Capital Gains Tax – the end of the 50% CGT discount

The Government has announced one of the most significant tax reforms in decades (perhaps the biggest since GST).

From 1 July 2027, the general 50% CGT discount will be replaced with cost base indexation (for assets held for more than 12 months). The new regime will also include a 30% minimum tax on net capital gains.

Importantly, this is not just a residential property measure. The changes will apply to all CGT assets, including pre-1985 CGT assets. This means the measure is relevant to shares, units, residential property, commercial property, goodwill, partnership interests and other private business assets.

The only apparent concession is for new residential property. Investors in new residential properties will be able to choose between the existing 50% CGT discount or the new cost base indexation/minimum tax model. Income support payment recipients, including Age Pension recipients, will be exempt from the 30% minimum tax.

Existing investments - transitional arrangements

The Budget Papers state that the 50% CGT discount will continue to apply to gains arising before 1 July 2027. Given the commencement date, we expect many taxpayers will consider bringing forward transactions before 1 July 2027.  

The Budget Papers also state that the transitional arrangements will limit the impact on existing investments by ensuring the changes only apply to gains arising on or after 1 July 2027. What that actually means in practice is unclear, and presumably legislation will be required to explain how to divide a gain between the pre-1 July 2027 period and the post-1 July 2027 period. Possible methods might be a time-based approach (e.g. based on the number of days held pre and post 1 July 2027) or a market value-based approach (e.g. based on the market value as at 1 July 2027).

The Budget wording suggests that the Government intends to protect gains accrued before 1 July 2027. However, the detail is not clear, including whether taxpayers will need valuations as at 1 July 2027.

No special relief for start-ups, employee equity or business owners

The Budget Papers do not announce any specific carve-out for start-ups, employee equity arrangements or business owners generally.

A founder selling shares in a start-up, an employee selling shares acquired under an employee share scheme, or a business owner selling shares in a private company may all be affected (unless another concession applies). In many of these situations, indexation will not materially assist given the asset in question may have a very low cost base.

One immediately apparent implication is that where relevant, the small business CGT concessions will become even more important. However, those concessions are technical and not always available. Even for taxpayers who do qualify for the small business CGT concessions, those concessions may not entirely eliminate capital gains (unless the 15-year exemption applies).

Pre-CGT assets – the holy grail is about to lose its shine

Pre-CGT status has long been one of the rarest and most valuable outcomes in Australian tax law (often treated as the “holy grail” of tax outcomes).

Assets acquired before 20 September 1985 are generally outside the CGT regime. Genuinely pre-CGT assets are difficult to find and even more difficult to preserve (due to a variety of integrity measures – most notably Division 149 and CGT event K6).

The Budget announcement states that capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT. For pre-CGT assets that continue to be held after that date, the transitional arrangements suggest that gains arising before 1 July 2027 should remain outside the CGT regime, but that any future growth after 1 July 2027 will be brought within the new CGT regime.

It is not clear from the Budget announcement how the post-1 July 2027 gain will be calculated. It would appear logical that pre-CGT assets will need to have their cost base uplifted to market value as at 1 July 2027, and taxpayers holding pre-CGT assets will need valuations as at 1 July 2027.

Over time, the change should reduce some of the importance of various rules that currently protect pre-CGT status, including rollover rules and integrity rules dealing with changes in underlying ownership.

Non-residents

Non-residents are not eligible to apply the general 50% CGT discount (since 8 May 2012). While the Budget Papers do not refer to non-residents, interestingly it would appear that a non-resident's CGT position may actually improve given the new indexation measures.

The 30% minimum tax – how will it work?

The Budget Papers refer to a 30% minimum tax on net capital gains, but the precise operation of this rule is not clear. Given the net capital gains form part of a taxpayer’s assessable income, it may be that this rule will limit the ability to use tax losses (not capital losses), the tax-free threshold or other tax offsets from being used to shelter capital gains.

Negative gearing – restricted to ‘eligible new builds’

From 1 July 2027, negative gearing for residential property will be limited to investments in an ‘eligible new build’. For established residential properties acquired after 7:30pm AEST on 12 May 2026, investors will no longer be able to deduct net rental losses against salary and wages, business income, dividends or other non-residential property income.

