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Federal Budget 2026–27: Key Proposed Tax Changes Explained

By Patricia Montagne Longue

25 May 2026

On Tuesday 12 May, the Treasurer handed down the 2026–27 Federal Budget. If the proposed changes to the tax system are implemented, the impact will be felt across a wide cross-section of Australian society. These reforms represent some of the most consequential changes to the tax system in recent years.

Outlined below are several of the most significant proposed changes emerging from this year’s Budget.

Removal of the 50% Capital Gains Tax (CGT) Discount

This is a significant change to the current CGT regime. Australia’s CGT system was introduced in 1985 and, until 1999, used indexation to tax real gains after adjusting for inflation. In 1999, indexation was replaced by the CGT discount method, designed to simplify the system and improve international competitiveness.

Currently, an asset held by an individual for 12 months or more attracts a 50% discount. Under the proposed new regime, capital gains will instead be subject to indexation for assets held for more than 12 months, meaning the concession will be tied to actual CPI movements. The changes apply to CGT assets held by individuals, trusts, and partnerships. To maintain incentives for new housing supply, investors in new residential properties will be able to choose between the 50% CGT discount or cost base indexation methods.

For individuals on the top marginal tax rate, the effective tax rate on capital gains increases from 23.5% (under the 50% CGT discount) to at least 30%, and up to 47% if the investment is held for a short time during periods of low CPI growth.

It is important to note that the indexation method does not always result in higher tax than the 50% discount. In periods of high inflation and longer holding periods, indexation may produce a better outcome. However, it can result in significantly higher tax on high-growth assets held for shorter periods when CPI growth is modest.

Example:

Jack invests $100,000 in July 2027 and sells the asset in December 2028 for $200,000. CPI growth over the period is assumed to be 7%.

CGT discount method:
Tax payable: 47% × ½ × ($200,000 – $100,000) = $23,500

Indexation method:
Indexed cost base: $100,000 × 1.07 = $107,000
Tax payable: 47% × ($200,000 – $107,000) = $43,710

In this example, the indexation method results in $20,210 more tax than the CGT discount method.

For both methods to result in the same tax outcome, CPI growth over the holding period would need to be 50%, as shown below:

Indexed cost base: $100,000 × 1.5 = $150,000
Tax payable: 47% × ($200,000 – $150,000) = $23,500

Introduction of a Minimum 30% Tax on Capital Gains

This measure would affect taxpayers whose marginal tax rate is below 30%. For example, a taxpayer earning $10,000 in salary and realising a $3,000 net capital gain on shares would currently pay no tax, as their total taxable income of $13,000 is below the tax-free threshold of $18,200.

Under the proposed rules, the $3,000 capital gain would be subject to a minimum tax rate of 30%.

Minimum 30% Tax on Discretionary Trusts

From 1 July 2028, trustees of discretionary (family) trusts will pay a minimum 30% tax on taxable income. Beneficiaries (other than corporate beneficiaries) will receive non-refundable credits for tax paid by the trustee.

This measure will not apply to superannuation funds, charitable trusts, fixed and widely held trusts, or deceased estates. Certain income, such as primary production income (e.g. farming income), will also be excluded.

The change removes the ability to distribute trust income in a tax-effective way to beneficiaries on marginal tax rates below 30%.

Discretionary trusts are commonly used in family and investment structures due to their flexibility in distributing income and capital each year. They can also provide estate planning benefits and, in some circumstances, asset protection advantages.

While the proposed minimum tax reduces their tax flexibility, these structures are still likely to remain relevant for non-tax reasons, particularly asset protection.

Changes to Negative Gearing for Residential Properties

‘Negative gearing’ refers to a situation where expenses associated with holding an investment exceed the income it generates. A range of investments can be negatively geared, not just property.

In the case of rental properties, losses can typically be offset against other income (such as salary, wages, or capital gains), reducing taxable income or creating a tax loss carried forward to future years.

Under the proposed changes, losses from established residential properties acquired from 7:30pm (AEST) on 12 May 2026 will only be deductible against rental income or capital gains from residential properties. Excess losses will be carried forward to offset future residential property income.

Properties acquired before this time will be exempt. The changes also will not apply to managed investment trusts or superannuation funds.

Bringing Pre-CGT Assets Into the Tax Net

This represents a significant policy shift. For more than 40 years, capital gains on pre-CGT assets have been disregarded under grandfathering provisions introduced in 1985.

Under the proposed changes, gains accrued up to 1 July 2027 will remain exempt. However, capital gains arising after that date on pre-1985 assets will become taxable. A market valuation as at 1 July 2027 will be required to establish the cost base for future gains.

With a number of significant tax changes now proposed, it is important to understand how any enacted measures may affect your position. Our team is available to provide tailored advice and help you respond with confidence. Please contact us if we can assist.

Patricia Montagne Longue