Federal Budget 2026: Proposed Tax Reforms
The Federal Government has announced a number of significant proposed tax reforms which, if legislated in their current form, will materially impact many existing investment, business and family structures.
The most significant proposed changes for many of our clients relate to discretionary trusts and existing asset holding structures.
Importantly, many of these announcements are currently policy proposals only. We require further legislation and detailed guidance before definitive advice can be provided.
We strongly recommend clients seek advice before acquiring new assets, commencing new business ventures, or restructuring existing arrangements.
Proposed Changes to Trusts
The proposed trust changes represent one of the most significant shifts to discretionary trust taxation in decades.
Key Proposed Changes
From 1 July 2028, discretionary trust distributions are proposed to be subject to a minimum 30% tax.
No grandfathering relief has currently been proposed, meaning existing trust structures may also be affected from 1 July 2028.
Individual beneficiaries are proposed to receive a non-refundable tax offset for tax paid by the trustee on undistributed trust profits.
Based on the current Budget and consultation materials, corporate beneficiaries (including bucket companies) do not appear to receive an equivalent tax offset or franking-style credit for trustee tax already paid.
As currently drafted, this could result in effective double taxation where trust income is taxed at the trustee level and subsequently taxed again when distributed to a corporate beneficiary.
This represents a substantial departure from longstanding trust and bucket company taxation principles and could materially impact many existing tax, asset protection and succession planning structures.
We expect these proposals to be highly controversial and subject to further consultation, clarification and potential amendment before legislation is finalised.
Further Detail Required
At this stage, there is insufficient detail to determine the full practical impact on:
retained earnings and unpaid present entitlements (UPEs);
family trust structures and family trust elections;
interposed entities and bucket company arrangements;
existing accumulated trust profits;
Division 7A interaction;
trust streaming arrangements; and
small business CGT concession structures.
IMPORTANT: Given the potential impact of these reforms, we strongly recommend clients seek advice before implementing any restructuring, acquiring new assets, establishing new entities, or undertaking transactions through existing trust structures.
Proposed Changes to Capital Gains Tax (CGT)
Key Proposed Changes
The existing 50% CGT discount will remain available for eligible assets acquired prior to 1 July 2027.
Based on the current Budget papers, unrealised capital gains accrued up to 30 June 2027 are expected to retain access to the current 50% CGT discount regime.
From 1 July 2027, the Government proposes replacing the existing 50% CGT discount with an inflation-based cost base indexation methodology for newly accrued gains.
Taxpayers may effectively be required to separate:
gains accrued up to 30 June 2027; and
gains accrued from 1 July 2027 onwards,
with different tax methodologies applying to each component.
Eligible new-build residential properties are expected to retain access to the current 50% CGT discount.
The Government has also announced that the blanket exemption for pre-CGT assets acquired before 20 September 1985 will cease.
Further Detail Required
Further legislation is still required to clarify:
whether taxpayers will be permitted to choose between indexation and discount methodologies;
whether market value reset provisions will apply;
how gains will be apportioned between pre and post reform periods;
how the rules will apply to long-held business and investment assets;
the interaction with small business CGT concessions; and
transitional valuation and record keeping requirements.
Proposed Changes to Negative Gearing
Key Proposed Changes
From 1 July 2027, negative gearing is proposed to be abolished for established residential properties purchased after 7:30pm on 12 May 2026.
Affected investors will no longer be able to offset rental losses against salary, wages or other assessable income.
Existing property owners and purchasers already under binding contract prior to the announcement are proposed to be grandfathered under the current rules.
Eligible new-build properties are proposed to remain exempt, retaining access to both negative gearing and the 50% CGT discount.
Income Tax Measures
Individuals
A proposed $1,000 instant work-related deduction will apply from 1 July 2026 without substantiation requirements, excluding certain expenses such as union and professional association fees.
A proposed $250 Working Australians Tax Offset will be introduced from the 2027–28 income year.
The Government is proposing to increase Medicare levy low-income thresholds for individuals, families, seniors and pensioners by 2.9% from 1 July 2025.
Business Tax Measures
Loss Carry-Back Measures
From 1 July 2026, eligible companies with aggregated turnover below $1 billion will be able to carry back revenue tax losses for up to two years and offset those losses against previously taxed profits.
This effectively allows eligible companies to obtain a cash tax refund for prior tax paid where the business subsequently enters a loss position.
Refunds are expected to remain limited by available franking account balances.
Start-Up Refundable Tax Offset
From 1 July 2028, eligible start-up companies with aggregated turnover below $10 million are proposed to receive refundable tax offsets for losses generated during their first two years of operation.
The refundable offset is expected to be capped by PAYG withholding and Fringe Benefits Tax (FBT) paid in relation to Australian employees.
Further detail is still required regarding integrity rules, grouping provisions and interaction with existing tax incentive programs.
Research & Development (R&D)
The Government has announced proposed enhancements to the Research & Development (R&D) Tax Incentive regime aimed at increasing support for Australian innovation and technology development.
Early-stage and loss-making companies are expected to continue receiving refundable R&D tax offsets, supporting cash flow during growth and development phases.
Additional consultation is expected regarding integrity measures, software development claims, eligible expenditure and interaction with other proposed start-up incentive measures.
Businesses undertaking development activities should continue maintaining robust contemporaneous documentation supporting eligible R&D claims.
What You Should Do
Given the scale of the proposed reforms, we recommend clients:
Seek advice before acquiring new assets or entities;
Avoid implementing restructuring strategies until further legislation is released; and
Contact our office to discuss the potential impact on your circumstances.
We will continue to monitor developments closely and provide further updates as additional detail becomes available.
Kind regards,
Kamper Chartered Accountants