Instead, losses from affected properties will be quarantined. Investors will only be able to offset those losses against residential rental income or capital gains from residential property. Excess losses will be carried forward and may be applied against residential property income or residential property capital gains in a later year.

Importantly, existing investments will be fully grandfathered. The measure will not apply to established residential properties acquired before 7:30pm AEST on 12 May 2026. This includes properties where the parties entered into a contract before that time, even if settlement occurs later. The existing rules will continue to apply to those properties until the owner disposes of them.

The key carve out is for eligible new builds. The Government intends this approach to direct the tax benefit towards investment that increases housing stock, rather than investment in existing dwellings. The Budget Papers use the term ‘eligible new build’, however, it is not immediately clear what this term refers to. Investors will need to review the final rules carefully to determine which types of residential projects qualify.

The Government will also carve out properties held through widely held trusts and superannuation funds. Targeted exemptions will also apply for build-to-rent developments and private investors who support government housing programs.

Discretionary trusts - 30% minimum tax – Is the death knell for trusts?

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

The measure will not apply to fixed trusts, widely held trusts, fixed testamentary trusts, complying super funds, special disability trusts, deceased estates or charitable trusts. Certain income will also be excluded, including primary production income, certain income for vulnerable minors, income subject to non-resident withholding tax, and income from assets of discretionary testamentary trusts existing at announcement.

The imposition of a minimum tax on discretionary trusts has been subject to debate over several decades, with the Australian Government having floated the introduction of such a tax in the past. This is a significant change which will fundamentally alter how small businesses and private individuals structure their affairs. Indeed, one must question the continued utility of using a trust to carry on a business or to hold assets, given the rate of trust taxation will now equal or exceed the rates paid by companies (particularly for companies which are base rate entities and pay tax at 25%).

Interestingly, the Government will provide expanded rollover relief for three years from 1 July 2027 to help small businesses and others restructure out of discretionary trusts into another entity type, such as a company or fixed trust. Together with the 50% discount CGT changes, this is a clear sign that the Government expects taxpayers to abandon the use of trust structures and is prepared to help facilitate that transition.

Trusts may still be useful for asset protection or for providing flexibility in how income is distributed. It is therefore important for taxpayers to think carefully about their existing trust structures and not be too hasty to abandon them as they may serve other benefits beyond tax planning.

As an aside, we note that this measure may have several unexpected benefits. For example, with a minimum 30% tax rate on trusts, integrity measures such as section 100A, Family Trust Distribution Tax and the Personal Services Income rules may become less relevant. However, there are no specific announcements on any of these measures (including known issues with Family Trust Distribution Tax).

Major R&D tax incentive reforms from 1 July 2028

From 1 July 2028, significant reforms will be made to the Research and Development Tax Incentive (R&DTI), intended to simplify the regime and better target support towards businesses undertaking substantive core R&D activities.

In particular:

