Australia Federal Budget 2026–2027 pushes structural tax reform across three fronts.

Federal Treasurer Dr Jim Chalmers has delivered the Labor Government’s Federal Budget. The government is proposing a tax reform package with three parts: a fairer tax system for workers, first home buyers and future generations; a better tax system for businesses by encouraging investment and innovation; and a simpler and more sustainable tax system.

The Budget measures are additional to recent developments, including the temporary reduction of excise and excise-equivalent customs duty rates for most fuel products from 1 April 2026 to 30 June 2026, the release of exposure draft legislation for the instant AUD 1,000 tax deduction for work-related expenses, the release of exposure draft legislation for strengthening the foreign CGT regime in Div 855 of ITAA 1997, including the transitional CGT discount for certain renewable energy assets, and the release of a consultation paper on options to strengthen the annual superannuation performance test.

Please note these measures are proposed and subject to the legislation passing through Parliament.

Income tax

The key income tax changes proposed in this Budget are:

• 50% CGT discount to be replaced with cost base indexation from 1 July 2027, with a minimum 30% tax on realised gains to apply
• Minimum 30% tax rate for discretionary trusts from 1 July 2028

CGT discount to be replaced with cost base indexation for all CGT assets from July 2027

From 1 July 2027, the 50% capital gains discount (CGT discount) will be replaced with cost base indexation for assets held for more than 12 months, with a 30% minimum tax on net capital gains applying from that date. This will apply to all CGT assets except new homes, including pre-CGT assets, held by individuals, trusts and partnerships.

Cost base indexation works by adjusting the cost base of the relevant CGT asset. Broadly, the expenditure incurred for each element of the cost base of the asset (except for the third element dealing with non-capital costs of ownership) is indexed by multiplying it by the relevant indexation factor. The resulting adjusted cost base is then used to calculate the net capital gain when a CGT event is triggered.

The measure essentially restores the taxation of CGT assets by applying inflation-adjusted indexation based on the Consumer Price Index (CPI) to tax real gains. Indexation will be calculated using CPI similar to the pre-September 1999 method. The ATO will provide guidance and tools to support taxpayers calculating this adjustment.

Importantly, a minimum tax of 30% will be applicable to realised capital gains accrued from 1 July 2027, after indexation has been applied.

Transitional arrangements will apply to existing investments:

• Existing assets purchased and sold before 1 July 2027 will still be eligible for the CGT discount
• The CGT discount will also continue to apply to gains accrued until 1 July 2027 for assets purchased prior to that date, regardless of when the actual CGT event is triggered. The difference will be calculated by reference to the difference in the asset’s cost base and its value as at 1 July 2027
• Indexation and the minimum 30% tax will be used to calculate CGT on gains accruing from 1 July 2027 (using the asset’s value at 1 July 2027 as the asset’s cost base)

An asset’s value at 1 July 2027 will be determined by taxpayers as part of their tax return in the year the asset is realised. Taxpayers can either:

• Seek a valuation of the asset as at 1 July 2027, which will include using quoted prices for assets such as shares, or
• Use a specified apportionment formula that estimates the asset’s value on 1 July 2027, based on its growth rate over the asset’s holding period. The ATO will provide tools to estimate this value for taxpayers

These transitional arrangements also apply to legacy assets, including pre-CGT assets. Capital gains arising on pre-CGT assets before 1 July 2027 will remain exempt from CGT.

Owners of new builds will be able to choose either the CGT discount or cost base indexation (with the 30% minimum tax still applicable). New builds include dwellings constructed on vacant land, or where existing properties are demolished and replaced with a greater number of dwellings. Knock down rebuilds or substantial renovations are not considered new builds and therefore will not be eligible. A new build cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months.

Income support payment recipients (including Age Pension and JobSeeker payment recipients) will be exempt from the 30% minimum tax if they receive payment in the financial year in which they realise the capital gain.

Discretionary trusts to be taxed at minimum 30%

A minimum tax rate of 30% has been introduced on discretionary trusts from 1 July 2028. Currently discretionary trusts are not considered separate taxable entities. Broadly, it is the beneficiaries of discretionary trusts who are ultimately entitled to receive and retain trust income that are taxed on the net income of the trust. The trustee is then, generally, taxed on the balance (if any) of the net income (subject to certain exceptions). Trustees are also taxed if no beneficiaries are made presently entitled to trust income.

