The upcoming Federal Budget has drawn the attention of many this year. Our predictions for next week’s Budget feel less speculative than prior years, and more like reading the writing on the wall, with Dr Jim Chalmers heavily telegraphing a major overhaul of long-standing principles of our tax system.

The Government will be conscious of pressure on several fronts this year. Ongoing geopolitical disruptions, stubborn inflation, low productivity, more than $1 trillion of national debt and the possibility of a recession are all weighing on the economy.

Meanwhile, younger voters are increasingly demanding structural reform to address housing affordability and perceived intergenerational inequality. With the next election not due until 2028, and the opposition in an ongoing malaise, the Government seems set to bring significant tax changes designed to herald a major redistribution of wealth amongst Australians.

We have provided our thoughts on the likely changes in next week’s Budget.

The end of the CGT discount

It has been well documented that the Treasurer is considering a removal of the 50% CGT discount. We anticipate a Back to the Future moment, whereby a Hawke-Keating style of cost base indexation is tipped to return to replace the 50% discount. This is perhaps not surprising given Dr Jim wrote his thesis on Paul Keating.

Under indexation, the cost base of your investments would be adjusted for inflation over the holding period. Exactly how the change from the 50% discount to indexation is implemented will be determined on Budget night. We expect some form of grandfathering here.

While indexation may provide benefits in prolonged high-inflation environments, many would mourn the death of the simple discount method. Short-to-medium term investments in low inflation environments (remember those days?) would likely be disadvantaged under this change.

We suggest this change is an unbackable favourite.

Negative gearing rears its head… again

As young voters grow ever more disillusioned with Australia’s housing market, the policy that arguably lost the 2019 election for Labor has returned from the grave. All indications are that negative gearing is going to be severely restricted in the future, with the impact on current rental properties unclear.

Whilst we were told before the last election that the Government wouldn’t change the rules for negative gearing, it seems likely that they will walk away from that commitment.

The treatment of existing investments remains uncertain. The current system may be grandfathered, with changes applying only to properties acquired from a certain date. Alternatively, owners of multiple properties may be forced to nominate a limited number of properties they wish to negatively gear.

We predict 50:50 odds on this change proceeding.

Trusts are only used by the “wealthy”, aren’t they?

Another measure that has more recently been speculated is the introduction of a minimum 30% tax on distributions from trusts to beneficiaries. Given the pervasive use of trusts for investors and businesses a change here would potentially have significant ramifications for many. Should such a change be announced, the 2027 tax year will be the year of the restructure.

We give this change long odds, but watch out for the dark horse.

What’s next?

If the Government follows through on Tuesday night, this Budget could bring one of the largest disruptions to Australia’s tax landscape in decades, with far-reaching implications for families, investors, and business owners alike.

Whilst Dr Chalmers has been active in the press, nothing is certain at this point, and we await Budget night with bated breath.

Keep an eye out for our summary of the key Budget measures in your inbox next Tuesday night.

Contact Pilot

If you would like to discuss what the Budget means for you, please contact Murray Howlett, Tom Howard or your Pilot advisor on (07) 3023 1300.