1. supporting R&D expenditure will no longer be eligible for the R&DT. This is a significant narrowing of the regime, as claimants will only receive support for expenditure directly referable to core R&D activities. This change may materially reduce the value of claims for businesses whose R&D projects involve substantial ancillary or supporting work, even where that work is connected to a broader R&D project. This change will make the distinction between core and supporting R&D more important. Claimants should review their current R&D claim methodology to identify expenditure currently treated as supporting R&D and assess whether it can properly be characterised as core R&D under the reformed rules.
2. the Government will increase the premium component of the R&D tax offset by 4.5 percentage points. For refundable claimants, the premium will increase from 18.5% to 23%. For non-refundable claimants, the premium will increase from 8.5% to 13% for R&D expenditure up to the intensity threshold, and from 16.5% to 21% for R&D expenditure above the intensity threshold. This will increase the premium component for core R&D expenditure by around 25% to 50%, depending on the claimant’s applicable offset rate.
3. the R&D intensity threshold will be reduced from 2% to 1.5%. This reduction will enable more businesses with substantial core R&D activity to access higher offset rates. However, the benefit of the lower threshold may be partly offset for some claimants by the proposed exclusion of supporting R&D expenditure, as only core R&D expenditure will be relevant under the reformed rules.
4. the turnover threshold for the highest offset rate will increase from $20 million to $50 million and refundability will be limited to companies under 10 years old. This change will allow larger scale-up businesses to access the refundable R&D tax offset for longer (subject to the 10-year age-restriction) and will benefit R&D-intensive companies that are growing revenue but are not yet profitable or cash-flow positive. However, older companies with turnover below $50 million will only be eligible for the higher offset rate on a non-refundable basis, reducing the working capital benefit of the incentive.
5. the maximum R&DTI expenditure threshold will increase from $150 million to $200 million, expanding the cap for larger R&D claimants. This will allow large R&D-intensive businesses to claim concessional R&DTI treatment on a greater amount of eligible expenditure. The change is likely to benefit companies with substantial Australian R&D programs, particularly those in sectors with high development costs, such as advanced manufacturing, biotechnology, clean energy, defence and mining technology. However, the benefit will still depend on whether the expenditure qualifies as core R&D expenditure, given supporting R&D expenditure will no longer be eligible.
6. the minimum expenditure threshold will increase from $20,000 to $50,000. R&D activities below this amount will only be eligible if undertaken with a registered Research Service Provider or Cooperative Research Centre. This will narrow access to the R&DTI for smaller claims and may exclude businesses with lower-value or early-stage R&D activities unless they work with an approved external provider. The change appears directed at improving assurance and reducing compliance risks for smaller claims but may increase costs or administrative complexity for start-ups and smaller businesses seeking to access the incentive.

Overall, the reforms are intended to better target the R&DTI towards businesses undertaking genuine core R&D activity, with some favourable changes for growing SMEs and scale-ups. In particular, SMEs with turnover between $20 million and $50 million may benefit from continued access to the higher refundable offset, provided they satisfy the proposed 10-year age limit.

However, the reforms may also make the R&DTI harder to access for some SMEs. The removal of supporting R&D expenditure, the higher $50,000 minimum expenditure threshold, and the age limit on refundability could reduce the value of claims or affect cash-flow planning. SMEs should review their R&D activities, expenditure classifications and supporting records before the changes commence to understand whether their current claims will remain eligible.

The reforms form part of the Government’s response to the Ambitious Australia: Strategic Examination of Research and Development Final Report and reflect the report’s recommended shift towards a more targeted, growth-oriented R&D system.

Electric vehicle FBT concessions scaled back

From 1 April 2029, a permanent 25% FBT discount will be available for electric cars valued up to and including the fuel-efficient luxury car tax threshold ($91,387 for the 2025-26 income year). This will be implemented by applying a 15% statutory formula rate, rather than the standard 20% statutory rate.

Transitional arrangements will apply. In particular:

1. all eligible electric cars will retain the FBT discount rate that was in place when the arrangement commenced. Employers should take care when varying existing arrangements, as changes that constitute a new arrangement could affect the applicable discount rate under the transitional rules;
2. electric cars valued up to and including $75,000 and provided before 1 April 2029 will continue to be eligible for a 100% discount on FBT. This will be implemented through a 0% statutory formula rate, preserving the current full concession for eligible lower-value electric cars provided before that date; and
3. electric cars valued above $75,000 and up to the fuel-efficient luxury car tax threshold, and provided between 1 April 2027 and 1 April 2029, will receive a 25% FBT discount. This will be implemented through the 15% statutory formula rate.

The existing 20% statutory rate will continue to apply to all other cars, including electric cars costing more than the fuel-efficient luxury car tax threshold.

Reportable fringe benefits for eligible electric cars will continue to be calculated as if the 20% statutory formula rate or obasis method applied. This means employees may still have reportable fringe benefits amounts for these vehicles, even where concessional FBT treatment applies.

Overall, the measure preserves favourable treatment for many electric vehicles, particularly lower-value vehicles provided before 1 April 2029, while reducing the generosity of the concession over time. Employers offering electric vehicles through salary packaging or novated lease arrangements should review vehicle values, commencement dates and FBT treatment when structuring arrangements.

New loss measures (carry back and tax offset)

The Budget returns loss carry-back for companies and introduces a separate loss refundability measure for small start-up companies.