Under the new measure, trustees will pay a minimum tax of 30% (unless higher rates apply) on the taxable income of discretionary trusts from 1 July 2028. Beneficiaries (other than corporate beneficiaries) will receive non-refundable credits for any tax payable by the trustee.

Trustees will be required to calculate, report and pay the minimum tax, as well as to notify beneficiaries of their entitlements and associated tax credits. The mechanism for collecting the minimum tax will be subject to consultation but is expected to be consistent with established collection mechanisms.

The minimum tax will not be applicable to:

• Other types of trusts (e.g. unit trusts or widely-held trusts)
• Complying superannuation funds
• Special disability trusts
• Deceased estates
• Charitable trusts

Importantly, income from assets of discretionary testamentary trusts existing as at 7:30pm (AEST) on 12 May 2026 will be excluded from the minimum tax. Some other types of income such as primary production income, certain income relating to vulnerable minors and amounts to which non-resident withholding tax applies, will also be excluded.

Expanded rollover relief provisions will be available for three years from 1 July 2027 to support taxpayers that wish to restructure out of discretionary trusts to another entity type (such as a company or fixed trust).

Individuals

The key measures affecting individuals are:

• Negative gearing for residential property will be limited to new builds from 1 July 2027, with no change for existing arrangements
• Each working Australian taxpayer will receive a AUD 250 Working Australians Tax Offset from the 2027–28 income tax year
• The Medicare levy low-income thresholds for singles, families and seniors and pensioners will be increased by 2.9% from 1 July 2025
• The temporary restrictions on foreign ownership of housing will be extended, and Australia’s foreign investment framework will be strengthened
• The age-based uplift of private health insurance rebate (the PHI rebate) will be removed from 1 April 2027
• The global and domestic minimum tax legislation (Pillar 2) will be amended from 1 January 2026 to implement the side-by-side package agreed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on 5 January 2026

Negative gearing restricted to new builds from July 2027

Negative gearing for residential property will be limited to new builds from 1 July 2027. Broadly, where net losses arise as a result of deductible expenses associated with income-producing property exceeding the income earned from that property, negative gearing allows for this resulting net loss to be offset against other assessable income of the taxpayer.

Under the new measures, negative gearing will be limited to eligible new builds only. This means that investors in new builds will still be able to deduct rental losses against other assessable income, such as their salary. New builds include dwellings constructed on vacant land, or where existing properties are demolished and replaced with a greater number of dwellings.

Knock-down rebuilds or substantial renovations are not considered new builds and therefore will not be eligible for negative gearing.

A new build cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months.

The measure will apply to individuals, companies, partnerships and most trusts. Widely-held trusts (e.g. most managed investment trusts) and superannuation funds (including self-managed superannuation funds) will be excluded.

Losses incurred from established residential properties will only be deductible against rental income or capital gains arising from residential properties. Any excess losses will be able to be carried forward and offset against income from residential property in future years.

These changes will apply to any established residential properties acquired from 7:30pm (AEST) on 12 May 2026. Any residential properties acquired prior to this time (including any contracts entered into but not settled) will be grandfathered, and will therefore be exempt from the changes until disposed of. Residential properties acquired between 7:30pm (AEST) on 12 May 2026 and 30 June 2027 may be negatively geared during this period, but not from 1 July 2027.

Properties held in widely-held trusts and superannuation funds will be excluded from these measures, with exemptions for build-to-rent developments and private investors supporting government housing programs.

Changes to negative gearing only apply to residential properties. Commercial property and other asset classes, such as shares, will remain eligible for negative gearing. Exemptions to negative gearing will also be available for private investors who support government housing programs (through the provision of affordable housing).

New Working Australians Tax Offset from 2027–28

Each working Australian taxpayer will receive a AUD 250 Working Australians Tax Offset from the 2027–28 income tax year.

From 1 July 2027, the Working Australians Tax Offset (WATO) will provide a permanent annual tax offset for Australians for their income derived from work, such as wages and salaries and the business income of sole traders. It will increase the effective tax-free threshold for income derived from work by nearly AUD 1,800 to AUD 19,985 (or up to AUD 24,985 for workers eligible for the low income tax offset (LITO)). It will be paid automatically via workers’ tax returns at the end of the year.

