Federal Budget Update: Changes to Capital Gains Tax

From 1 July 2027, the current 50% capital gains tax (CGT) discount for assets held longer than 12 months will be replaced with a cost base indexation system, together with a 30% minimum tax on net capital gains. The changes will apply broadly to CGT assets (including pre-CGT assets) held by individuals, trusts and partnerships. New residential builds will be excluded.

Under the proposed approach, instead of reducing capital gains by 50%, the cost base of an asset will be increased in line with inflation (CPI) before calculating the taxable gain. The aim is to ensure only ‘real’ (inflation-adjusted) gains are taxed.

Transitional rules will apply to existing investments. Assets sold before 1 July 2027 will continue to access the existing CGT discount. For assets held at that date, gains accrued up to 1 July 2027 will generally retain the 50% discount, while gains after that date will be calculated using the new indexed cost base system and will be subject to the 30% minimum tax.

To apply the transitional rules, taxpayers will need to determine an asset’s market value as at 1 July 2027 when it is eventually sold. This can be done by either:

• obtaining a formal valuation (including the use of quoted market prices where relevant), or
• using an ATO-approved apportionment method based on estimated growth over the holding period.

These transitional arrangements will also extend to legacy and pre-CGT assets, although gains made before 1 July 2027 on pre-CGT assets will remain exempt.

Owners of newly constructed residential properties will be able to choose between the existing CGT discount or the new indexation method, although the 30% minimum tax will still apply. Eligible new builds generally include newly constructed dwellings or developments replacing multiple dwellings, but exclude knock-down rebuilds and substantial renovations.

Example

Maggie purchases an asset on 1 July 2022 for $800,000 and sells it on 1 July 2032 for $1.6 million.

Using ATO tools, she determines the asset’s value at 1 July 2027 is $1,131,371.

Under the transitional rules:

• the pre-commencement portion of the gain receives the existing 50% CGT discount, and
• the post-commencement portion is taxed using the indexed cost base method.

Her total taxable capital gain is $485,643, compared with $400,000 under the current 50% discount system.

Assuming a 47% marginal tax rate, her tax liability would be approximately $228,252, compared with about $188,000 under the existing rules.

Discretionary trusts to be taxed at minimum 30%

From 1 July 2028, a proposed minimum 30% tax will apply to the income of discretionary trusts.

At present, discretionary trusts are generally not taxed as separate entities. Instead, trust income is taxed in the hands of beneficiaries who are made presently entitled to receive it. 

Under the proposed changes, trustees will be required to pay at least 30% tax on the taxable income of the trust. Beneficiaries will receive non-refundable tax credits for any tax already paid at the trust level.

Trustees will also be responsible for calculating, reporting and paying the tax, as well as notifying beneficiaries of their entitlements and associated credits.

The measure will not apply to unit trusts or widely-held trusts, complying superannuation funds, special disability trusts, deceased estates, or charitable trusts.

Certain income will also be excluded, including income from existing discretionary testamentary trusts (in place as at 7:30pm AEST on 12 May 2026), as well as certain primary production income and income relating to vulnerable minors.

A three-year rollover relief period from 1 July 2027 is also proposed to allow taxpayers to restructure out of discretionary trusts into alternative structures such as companies or fixed trusts.

Individuals

Negative gearing restricted to new builds from July 2027

From 1 July 2027, negative gearing on residential property will be limited to new builds only.

Negative gearing currently allows investors to offset rental losses (where expenses exceed rental income) against other income such as wages. Under the proposed changes, this concession will be restricted to eligible new residential dwellings.

New builds will generally include:

• properties constructed on vacant land, or
• developments where existing dwellings are demolished and replaced with additional new dwellings.

However, knock-down rebuilds and substantial renovations will not qualify. A property will also need to be genuinely new (not previously sold, unless first owned by the builder and not occupied for more than 12 months).

Under the proposal:

• investors in new builds will continue to be able to offset rental losses against other income, and
• investors in established properties will no longer be able to offset losses against salary or other income.

Instead, losses from established residential properties will only be deductible against other income from residential property or capital gains, with any excess losses carried forward to offset future residential property income.

The changes will apply to individuals, partnerships and most trusts, but will exclude widely-held trusts (such as most managed investment trusts) and superannuation funds, including SMSFs. 

Importantly, the measure will apply only to residential property. Commercial property and other investments (such as shares) will remain under existing tax rules.

Transitional arrangements

For established residential properties:

• Properties held at 7:30pm AEST on 12 May 2026 (including where a contract has been entered into but not settled) can continue to be negatively geared until sold.
• Properties purchased between 7:30pm AEST on 12 May 2026 and 30 June 2027 will be negatively geared during that period only.
• Properties purchased from 1 July 2027 cannot be negatively geared.

$1,000 Instant Tax Deduction

From the 2026–27 income year, the Government will introduce a $1,000 instant tax deduction for work-related expenses.

The measure is intended to simplify tax returns and provide cost-of-living relief for employees by allowing an automatic deduction of up to $1,000 against employment income without the need to retain receipts.

Taxpayers whose eligible work-related expenses exceed $1,000 will still be able to claim the higher amount under existing substantiation rules.

Importantly, other deductions such as charitable donations, union fees, and professional or industry membership fees will continue to be claimable in addition to the instant deduction.

Other notable announcements

• From the 2027–28 income year, all working Australian taxpayers will receive a $250 Working Australians Tax Offset (WATO).
• From 1 July 2025, the Medicare levy low-income thresholds for singles, families, and seniors and pensioners will be increased.
• Electric vehicle (EV) taxation will move from a full fringe benefits tax exemption to a permanent discounted FBT regime.
• Small businesses with annual turnover under $10 million will be able to permanently claim an immediate deduction for eligible assets costing less than $20,000.

High Superannuation Balances >$3m (Division 296).

Any discussion of the 2026–27 Federal Budget and its impact on SMSFs inevitably focuses on Division 296.

The Treasury Laws Amendment (Building a Stronger and Fairer Super System) Act 2026 has now been enacted, introducing an additional 15% tax on earnings attributable to the portion of superannuation balances above $3 million from 1 July 2026. Members with balances above $10 million will also face further reductions in concessional treatment under the new framework.

For SMSF members with higher balances, this represents a material increase in tax. Earnings on amounts above the $3 million threshold will effectively be taxed at up to 30% in accumulation phase, compared with the current 15% rate.

However, it is important to place this in context. The vast majority of SMSF members remain below the $3 million threshold, meaning Division 296 will have little or no impact for most trustees. In fact, the broader Budget measures may enhance the relative tax efficiency of superannuation as a long-term investment structure.

Even for those approaching or slightly above the threshold, superannuation can still remain comparatively tax effective. A 30% tax rate within super may still be more favourable than personal investment structures subject to higher marginal tax rates, reduced CGT concessions, or discretionary trusts now facing minimum tax settings.

This article is for general information only. It does not constitute financial product advice and has been prepared without taking into account any individual’s personal objectives, situation or needs. It is not intended to be a complete summary of the issues and should not be relied upon without seeking advice specific to your circumstances.