For tax years commencing on or after 1 July 2026, companies with aggregated annual global turnover of less than $1 billion will be able to carry back a tax loss and offset it against tax paid up to two years earlier. Loss carry-back will apply to revenue losses only and will be limited by the company’s franking account balance.

This is broadly similar in concept to the COVID-era loss carry-back rules, which applied to losses made in the 2019–20 to 2022–23 income years, but with a lower turnover threshold ($1 billion rather than $5 billion). It should provide useful cash flow relief for companies that have recently paid tax but then suffer a trading loss, particularly businesses exposed to cyclical conditions, project delays, customer insolvency or working capital shocks. The measure only applies to companies (and not trusts, partnerships or individuals).

For tax years commencing on or after 1 July 2028, “small start-up companies” with aggregated annual turnover of less than $10 million that generate a tax loss in their first two years of operation will be able to use that loss to generate a refundable tax offset. The offset will be capped by the value of fringe benefits tax and withholding tax on wages paid in respect of Australian employees in the loss year. Given that the measure is capped to essentially the tax paid on employment income, the measure appears to be targeted at small businesses with employees, rather than small businesses at large.

$20,000 instant asset write-off made permanent

From 1 July 2026, the $20,000 instant asset write-off (IAWO) will be made permanent for small businesses with turnover of up to $10 million. Assets costing $20,000 or more will continue to be dealt with under the small business simplified depreciation pool. The measure is estimated to reduce receipts by $815 million over five years.

In recent years, the IAWO has operated less as a simple depreciation concession and more as a temporary cash-flow lever, with changing thresholds, repeated extensions and the broader COVID-era temporary full expensing rules. That has made the concession familiar, but also uncertain, particularly where businesses have had to wait for Budget announcements or late legislative amendments to confirm the rules applying for an income year.

Making the IAWO permanent should give small businesses a more stable basis for ordinary asset purchasing decisions.

$1,000 minimum tax deduction

From 1 July 2026, Australian tax residents who earn work income will be able to claim a minimum deduction of up to $1,000 for work-related expenses.

The measure is aimed at taxpayers with modest work-related expense claims. Eligible individuals with work-related expenses below $1,000 will be able to claim the minimum deduction instead of itemising those expenses under the existing rules.

Taxpayers with work-related expenses above $1,000 will still be able to claim their actual deductions. However, those taxpayers will need to satisfy the ordinary deductibility and substantiation requirements.

Importantly, the instant deduction will not replace other separately claimable deductions. Taxpayers may continue to claim deductions for charitable donations, union fees and professional association fees in addition to the instant deduction, where they otherwise qualify.

Overall, this measure will reduce the compliance burden for individuals with modest work-related expenses by removing the need to itemise low-value claims, while preserving the existing rules for taxpayers with higher deductible expenses.

$250 working Australians tax offset

From the 2027-28 income year, a new Working Australians Tax Offset (WATO) will provide a permanent tax offset of up to $250 for income earned from work, including wages, salary and sole trader business income. The measure is expected to benefit more than 13 million workers and will increase the effective tax-free threshold for work income to $19,985, or $24,985 for workers also eligible for the Low Income Tax Offset.

Together with the proposed $1,000 instant tax deduction, the WATO provides modest relief for workers in the absence of indexation of income tax thresholds. That focus on work income is consistent with the other Budget measures, with relief directed towards employees and sole traders while the changes to negative gearing, CGT and discretionary trusts narrow the benefits available from investment income, asset ownership and income splitting.

Eligibility for the offset is the key detail still to be confirmed. The Budget describes the measure by reference to income derived from work, but it is not yet clear whether any amount of work income will be sufficient, or whether a minimum amount of qualifying income will be required to access the offset.

Foreign resident CGT – real property

The application of the CGT to foreign residents is set out in Division 855 of the Income Tax Assessment Act 1997 (Cth). Very broadly, CGT on foreign residents is limited to real property, indirect interests in real property (e.g. shares in a company or units in a unit trust which owns real property) and land-like interests like mining and quarrying rights.