The offset is in addition to the proposed AUD 1,000 instant tax deduction for resident individuals who earn income for work from 1 July 2026 and the legislated 2025–26 Budget measure to reduce the personal income tax rates for individuals from 1 July 2026 and 1 July 2027.

Medicare levy low-income thresholds to be increased

The Medicare levy low-income thresholds for singles, families and seniors and pensioners will be increased by 2.9% from 1 July 2025. The updated thresholds are as follows:

• Singles: increased from AUD 27,222 to AUD 28,011
• Family threshold: increased from AUD 45,907 to AUD 47,238
• Single seniors and pensioners: increased from AUD 43,020 to AUD 44,268
• Family threshold for seniors and pensioners: increased from AUD 59,886 to AUD 61,623
• Family income thresholds will increase by AUD 4,338 for each dependent child or student, up from AUD 4,216

Restrictions on foreign ownership of housing and strengthening the foreign investment framework

The temporary ban on foreign purchases of established residential dwellings will be extended by two years and three months until 30 June 2029. The ban, which was announced as a measure in the 2025–26 Budget, was originally implemented for two years from 1 April 2025. Current limited exceptions to the ban for purchases of established dwellings that support housing supply will continue. General exemptions from foreign investment screening will also continue to apply for purchases of established dwellings, including for permanent residents and New Zealand citizens.

Additionally, funding of AUD 47.5 million over four years from 2026–27 (and AUD 3.9 million per year ongoing) will be provided for the Treasury and the ATO to strengthen and streamline Australia’s foreign investment framework, including a new performance target to decide all low-risk applications within 30 days from 1 January 2027, removal of ineffective conditions on existing approvals and reforms to foreign investment laws and the Register of Foreign Ownership of Australian Assets.

Legislation will also be introduced to amend the Foreign Acquisitions and Takeovers Act 1975, the Foreign Acquisitions and Takeovers Regulation 2015 and the Foreign Acquisitions and Takeovers Fees Imposition Regulations 2020 to implement the foreign investment framework reforms.

Age-based uplift of private health insurance rebate to be removed

The age-based uplift of private health insurance rebate (the PHI rebate) will be removed from 1 April 2027.

Eligibility for pension supplement to be amended

Eligibility for the pension supplement will be amended, including:

• Extending payment of the full rate of pension supplement from six weeks to 12 weeks for recipients who are temporarily absent from Australia
• Ceasing the pension supplement for those recipients who are residing permanently overseas or who are temporarily absent from Australia for longer than 12 weeks

Business

The key measures affecting businesses are:

• Transition to a permanent 25% discount on FBT for certain electric vehicles
• Instant asset write-off of AUD 20,000 for small businesses has been extended permanently
• Companies with up to AUD 1 billion in turnover will be eligible to carry back tax losses for up to two years from 1 July 2026
• Small start-ups in their first two years of operation will be able to get a refund for tax losses capped to the value of tax remittances relating to employment from 1 July 2028
• Reforms have been announced to the R&D tax incentive from 1 July 2028
• The venture capital limited partnership (VCLP) and early stage venture capital limited partnership (ESVCLP) tax incentives will be expanded from 1 July 2027

Transitioning to a permanent 25% FBT discount for certain electric vehicles

From 1 April 2029, a permanent 25% discount on FBT will be available for all electric cars valued up to and including the fuel-efficient luxury car tax (LCT) threshold, implemented through a 15% rate in the FBT statutory formula. The following transitional arrangements will be adopted:

• All eligible electric cars will retain the FBT discount rate that was in place when the arrangement commenced
• All electric cars valued up to and including AUD 75,000 that are provided before 1 April 2029 will continue to be eligible for a 100% discount on FBT, implemented through a 0% rate in the FBT statutory formula
• Electric cars valued above AUD 75,000 and up to and including the fuel-efficient LCT threshold that are provided between 1 April 2027 and 1 April 2029 will be eligible for a 25% discount on FBT, implemented through a 15% rate in the FBT statutory formula

The existing 20% statutory rate will continue to apply for all other cars, including electric cars costing more than the fuel-efficient LCT threshold. Reportable fringe benefits will continue to be determined for eligible electric cars as if a 20% FBT statutory formula rate or cost basis method applied.

