets. Although temporary increases to the threshold have been legislated in recent years (particularly the post-COVID years), the permanent IAWO threshold has remained at $1,000.

From 1 July 2026, the $20,000 threshold from recent years will be made permanent in the legislation. SBEs that have previously opted out of the simplified depreciation regime will be allowed to re-enter by 30 June 2027 and access the IAWO rules. This is a welcome change that will allow SBEs to better understand their tax position and plan new asset purchases with certainty.

Pay As You Go (PAYG) instalments

Another change of note is the “modernisation” of the Pay As You Go (PAYG) instalment system. From 1 July 2027, small and medium businesses can opt in to reporting and paying their PAYG instalments monthly using an ATO-approved calculation method within accounting software. For businesses with a history of non-compliance, the new monthly reporting and payment frequency will be mandated by the ATO.

The purpose of this is stated as assisting in the alignment of instalments to actual business activities and simplifying lodgement processes, although mention of the hastened pace of tax collection by the ATO is notably absent. Will this new system be mandated for all business taxpayers at some point in the future? Only time will tell…

These changes signal a continued move toward real-time tax reporting and payments. We might anticipate similar automation processes to be introduced for Business Activity Statement lodgements and other tax reporting into the future.

Research & Development Tax Incentive (R&DTI) gets a makeover

In a move aimed squarely at lifting productivity and courting business support, the Government has proposed an overhaul of the Research and Development Tax Incentive (R&DTI). With the rules last updated in July 2021, this is a relatively low-friction reform area for the Government.

The proposed changes which are set to apply from 1 July 2028 include:

• Higher offsets – the core R&D offset rates are increasing by 4.5% percentage points, lifting the offset for core expenditure by around 25-50%.
• Lower intensity hurdle – the R&D intensity threshold will be reduced from 2% to 1.5%, allowing more R&D businesses to access higher offset rates.
• Tighter scope – removal of eligibility for supporting R&D expenditure and strong assurance requirements for smaller claims via registered service providers or cooperative research centres.
• Higher cap – the maximum eligible expenditure on R&D activities is increasing from $150 million to $200 million.
• Higher minimum spend – the minimum expenditure threshold is lifting from $20,000 to $50,000.
• Expanded refunds – changes to the refundable offset turnover threshold, increasing from $20 million to $50 million.
• Rates and refundability –maintaining older firms’ eligibility for the higher offset rate while limiting refundability to firms under 10 years of age.

The impact of these proposed changes will be as follows:

And naturally, the ATO won’t be left watching from the side lines – picking up a tidy $2.8 million over three years to support to support the rollout and administration of these changes.

Refundable loss tax offset

Start-up companies will be able to benefit from the loss refundability measure. From 1 July 2028, start-up companies with an aggregated annual turnover below $10 million will gain access to a limited refundable loss tax offset in their first two years of operation. The offset will be limited to the value of the PAYG withholding and fringe benefits tax paid in respect of Australian employees in the loss year.  As such, the benefit of this measure will be dependent on their wage costs, with a larger offset available for the companies with a higher wage expense.

Ordinarily founders of start-up companies opt to not pay themselves a wage and instead reinvest funds to build the business. This measure may drive change here, with founders moving to pay themselves a wage to benefit from the offset.

Relieving reporting burden

The Government is focusing on reducing reporting burdens for businesses through proposed changes to the financial thresholds under which a proprietary company needs to report information to the Australian Securities and Investments Commission (ASIC).

This proposed change would reduce the number of entities that are required to lodge an audited financial report, directors’ report, or sustainability report with ASIC.

These proposed changes are detailed as follows:

These are only proposed changes to the financial thresholds, noting it remains law that a proprietary company must satisfy at least two of the above criteria to be required to lodge with ASIC, unless relief is granted. With undoubtedly less information flowing to ASIC and the broader public, the companies who no longer need to report will benefit.

Electric Vehicles: Incentives trimmed, not eliminated

The Federal Budget has revisited the tax treatment of electric vehicles (EVs), with the Government opting to scale back, rather than remove, the existing incentives.

The previously generous fringe benefits tax (FBT) exemption for EVs has been tightened, with a phased reduction now applying for eligible EVs above certain value thresholds. This effectively narrows the benefit for higher-end EVs, while still maintaining support for more affordable options. Concessions for lower-priced EVs will remain in place until 31 March 2030, signalling a continued policy focus on encouraging broader adoption rather than subsidising premium purchases.  The change are as follows for the FBT years ending:

• 31 March 27 – no change.
• 31 March 2028 and 2029:
  • Full discount for EVs costing $75,000 or less to continue.
  • EVs costing more than $75,000 but less than the luxury car tax threshold will receive a 25% discount on their payable FBT.
• 31 March 2030 onwards – all EVs below the luxury car tax threshold will receive a 25% discount on payable FBT.

