Federal Budget 2026–27 — taxation measures

On 12 May 2026, Treasurer Jim Chalmers handed down the Federal Budget 2026–27.

The key measures in the Federal Budget include:

• 50% CGT discount — From 1 July 2027, the 50% capital gains tax (CGT) discount will be removed, to be replaced with cost base indexation, with a 30% minimum tax on net gains. This measure applies to all CGT assets, including pre-1985 CGT assets, held by individuals, trusts, and partnerships. Accordingly, pre-CGT assets will no longer receive a full exemption from CGT, and capital gains arising after 1 July 2027 will be taxable. This measure preserves the existing exemption for gains on pre-CGT assets that have accrued prior to 1 July 2027.
• Negative gearing — From 1 July 2027, negative gearing will be limited to newly built premises; however, this restriction will only apply to established residential properties acquired from 7:30 p.m. (AEST) on 12 May 2026. Properties acquired prior to this time (including contracts entered into but not yet settled) will be exempt from this amendment.
• Discretionary trusts — From 1 July 2028, a minimum tax rate of 30% will apply to discretionary trusts. Trustees will pay this minimum 30% tax at the trustee level, and beneficiaries (other than corporate beneficiaries) will receive non-refundable credits for the tax paid by the trustee. This measure will significantly reduce the attractiveness of discretionary trusts as investment vehicles.
• Tax losses — From 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.

Detailed below are the key tax announcements in the 2026–27 Federal Budget.

Personal income tax

Increasing the Medicare levy low‑income thresholds

The Government will increase the Medicare levy low‑income thresholds for singles, families, and seniors and pensioners by 2.9% from 1 July 2025.

The low-income thresholds will be increased as follows:

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

Working Australians Tax Offset

The Government will introduce a $250 Working Australians Tax Offset from the 2027–28 income tax year.

This measure will provide a permanent annual tax offset for individuals on their income derived from work, such as wages and salaries, and the business income of sole traders, from 1 July 2027. The offset 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).

$1,000 instant tax deduction

The Government will introduce an instant tax deduction of up to $1,000 from the 2026–27 income tax year.

Australian tax residents who earn income from work will be eligible for this instant tax deduction, without the need to itemise and claim work‑related expenses where they are claiming less than $1,000.

Individuals who incur work‑related expenses greater than the instant tax deduction can continue to claim their deductions in the usual manner. Charitable donations, union and professional association membership fees, and other non‑work‑related deductions can still be itemised separately and claimed on top of the instant tax deduction.

Reforming CGT and negative gearing

CGT discount

From 1 July 2027, the 50% CGT discount will be replaced by cost base indexation for assets held for more than 12 months, with a 30% minimum tax on net capital gains. These changes will apply to all CGT assets, including pre-1985 CGT assets, held by individuals, trusts and partnerships.

Under the indexation method, the cost base of an asset (broadly defined as the purchase price and certain holding costs) will be adjusted for inflation before calculating CGT payable.

Transitional arrangements will limit the impact on existing investments by ensuring the changes only apply to gains arising on or after 1 July 2027 — the 50% CGT discount will continue to apply to gains arising before 1 July 2027. Capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT.

To maintain incentives for new housing supply, investors in new residential properties will have the choice to apply either the 50% CGT discount, or cost base indexation and the minimum tax of 30% on net capital gains. Income support payment recipients, including Age Pension recipients, will be exempt from the minimum tax requirement.

Reforming negative gearing

The Government 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 capital gains from residential properties. Excess losses will be carried forward and will be able to be offset against residential property income in future years.

These changes will apply to established residential properties acquired from 7:30 p.m. (AEST) on 12 May 2026. Properties acquired prior to this time (including contracts entered into but not yet settled) will be exempt from the changes until disposed of. Accordingly, negative gearing can continue to be applied by taxpayers to properties that they held prior to Budget night.

Properties purchased after 7:30 p.m. on 12 May 2026 and before 30 June 2027 can be negatively geared during this period, but not in subsequent years.

Eligible new builds will be exempt from the changes, which are intended to ensure the benefits of negative gearing are directed to investment that increases the housing stock. Properties in widely held trusts and superannuation funds will be excluded, alongside targeted exemptions for build-to-rent developments and private investors supporting government housing programs.

Business taxation

Loss refundability reforms for businesses and start-ups

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 a company’s franking account balance.

The Government will also introduce loss refundability for small start‑up companies. For tax years commencing on or after 1 July 2028, 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 utilise the loss to generate a refundable tax offset. The offset will be limited to the value of fringe benefits tax (FBT) and withholding tax on wages paid in respect of Australian employees in the loss year.

