2026-27 Federal Budget

The Federal Treasurer, Dr Jim Chalmers, handed down the 2026–27 Federal Budget on 12 May 2026.

The government is proposing a tax reform package with 3 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.

Details of the highly anticipated initiatives to improve housing affordability have emerged. While negative gearing for residential property will be limited to new builds from 2027–28, all existing investments made before 7:30 pm AEST on 12 May 2026 will be grandfathered. As for capital gains tax (CGT), the 50% discount will be replaced with cost base indexation from 1 July 2027, with a minimum 30% tax rate on realised gains. This will apply to all CGT assets, including pre-CGT assets, except new builds. It will be prospective, with gains accrued on existing investments prior to 1 July 2027 to retain the 50% discount.

Other notable measures include those relating to discretionary trusts, a new tax offset for working Australians and the gradual reduction of the Fringe Benefits Tax (FBT) discount for affordable electric vehicles. In particular, discretionary trusts will be taxed at 30% from 1 July 2028. With trusts historically not being taxed as separate entities, this measure will have significant implications for individuals and businesses alike. To ease the cost-of-living pressures, an annual working Australian tax offset of $250 is proposed for eligible Australian workers. The current FBT discount for affordable electric vehicles will transition to a permanent 25% discount progressively over 3 phases.

The Budget measures are in addition 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 $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.

Income tax

• The 50% CGT discount will be replaced with cost base indexation for all CGT assets (except new homes) from 1 July 2027, with a 30% minimum tax on realised gains also applying from that date.
• A minimum tax rate of 30% will be payable by trustees of discretionary trusts from 1 July 2028.

Individual

• Cutting taxes for working Australians – WATO
• Making tax easier for workers – instant tax deduction
• Individual Rates
• Medicare levy low-income thresholds to be increased
• Negative Gearing

Business

• Transitioning to a permanent 25% FBT discount for certain electric vehicles
• Small business depreciation — instant asset write-off of $20,000 made permanent
• Permanent 2-year loss carry back rules introduced
• Loss refundability introduced for small start-ups
• Reforms to R&D tax incentive announced
• OECD Pillar 2 side-by-side package to be implemented

Tax administration

• 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 from 2026–27 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).

Not-for-profits

• Deductible gift recipients list to be updated.

Income Tax

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, which was replaced in September 1999 with the CGT discount, 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 in 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.

Source: Budget Paper No 2, p 21; Prime Minister, Treasurer and Minister for Finance, Tax reform for workers, businesses and future generations [joint press release], Tax Explainer – Negative gearing and capital gains tax reform, 12 May 2026.

Discretionary trusts to be taxed at a minimum 30%

A minimum tax rate of 30% has been introduced on discretionary trusts from 1 July 2028.

Currently, under Australian taxation laws, 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 (as defined for income tax purposes). 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. Trustees that receive franked dividends will be required to use their franking credits to pay the minimum tax.

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, and
• 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 3 years from 1 July 2027 to support taxpayers who wish to restructure out of discretionary trusts to another entity type (such as a company or fixed trust).

Source: Budget Paper No 2, p 22; Prime Minister, Treasurer and Minister for Finance, Tax reform for workers, businesses and future generations, [joint press release]; Tax Explainer – Minimum tax on discretionary trusts, 12 May 2026.

Individual

Cutting taxes for working Australians – WATO

The Federal Budget 2026–27 announced a new Working Australians Tax Offset (WATO), which is proposed to apply from the 2027–28 financial year. Under the current announcement, eligible taxpayers who derive employment or business income may receive a tax offset of up to $250 per annum. As a tax offset, the measure will reduce an individual’s income tax liability and may increase their tax refund where sufficient PAYG tax has been withheld.

The WATO will increase the effective tax-free threshold for income derived from work by nearly $1,800 to $19,985 (or up to $24,985 for workers eligible for the low-income tax offset (LITO).

The Government has indicated that the offset is intended to provide additional cost-of-living relief for working Australians and may apply broadly without specific income thresholds, however detailed legislation and ATO guidance are still pending.

Source: Budget Paper No 2, pp 16–17; Prime Minister, Treasurer and Minister of Finance [joint press release] “Tax reform for workers, businesses and future generations”, 12 May 2026; Tax explainer – New tax cuts for Australian workers.

Making tax easier for workers – instant tax deduction

The Budget announced a proposed $1,000 instant tax deduction for eligible individual taxpayers from 1 July 2026. Under the proposal, employees and other eligible taxpayers will be able to claim a standard deduction of $1,000 for work-related expenses without the need to retain receipts or substantiate individual claims. Taxpayers whose actual deductible expenses exceed $1,000 may still choose to claim their actual expenses under the existing substantiation rules.

The measure is intended to simplify tax return preparation and reduce compliance costs for individuals with modest work-related deductions. At this stage, the proposal has not yet been legislated and further details, including eligibility criteria and implementation rules, are expected following the release of draft legislation and ATO guidance.

Source: Budget Paper No 2, pp 16–17; Prime Minister, Treasurer and Minister of Finance [joint press release] “Tax reform for workers, businesses and future generations”, 12 May 2026; Tax explainer – New tax cuts for Australian workers.