Transitional arrangements have been included. For clients who already have EV novated leases in place, existing agreements are expected to be protected, providing certainty and avoiding retrospective changes to established arrangements.

These changes mean that while EVs remain tax-effective, the advantage is no longer as pronounced, especially for high income earners. As a result, careful modelling will be required when considering new novated lease arrangements to ensure the after-tax outcomes still stack up.

International Taxation

Another Budget, more changes for Foreign Residents

The Government will provide concessions for certain renewable energy investments by foreign tax residents, while amending the definition of “taxable Australian real property” (TARP) assets for CGT purposes consistent with other Commonwealth legislation.

Foreign companies and trusts which dispose of Australian renewable energy assets (or eligible indirect interests in companies or trusts, where 90% of the underlying value of the entity’s TARP assets are eligible renewable energy assets) will be eligible for a 50% discount. This concession will apply to CGT events occurring from the start of the quarter following royal assent until 30 June 2030. This change is targeted to encourage foreign investment in renewable energy projects.

The Government has introduced draft legislation to clarify (and effectively broaden) the types of assets which are considered to be TARP. While the changes are highly technical in nature, they are intended to capture assets which are affixed to or attached to the land for most of their useful lives, such as wind farms, solar panel, electricity transmission assets and types of mining equipment/plant which derive their value from the land. Controversially, the changes to the definition of TARP assets will be effective from the introduction of the current foreign resident CGT regime on 12 December 2006.

Further, foreign residents disposing of shares or other indirect interests with a value of $50 million or more which they believe are not indirect TARP interests will be required to notify the ATO prior to the completion of the transaction (and complete a declaration to provide to the purchaser). This mirrors changes introduced in recent years for disposals by foreign residents of real property assets, and effectively extends these rules to assets held through Australian companies and trusts. The “principal asset test” for indirect interests in TARP assets will also be amended to a 12-month lookback period (as opposed to the current test applying at the date of the relevant CGT event) as an additional anti-avoidance measure.

Additionally, with a continual eye on boosting Australia’s housing supply, the Government is proposing an extension of their ‘temporary’ ban on foreign persons (including temporary residents and foreign-owned companies) from purchasing established residential dwellings to 30 June 2029.

This measure was first introduced from 1 April 2025. Notably, new residential (including substantially renovated) properties, off-the-plan purchases and vacant residential land were excluded, as were New Zealand citizens who are classified as special category visa holders. While existing exemptions remain, the extension continues the Government’s focus on prioritising domestic homebuyers and directing foreign investment towards new housing supply.

Superannuation

Super Tax Rules (Division 296 starts 1 July 2026)

The Budget papers are at pains to note that there are no new major superannuation measures in this Budget.  However, one may suggest that the significance of the changes to superannuation announced in the 2023-2024 Federal Budget has made up for no announcement this year, particularly given their commencement date of 1 July 2026.

As first announced in the 2023-2024 Federal Budget, the changes to tax on superannuation earnings, aka ‘Division 296 tax’ have now been legislated. This was another measure introduced with an eye on intergenerational wealth equity. Broadly, the changes increase the effective tax rate on superannuation balances above $3 million and $10 million by 15% and a further 10% respectively. A summary is as follows:

*Lower tax rates apply to discounted capital gains (10%) and a tax exemption applies to earnings attributable to pension balances (this is not applicable to Division 296).

These changes will take effect from 1 July 2026. However, affected individuals with self-managed superannuation funds (SMSFs) in particular will need to consider the impact of these changes on their investment strategies and liquidity within the fund, as well as the potential impact of elections to reset the cost bases of assets held by SMSFs at 30 June 2026.

Other Measures

Fraud in focus

The Budget has allocated a further $86 million to the ATO to modernise fraud detection and protection in the tax and superannuation systems. These funds are intended to improve the ATO’s ability to detect fraud and minimise losses to Government revenue from breaches in digital systems. The ATO will also be granted powers to pause (and waive as appropriate) debt recovery from taxpayers who have been impacted by fraud.

The Government is especially focused on fraud related to the Research and Development Tax Incentive scheme.

Additionally, ASIC will be provided with additional funding to strengthen oversight and monitoring of the managed investment fund sector. This is in the context of a significant increase in the number of self-managed superannuation funds and the recent First Guardian/Shield investment scandals, which saw about 12,000 taxpayers lose total assets of over $1.2 billion.

Further, an eye-watering $654 million has been pledged over four years to maintain Australia’s Digital ID systems (including MyID) and enhance security controls. At least the name will stay the same (at least for now…).

Contact Pilot

If you would like to discuss any of this in more detail, contact Murray Howlett, Tom Howard, Kylee Smith or your Pilot advisor on (07) 3023 1300.