Extension of the instant asset write-off

From 1 July 2026, the Government will permanently extend the $20,000 instant asset write‑off for small businesses with turnover up to $10 million. Assets valued at $20,000 or more can continue to be placed into the small business simplified depreciation pool. The provisions that prevent small businesses from re‑entering the simplified depreciation regime for 5 years after opting out will continue to be suspended until 30 June 2027.

The Government will also provide $10.9 million to the ATO to expand its pilot of dynamic pay as you go (PAYG) instalment calculations and will expand access to monthly payments.

From 1 July 2027, small and medium businesses will be able to opt in to reporting and paying PAYG instalments monthly and to using an ATO‑approved calculation embedded in accounting software to calculate and vary their instalments, which is intended to support businesses by enabling tax instalments to better reflect real‑time business activity. Taxpayers with a demonstrated history of non‑compliance will be required to report and pay PAYG instalments monthly.

FBT — electric car discount

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 threshold and will be implemented through a 15% rate in the FBT statutory formula.

The following transitional arrangements will be put in place:

• 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 nil percent rate in the FBT statutory formula; and
• electric cars valued above $75,000 and up to and including the fuel‑efficient luxury car tax 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 to all other cars, including electric cars costing more than the fuel‑efficient luxury car tax threshold.

Reportable fringe benefits will continue to be determined for eligible electric cars as if a 20% FBT statutory formula rate or the cost basis method applied.

Research & Development (R&D) Tax Incentive

The Government will reform the R&D Tax Incentive to simplify and better target Government support for business R&D.

From 1 July 2028, the Government will:

• increase the offset for core R&D expenditure by around 25 to 50%, through a 4.5 percentage point increase in core R&D offset rates;
• reduce the intensity threshold from 2% to 1.5%, enabling more firms that engage in substantial core R&D to qualify for higher offset rates;
• remove eligibility of supporting R&D expenditure for the R&D Tax Incentive;
• enable growing firms to retain access to the refundable tax offset for longer by increasing the turnover threshold for the highest offset rate from $20 million to $50 million;
• for firms below the $50 million turnover threshold, maintain older firms’ eligibility for the higher offset rate while limiting refundability to firms under 10 years of age;
• lift the maximum R&D Tax Incentive expenditure threshold from $150 million to $200 million; and
• improve assurance on smaller claims by lifting the minimum expenditure threshold from $20,000 to $50,000, with research activities valued below this amount required to be undertaken with a registered Research Service Provider or Cooperative Research Centre in order to be eligible for the R&D Tax Incentive.

Currently, an entity may be eligible to claim the R&D Tax Incentive if it has incurred notional deductions of at least $20,000 on eligible R&D activities. R&D activities must meet certain criteria to be eligible for the Tax Incentive — currently, they must be classified as either ‘core R&D activities’ or ‘supporting R&D activities.’

Broadly, core R&D activities are experimental activities whose outcome cannot be known or determined in advance on the basis of current knowledge, information or experience. ‘Supporting R&D activities’ are those that are directly related to core R&D activities, or have been undertaken for the dominant purpose of supporting those activities. For example, such supporting activities may include feasibility studies, site surveys, data analysis and regulatory compliance.

While the R&D Tax Incentive will be removed for supporting R&D activities, the reduction of the intensity threshold will enable more firms to access the R&D Tax Incentive.

Expanding venture capital tax incentives

The Government will expand the venture capital tax incentives.

From 1 July 2027:

• the venture capital limited partnership (VCLP) cap on the asset size of the investee business at the time of investment will be increased to $480 million, from $250 million;
• the early stage venture capital limited partnership (ESVCLP) cap on the asset size of the investee business at the time of investment will be increased to $80 million, from $50 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 to $420 million, from $250 million; and
• the maximum fund size of ESVCLPs will be increased to $270 million, from $200 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.

The eligible venture capital investor program will be closed to new applications from 7:30 p.m. (AEST) 12 May 2026.

Taxation of trusts

Minimum tax on discretionary 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 the tax payable by the trustee.

The minimum tax will not apply to other types of trusts, such as fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates, and charitable trusts. Specific types of income, such as primary production income, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies, and income from assets of discretionary testamentary trusts existing at announcement, will also be excluded.

The Government will provide expanded rollover relief for three years from 1 July 2027 to support small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust.

Foreign residents and international tax

Foreign resident CGT regime

The Government will provide a time‑limited, targeted concession in the foreign resident CGT regime for investment in the renewables sector.

The transitional arrangement will apply to foreign investors disposing of certain renewable energy infrastructure assets from commencement, being the first day of the next quarter after Royal Assent, until 30 June 2030.