Individual Rates

The Government believes that the combined benefit to a worker on average earnings of the 3 tax cuts, new tax offset and instant tax deduction will be up to $2,816 from 2027-28 (or $54 per week).

Resident tax rate changes – summary

Taxable income ($)	2024-25 & 2025-26	2026-27	2027-28
0 – 18,200	0%	0%	0%
18,201 – 45,000	16%	15%	14%
45,001 – 135,000	30%	30%	30%
135,001 – 190,000	37%	37%	37%
190,001+	45%	45%	45%

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 threshold for singles will be increased from $27,222 to $28,011. The family threshold will be increased from $45,907 to $47,238. For single seniors and pensioners, the threshold will be increased from $43,020 to $44,268. The family threshold for seniors and pensioners will be increased from $59,886 to $61,623. The family income thresholds will increase by $4,338 for each dependent child or student, up from $4,216.

Source: Budget Paper No 2, p 13.

Negative Gearing

The Government significant proposed changes to the negative gearing rules for residential property investors. Under the proposed reforms, from 1 July 2027, negative gearing concessions for newly acquired residential investment properties will generally be limited to newly constructed properties, while established residential properties acquired after Budget night will no longer allow rental losses to be offset against salary and other assessable income. Instead, losses relating to these properties may only be carried forward to offset future rental income or capital gains from the investment. Importantly, existing investment properties held before the commencement date are expected to be grandfathered under the current rules.

However, existing residential property owners can heave a sigh of relief as grandfathering provisions will apply to owners of existing investment properties as at 7:30pm AEST 23 Federal Budget 2026-27 on 12 May 2026 until they are sold. Residential investment properties purchased between the announcement and 30 June 2027 may be negatively geared during that period, but not from 1 July 2027.

The Government has stated that the reforms are intended to improve housing affordability and encourage investment into new housing supply. At this stage, the measures remain proposed only and further legislative detail and transitional rules are still to be released.

New builds comparison table:

Eligible new build	Not an eligible new build
A newly constructed apartment bought off-the-plan.	An established property that has recently been extended to add additional bedrooms.
A duplex constructed through a knock-down rebuild replacing a single, free-standing house.	A free-standing house constructed through a knock-down rebuild replacing an older, smaller free-standing house.
Any residential construction on previously vacant land.	A granny flat built adjacent to an established property that is not eligible for negative gearing.
A newly built property which is occupied for less than 12 months before being first sold.	A newly built property which is occupied for more than 12 months before being sold to a subsequent investor.

Source: Budget Paper No 2, p 21; Prime Minister, Treasurer and Minister for Finance, Tax reform for workers, businesses and future generations [joint press release], Tax Explainer – Negative gearing and capital gains tax reform, 12 May 2026.

Business

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

Australia will transition to a permanent 25% discount on FBT for certain electric vehicles (EVs).

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 $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, and
• electric cars valued above $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.

Source: Budget Paper No 2, p 11; Treasurer and Minister for Climate Change and Energy, Fairer tax treatment to encourage affordable EVs, press release, 5 May 2026.

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

The instant asset write-off threshold of $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 $10 million) may choose to calculate capital allowances for depreciating assets under a simplified regime. Under these simplified depreciation rules, an immediate write-off applies for low-cost depreciating assets. A $20,000 threshold currently applies for the immediate write-off, applicable to eligible assets costing less than $20,000.

Assets valued at $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 5 years if they opt out will be suspended until 30 June 2027.

Source: Budget Paper No 2, p 20; Treasurer and Minister for Small Business, Backing small businesses with tax relief [joint press release], 12 May 2026.

Permanent 2-year loss carry back rules introduced

From 1 July 2026 companies with aggregated annual global turnover of less than $1 billion will be able to use their current year tax losses to claim a refund for taxes paid in the prior 2 income years.

The loss carry back tax offset was a temporary measure which applied from the 2019−20 to 2022−23 income years. Broadly, it allowed certain eligible companies to choose to carry back income tax losses incurred in those specific income years and apply them against their taxed profits in a previous income year. The benefit generated by this loss carry back was received in the form of a refundable tax offset (called the loss carry back tax offset). The offset effectively represented the tax that the company would have saved if it had been able to deduct that loss in the earlier year using the loss year tax rate.

The measure essentially re-introduces the loss carry back offset permanently for eligible companies and allows them to carry back tax losses and offset them against taxes paid up to 2 years earlier.  The previous measure had been available to companies with an aggregated turnover of less than $5 billion.

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.

The ATO will be responsible for implementing and administering this measure.

Source: Budget Paper No 2, pp 19-20; Prime Minister, Treasurer and Minister for Finance, Tax reform for workers, businesses and future generations, [joint press release], 12 May 2026; Australian Government Small Business Statement.

Loss refundability introduced for small start-ups

Small start-up companies that generate a tax loss in their first 2 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 $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.

The ATO will be responsible for implementing and administering this measure.

Source: Budget Paper No 2, pp 19-20; Prime Minister, Treasurer and Minister for Finance, Tax reform for workers, businesses and future generations [joint press release], 12 May 2026; Australian Government Small Business Statement.

