Reforming capital gains tax

Effective date: 1 July 2027

From 1 July 2027, the 50% CGT discount will be replaced by cost base indexation for asset held for more than 12 months. In addition, a 30% minimum tax will apply to net capital gains. The Government confirmed that these changes will apply to all CGT assets (including property and shares) and will also apply to pre-1985 CGT assets, held by individuals, trusts and partnerships.

The Government confirmed indexation will be calculated using Consume Price Indexation (CPI) in a similar way to rules that previously applied between 1985 and 1999.

Note: Indexation is only available if the asset is held for at least 12 months. Capital gains accrued from 1 July 2027 is taxed at a minimum of 30% (see below) unless an exemption exists.

Minimum 30% tax on capital gains

A minimum tax rate of 30% will apply to real capital gains accrued from 1 July 2027.

An exemption applies for people receiving a means-tested income support payment, such as Age Pension or JobSeeker Payment, in the income year the gain is realised. In these cases, the capital gain would continue to be taxed at the person’s marginal tax rate than being subject to the 30% minimum tax.

Exclusions

A number of exclusions apply to these changes, including:

• Companies and super funds are not impacted by these changes and gains continue to be taxed under current rules
• No changes to the main residence exemption and small business CGT concessions
• Investors in newly built residential property can choose between retaining the current 50% CGT discount or applying the new CPI-indexation method with the minimum 30% tax

Reforming negative gearing

Effective date: 1 July 2027

The Government has announced it will limit negative gearing for residential property to new builds. From 1 July 2027, losses from established residential properties will only be deductible against rental income or the capital gains from residential properties. Excess losses will be carried forward and are able to be offset against residential property income in future years.

These changes will apply to individuals, partnerships, companies and most trusts.

Transitional rules

For established residential properties:

• Properties held at announcement (including contracts entered into but not yet settled) will be exempt from the changes until disposed of
• Properties purchased between the announcement and 30 June 2027 may be negatively geared during this period, but not from 1 July 2027
• Properties purchased from 1 July 2027 will not be able to be negatively geared

Exemptions

New builds can continue to be negatively geared before and after 1 July 2027.

New build residential properties 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 that do not increase supply will not qualify as new build residential properties.

The Government confirmed properties in widely held trusts (for example, most managed investment trusts) and superannuation funds will be excluded.

Introducing a minimum tax on discretionary trusts

Effective date: 1 July 2028

The Government will introduce a 30% minimum tax rate on the taxable income of discretionary trusts. The tax will be paid by the trustee of the trust as it controls the distributions. Beneficiaries will then need to declare their trust income in their tax return, but beneficiaries, other than corporate beneficiaries, will then receive a non-refundable tax credit for the 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.

To ensure the use of refundable franking credits does not undermine the minimum tax, the Government also confirmed:

• Trustees that receive franked dividends will be required to use their franking credits to pay the minimum tax; and
• Corporate beneficiaries will not receive non-refundable credits for tax payable by the trustee, to avoid them converting these to refundable franking credits to avoid the minimum tax.

Exemptions

The Government has confirmed the minimum tax will not apply to other types of trust such as:

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

Tax relief measures

Two new tax relief measures have been introduced in this budget for working Australians, in addition to the tax cuts already legislated from 2024–25. These three changes combined aim to provide cost-of-living relief and will be applied in various stages until 2027-28.

Working Australians Tax Offset (WATO)

Applicable from 1 July 2027, a new permanent tax offset of up to $250 per financial year will be available for income earned from work such as wages, salaries and business income of sole traders. WATO will be applied automatically on assessment after the tax return for the relevant financial year is lodged.

Instant tax deduction of $1,000

Applicable from 1 July 2026, a new instant tax deduction of up to $1,000 will be introduced that can be claimed on work related expenses without the need to itemise or keep records of receipts. If total work-related expenses exceed $1,000, normal substantiation rules apply. Charitable donations, union and professional association membership fees and other non-work related deductions can still be claimed on top of the instant tax deduction.

Note: Unlike a tax offset that directly reduces the tax liability, a tax deduction reduces the amount of assessable income.

Tax cuts already legislated

From 1 July 2026

Tax cuts for all taxpayers commence 1 July 2026, by reducing the lowest marginal tax rate for taxable income between $18,201 and $45,000 as follows:

• From 1 July 2026, the 16% rate will be reduced to 15%.
• From 1 July 2027, the 15% rate will be reduced further to 14%.

This will provide a tax cut of up to $268 in 2026–27 and up to $536 in 2027-28, relative to current tax settings.

New marginal tax rates for individuals:

The reduction in the lowest marginal rate leads to an increase in several tax thresholds:

• Seniors and Pensioners Tax Offset (SAPTO) income shading-out threshold:
  • For a single person, this threshold will increase from $34,919 to $36,033 in 2026-27, and to $37,307 in 2027-28.
  • For each member of a couple, this threshold will increase from $30,994 to $31,847 – in 2026-27, and to $32,821 in 2027-28.

• Effective tax-free threshold:
  • For a single person or each member of a couple eligible to receive the Low Income Tax Offset (LITO) but not SAPTO, this threshold will increase from $22,575 to $22,866 in 2026-27 and to $23,200 in 2027-28.
  • For a single person eligible to receive both LITO and SAPTO, this threshold will increase from $35,813 to $36,960 in 2026-27, and to $38,147 in 2027-28.
  • For each member of a couple eligible to receive both LITO and SAPTO, this threshold will increase from $31,888 to $32,773 in 2026-27, and to $33,783 in 2027-28.

Effective tax-free threshold – proposed Working Australians Tax Offset (WATO):

The Government has proposed a $250 tax offset for income earned by Australian workers from 1 July 2027.  If legislated, clients eligible for WATO will have an increased effective tax free threshold for 2027-28.

The following table compares effective tax-free thresholds in 2027-28 (for those eligible or not eligible for WATO):