This concession is intended to balance ongoing Government support for Australia’s practical action on climate change, with the need to ensure the tax treatment of these assets aligns with the treatment of other assets in the longer term.

The Government will also ensure the concept of ‘real property’ in Australia is determined by Commonwealth legislation rather than State and Territory laws, with effect from 12 December 2006, when the regime was introduced. This measure is intended to address the potential inconsistency through the application of different State and/or Territory legislation to determine the legal meaning of ‘real property’. Due to this inconsistency across states, foreign resident vendors can argue that certain assets do not constitute ‘real property’ based on their location in Australia, such that no CGT is payable upon the disposal of certain assets. This measure will ensure a single Federal definition, which we anticipate will be broader than State and Territory laws, resulting in more assets held by foreign vendors being subject to CGT on their disposal.

Global Anti‑Base Erosion Rules (Pillar Two) side-by-side package implementation

Australia’s tax legislation will be amended to implement the side‑by‑side package agreed by the Organisation for Economic Co-operation and Development (OECD)/G20 Inclusive Framework on Base Erosion and Profit Shifting (BEPS) on 5 January 2026.

The Global Anti-Base Erosion Rules are intended to ensure multinational enterprise groups (MNE groups) are subject to a global minimum tax rate of 15% in each of the jurisdictions where they operate, and are a key part of the OECD’s Two-Pillar Solution to address the tax challenges arising from the digitisation of the economy.

The Australian global and domestic minimum tax applies to constituent entities that are members of a MNE groups with annual revenue of €750 million or more in the consolidated financial statements of the ultimate parent entity.

The global and domestic minimum tax comprises the following:

1. A global minimum tax consists of two interlocking rules:
   1. the Income Inclusion Rule (IIR) — this acts as the primary rule which broadly allows Australia to apply a top-up tax on multinational parent entities located in Australia if the group’s effective tax rate in another jurisdiction is below 15%; and
   2. the Undertaxed Profits Rule (UTPR) — this acts as a backstop rule, which permits Australia to apply a top-up tax on constituent entities located in Australia if the group’s effective tax rate in another jurisdiction is below 15% and where the profit is not taxable under an IIR.
2. A domestic minimum tax, which provides Australia the ability to claim primary rights to impose top-up tax over any low-taxed profits in Australia, in priority over the IIR and UTPR.

The side-by-side package will apply from 1 January 2026. This package includes several components, including simplifications, a one-year extension of the transitional country-by-country reporting safe harbour, and a safe harbour dealing with qualified tax incentives.

Fuel excise

Temporary reduction of fuel excise and heavy vehicle road user charge

The Government has temporarily reduced the excise and excise‑equivalent customs duty rates (excise rates) applying to most fuel products, and the road user charge for heavy vehicles, for three months from 1 April 2026.

The excise rates have been reduced by a total of 60.9%, equating to a 32 cent per litre reduction for petrol and diesel. The States and Territories have agreed to provide the Commonwealth with up to $400 million to enable increased GST revenue to be returned through lower excise, which equates to 5.7 cents per litre of the cut for petrol and diesel. The road user charge for heavy vehicles has also been reduced from 32.4 cents per litre to zero.

Indirect Tax Concession Scheme

Diplomatic and consular concessions

The Government has extended access to refunds of indirect tax (including GST, fuel and alcohol taxes) under the Indirect Tax Concession Scheme (ITCS).

New access to refunds has been provided to the European Union, Italy and Chile, relating to the construction and renovation of their current and future diplomatic missions and consular posts. Tuvalu will also have ITCS access extended to its High Commission, current and future consular posts, and applicable accredited staff.

Tax administration

Counter Fraud Strategy

From 1 July 2026, the Government will deliver Phase 2 of the Australian Taxation Office (ATO) Counter Fraud Strategy to modernise the prevention and detection of fraud in the tax and superannuation systems.

This measure is intended to enhance the ability of the ATO 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 will be provided with powers to pause the recovery of tax debts of taxpayers who are victims of fraud by tax intermediaries, waive those debts in appropriate circumstances, and 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.

The Government will also progress 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.

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

Deductible gift recipients

The Government will amend the tax law to list the following organisations as deductible gift recipients (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 Government has named the Jewish Community Foundation (JCF) and Australian Jewish Funders (AJF) 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 Government will remove the ministerial declaration requirement from the community charity DGR process, reducing red tape for eligible community charities by removing a step in the endorsement process.

Contact us

If you would like to discuss the announced tax measures in greater detail, and how they may impact you, please contact Tamara Cardan, Special Counsel — Tax, on +61 3 9321 7862.
_{Reference: Budget Measures: Budget Paper No.2.}