While Division 855 has been in the tax legislation for almost 20 years, unfortunately the provisions are still routinely litigated as their application can be uncertain. This was highlighted in the recent case of YTL Power Investments Limited v Commissioner of Taxation [2025] FCA 1317, which concerned the application of Division 855 to electricity infrastructure assets and in particular whether those assets were ‘real property’. It was held in that case that ‘real property’ took its ordinary meaning (as it was not defined in the tax legislation), and this ordinary meaning was impacted by provisions within State-based legislation which treated electricity infrastructure as personal property severed from the land to which it was affixed. This concept of State-based ‘statutory severance’ ultimately infected the application of Division 855.

To correct this, the Government released draft legislation on 10 April 2026 to broaden the application to Division 855 by capturing assets that have a close economic connection with Australian land and/or natural resources. A statutory definition of ‘real property’ would also be introduced into the tax legislation. Finally, changes would be made to the Principal Asset Test so that it would be satisfied if the entity’s real property assets were more than 50% of its total assets at any time over the past 365 days, rather than at the point in time just before the sale of the asset occurs. Taken with the expansion of the meaning of ‘real property’, it is more likely that the Principal Asset Test will be satisfied, bringing more transactions by foreign residents into the Australian CGT net.

A time-limited transitional concession will apply to foreign investors disposing of certain renewable energy infrastructure assets from commencement until 30 June 2030.  

Controversially, the Government has expressed these changes as clarification of the law, stating that these changes will apply with effect from 12 December 2006 (i.e. when Division 855 was introduced). Many commentators have expressed concern that the retrospective nature of this measure will open long completed transactions up for ATO scrutiny. However, the ATO has indicated on its website that in practice they would continue their compliance approach for disposals that are currently under review or occurred within the past four years.

ATO tax fraud and intermediary powers expanded

In what is becoming an annual Budget piece, the ATO has been provided funding for a much stronger fraud detection and recovery package. From 1 July 2026, the Government will fund Phase 2 of the Counter Fraud Strategy, including real-time fraud detection, additional fraud protections for individuals and expanded live monitoring of fraudulent account access for tax agents and businesses. The ATO will also receive new powers to respond to fraud by tax agents and other intermediaries.

The debt recovery garnishee powers will be expanded to jointly held assets where arrangements are used to frustrate recovery action. Jointly held assets, related-party funding movements and asset protection steps could now be at risk where there is unpaid tax debt.

The ATO will also undertake targeted compliance activity over two years from 2026-27, including in relation to the Research and Development Tax Incentive. R&D claimants should expect more reviews and should ensure that registration, technical evidence, contemporaneous project records, expenditure apportionment and employee time records are defensible before claims are lodged.

However, in a welcome development, where a taxpayer is the victim of intermediary fraud, the ATO will be able to pause recovery of the taxpayer’s tax debt, waive the debt in appropriate cases, and pursue the intermediary instead. It remains to be seen how easy it will be to convince the ATO of this fraud.

Extending the ban: foreign ownership of housing

For a long time, Australia has placed restrictions on foreign persons (including companies and trusts) purchasing residential property in Australia. Generally, a foreign person seeking to purchase Australian residential property is required to obtain approval from the Foreign Investment Review Board (FIRB).

As part of the Federal Budget 2025-26, the Government banned foreign persons from purchasing established residential dwellings for two years from 1 April 2025 to 31 March 2027. The ban extends to temporary residents and foreign-owned companies.

As part of the Federal Budget 2026-27, the Government has announced an extension of this ban until 30 June 2029. It is stated that the existing exemptions will continue to apply, and that interestingly, the measure is estimated to decrease tax receipts by $185 million over the five years from 2025–26 due to foregone revenue from foreign investment applications.

What’s not in the Budget

The 2026-27 Budget is no doubt the biggest in recent memory. However, several significant items remain on the tax agenda for private businesses and their owners. These include:

• Division 7A reform, including any broader legislative response to the Bendel litigation; although the minimum 30% tax on trusts may indirectly address those matters.
• reforming the tax residency rules for individuals and companies.
• a review of CGT rollovers and demerger rollover relief.
• reform of the small business CGT concessions and the Small Business Restructure Rollover.
• further guidance or reform concerning section 100A and trust reimbursement agreements; again, the trust taxation measures may indirectly resolve issues under these provisions.
• amending the trust loss rules, including known deficiencies in the family trust distribution tax rules.

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.