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 $20 million to $50 million, with an equivalent non-refundable offset available for eligible businesses older than 10 years
• lift the maximum R&D tax incentive expenditure threshold from $150 million to $200 million, and
• lift the minimum expenditure threshold from $20,000 to $50,000, with smaller R&D projects valued below $50,000 required to be undertaken with a recognised research organisation to support quality research outcomes.

The ATO will be responsible for implementing and administering this measure.

Source: Budget Paper No 2, p 17-18; Treasurer and Minister for Industry and Innovation, A budget that backs innovation and investment [joint press release], 12 May 2026.

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 global and domestic minimum tax law was implemented in Australia by the Taxation (Multinational — Global and Domestic Minimum Tax) Act 2024, in line with Pillar Two of the Two-Pillar Solution of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) (the Inclusive Framework) to address tax challenges arising from the digitalisation of the economy.

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.

Source: Budget Paper No 2, p 12.

Not-for-profits

Deductible gift recipients list to be updated

The list of specifically listed deductible gift recipients (DGRs) will be updated to list the following organisations as DGRs for gifts received after 30 June 2026 and before 1 July 2031:

• CEW Bean Foundation
• Council of First Nations Ltd
• Hakoah Club Ltd (for gifts received after 30 June 2025 and subject to maintaining tax exempt status as a not‑for‑profit sporting organisation)
• Jewish Education Foundation (Vic) Ltd
• Sydney Harbour Federation Trust
• Sydney Harbour Foundation Limited, and
• Virtual War Memorial Limited.

The Jewish Community Foundation and Australian Jewish Funders have been named in a ministerial declaration, enabling them to seek DGR endorsement as community charities with the ATO and provide relief to the Jewish community in the aftermath of the terrorist attack at Bondi Beach on 14 December 2025.

Further, the ministerial declaration requirement will be removed from the community charity DGR process, reducing red tape for eligible community charities by removing a step in the endorsement process.

Source: Budget Paper No 2, p 15-16

Tax Administration

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.

Source: Budget Paper No 2, p 20; Prime Minister, Treasurer and Minister for Finance, Tax reform for workers, businesses and future generations, [joint press release], 12 May 2026; Factsheet: Backing small business to grow, compete and build resilience.

Protecting and strengthening the tax system against fraud

The government will provide funding of $86.3 million over 4 years from 1 July 2026 and $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.

Further targeted exceptions to tax secrecy and enhancements to tax regulators’ information‑gathering powers to support integrity, compliance and effective administration of the tax system will also be progressed.

The ATO will also undertake additional targeted compliance activities over the 2 years from 2026–27 to further address fraud in the system, including in relation to the R&D Tax Incentive.

Source: Budget Paper No 2, p 14.

Streamlining regulatory systems

Funding will be provided over 2 years from 2026–27 to streamline regulatory systems and secure access to data. Legislation will also be introduced to improve regulation in the financial sector.

Funding initiatives will be provided to streamline regulator systems and secure access to data. These include:

• $136.1 million over 2 years from 2026–27 to complete the second tranche of stabilisation and uplift of Australia’s business registers, including synchronising director information with the Australian Charities and Not‑for Profits Commission’s Charities Register, linking Director IDs to the Companies Register, uplifting Australian Business Number (ABN) authentication and completing the transition of ABN and superannuation lookup functions to the ATO
• $62.0 million over 2 years from 2026–27 to extend the operation and participation in the Consumer Data Right to continue supporting Australian consumers and businesses and to explore the potential to enable taxpayers to share certain ATO‑held data through the Consumer Data Right.

Legislation will also be introduced to modernise, simplify and improve regulation in the financial sector to reduce unnecessary reporting and disclosure requirements and simplify financial system frameworks.

For superannuation, ASIC instruments will be legislated to address unnecessary disclosure requirements and to align portfolio holdings disclosure obligations for internally managed private debt with externally managed private debt.

The government’s modernising business communications agenda will be strengthened. This includes updating laws that may prevent businesses from keeping records electronically, allowing ASIC to update forms to streamline communication with businesses and individuals, and allowing the Australian Small Business and Family Enterprise Ombudsman to better use technology to communicate with the public. This will give businesses greater flexibility in meeting their record-keeping obligations under the superannuation and corporations laws.

In addition, administrative burden from the financial accountability regime will be reduced. Routine and low-value notifications by regulated entities will be reduced by not requiring reporting of accountability statements and maps, removing the need to report low-value breaches, providing more time to register accountable persons, and aligning terminology and timing.

This measure builds on the 2025–26 Budget measure titled Treasury Portfolio – additional resourcing.

Source: Budget Paper No 2, pp 139–140; Budget Factsheet — Whole-of-Government Regulatory Reform Agenda.

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.

Source: Budget Factsheet — Whole-of-Government Regulatory Reform Agenda, p 5; Budget Factsheet — Productivity Package, p 2

Disclaimer: The above information is general in nature and does not take into account your individual circumstances, objectives, or needs. Before taking any action based on this information, please reach out to your dedicated Walker Wayland adviser for tailored advice specific to your situation.