Small business depreciation, instant asset write-off of AUD 20,000 made permanent

The instant asset write-off threshold of AUD 20,000 for small businesses applying the simplified depreciation rules has been extended permanently from 1 July 2026.

Small businesses (aggregated annual turnover less than AUD 10 million) may choose to calculate capital allowances for depreciating assets under a simplified regime in Subdiv 328-D of ITAA 1997. Under these simplified depreciation rules, an immediate write-off applies for low-cost depreciating assets. A AUD 20,000 threshold currently applies for the immediate write-off, applicable to eligible assets costing less than AUD 20,000.

Assets valued at AUD 20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15% in the first income year and 30% each income year thereafter. The provisions that prevent small businesses from re-entering the simplified depreciation regime for five years if they opt out will be suspended until 30 June 2027.

Permanent two-year loss carry back rules introduced

From 1 July 2026 companies with aggregated annual global turnover of less than AUD 1 billion will be able to use their current year tax losses to claim a refund for taxes paid in the prior two income years.

The measure essentially re-introduces the loss carry back offset (previously introduced as a temporary measure which applied from the 2019–20 to 2022–23 income years) permanently for eligible companies and allows them to carry back tax losses and offset them against taxes paid up to two years earlier.

As with the previous temporary measure, the loss carry back tax offset will apply to revenue losses only and will be limited to the company’s franking account balance.

Loss refundability introduced for small start-ups

Small start-up companies that generate a tax loss in their first two years of operation will be able to utilise that loss to generate a refundable tax offset. The measure will apply for tax years commencing on or after 1 July 2028 to start-up companies with aggregated annual turnover of less than AUD 10 million.

Importantly, the offset will be limited to the value of fringe benefits tax and withholding tax on wages paid in respect of Australian employees in the loss year.

Reforms to R&D tax incentive announced

The Research and Development (R&D) Tax Incentive will be reformed to make it easier to use, increasing the incentive for new businesses to invest in R&D activities. From 1 July 2028, the measure proposes to:

• Increase the offset for experimental “core” R&D expenditure from 25% to 50% through a 4.5 percentage point increase in core R&D offset rates
• Remove the eligibility of supporting R&D expenditure for the R&D tax incentive
• Reduce the intensity threshold from 2% to 1.5%, enabling more firms to qualify for higher offset rates
• Allow greater access to the highest refundable tax offset for businesses younger than 10 years by increasing the turnover threshold from AUD 20 million to AUD 50 million, with an equivalent non-refundable offset available for eligible businesses older than 10 years
• Increase the maximum R&D tax incentive expenditure threshold from AUD 150 million to AUD 200 million
• Lift the minimum expenditure threshold from AUD 20,000 to AUD 50,000, with smaller R&D projects valued below AUD 50,000 required to be undertaken with a recognised research organisation to support quality research outcomes

A summary of R&D Tax Incentive (R&DTI) offset changes is set out below.

Venture capital tax incentives to be expanded

The venture capital limited partnership (VCLP) and early-stage venture capital limited partnership (ESVCLP) tax incentives will be expanded from 1 July 2027. The eligible venture capital investor program will be closed to new applications from 12 May 2026 7:30pm (AEST). From 1 July 2027:

• The VCLP cap on the asset size of the investee business at the time of investment will be increased from AUD 250 million to AUD 480 million
• The ESVCLP cap on the asset size of the investee business at the time of investment will be increased from AUD 50 million to AUD 80 million
• The ESVCLP tax incentive cap on the asset size of the investee business, at which investment returns can be fully tax exempt, will be increased from AUD 250 million to AUD 420 million
• The maximum fund size of ESVCLPs will be increased from AUD 200 million to AUD 270 million

The increases will apply to new and existing funds and to new investments they make, including where funds make further investments in businesses already held. ESVCLPs must remain in compliance with their existing investment plans or seek approval for a replacement plan.

OECD Pillar 2 side-by-side package to be implemented

The global and domestic minimum tax legislation will be amended from 1 January 2026 to implement the side-by-side package agreed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on 5 January 2026. The Inclusive Framework agreed to a side-by-side package on 5 January 2026 that included the following five key components:

• A series of simplification measures to reduce compliance burdens for multinational enterprises (MNEs) and tax authorities in calculating and reporting under the global minimum tax rules
• Introduction of a new targeted substance-based tax incentive safe harbour to align the treatment of tax incentives globally
• New safe harbours for MNE groups having an ultimate parent entity located in an eligible jurisdiction that meets minimum taxation requirements
• An evidence-based stocktake process to ensure a level playing field is maintained for all Inclusive Framework members
• Reinforcement of the objective that qualified domestic minimum top-up tax regimes remain a primary mechanism in the global minimum tax framework for ensuring the protection of local tax bases, particularly in developing countries

Australian legislation will be amended to implement the side-by-side package from 1 January 2026 to ensure Australia’s global minimum tax rules are consistent with those of other implementing jurisdictions.

Tax administration

The key tax administration measures are:

• Access to monthly reporting and payments as well as dynamic PAYG instalment calculations will be expanded for small and medium businesses from 1 July 2027
• Funding will be provided, and measures will be introduced, to protect and strengthen the tax system against fraud
• Funding will be provided to the ATO and other government organisations to meet the government’s commitments under the Digital ID Act 2024 and maintain the security and reliability of the government’s Digital ID System
• Reforms to harmonise state payroll tax administration frameworks will be explored as part of the government’s national competition policy (NCP)

Access to monthly business tax payments and dynamic calculations for small and medium businesses

Small and medium businesses will be able to choose to report and make business tax payments monthly from 1 July 2027. These businesses will also be able to use an ATO-approved calculation embedded in accounting software to dynamically calculate and vary their PAYG instalments on a monthly basis.

Interest charges levied on businesses that accidentally get their instalment variation incorrect when using ATO-approved calculators will be removed by the ATO.

Monthly reporting and payment of PAYG instalments will be mandatory for taxpayers with a demonstrated history of non-compliance. The ATO will be provided funding by the government to allow for expansion of the dynamic instalment calculation pilot.

Protecting and strengthening the tax system against fraud

The government will provide funding of AUD 86.3 million over four years from 1 July 2026 and AUD 9.7 million per year ongoing from 2030–31 to deliver Phase 2 of the Counter Fraud Strategy to modernise the prevention and detection of fraud in the tax and superannuation systems.

The proposal will enhance the ATO’s ability to detect and prevent fraud in real time, provide additional fraud protections for individuals and expand live monitoring of fraudulent account access to tax agents, business and for high-risk superannuation changes.

The ATO’s ability to combat fraud by tax agents and other intermediaries will also be strengthened. The ATO will be given powers to pause the recovery of tax debts of taxpayers who are victims of fraud by tax intermediaries, and waive those debts in appropriate circumstances, and to recover the debts from the tax intermediaries. Existing garnishee powers will also be expanded to include jointly held assets in circumstances where such arrangements are being used to frustrate recovery actions.

Options to harmonise payroll tax administration

Reforms to harmonise state payroll tax administration frameworks will be explored as part of the government’s national competition policy (NCP), in its efforts to boost productivity and reduce red tape.

GST and other measures

The following GST and other measures were announced:

• Updates to the Deductible Gift Recipients list
• Access to refunds of indirect tax under the Indirect Tax Concession Scheme has been extended
• More nuisance tariffs will be abolished from 1 July 2026
• The duty exemption for goods imported from Ukraine will be extended for a further two years to 3 July 2028
• Funding will be provided, and measures will be introduced to combat the illicit tobacco market

Building on the removal of 457 nuisance tariffs in July 2024, a second tranche of 497 nuisance tariffs will be abolished from 1 July 2026. This measure will eliminate tariffs on a wide range of imported goods including wine glasses, tyres, air conditioners, margarine and bitumen.

The government will also strengthen and enhance law enforcement powers to investigate illicit tobacco-related offending through amendments to Treasury and Home Affairs portfolio legislation. These include increased monetary and imprisonment penalties for illicit tobacco offences, nationally consistent protective order power for restraining order applications, and expanded law enforcement powers to target proceeds of crime, unexplained wealth and tainted property.