Insights: Australian Federal Budget 2026-27

Budget Highlights:

• Very significant changes to Negative Gearing, the Capital Gains Tax Discount and the taxation of Discretionary Trusts introduced. These potentially have major implications for your business and personal taxation.
• No significant additional cost of living support in the near term beyond the temporary fuel excise reductions already announced. This should not add to the RBA’s challenge to return inflation to target. Interest rates are likely to remain on hold in June.
• No significant near-term progress improving the government’s overall financial position (nor is it worsened). This may leave Australia more vulnerable to an economic downturn.
• The top marginal tax rate (both the rate and the low level at which the rate applies) and the rate of GST, remain off limits. These are arguably the most important tax reforms that need addressing.
• In the short term, the inflation and economic outlook very much remain hostage to developments in the Middle East. An extended closure of the Strait of Hormuz would likely result in considerably less favourable business conditions.

A more challenging macroeconomic backdrop:

This year’s budget is framed in a more difficult macroeconomic backdrop. The RBA has raised interest rates three times in quick succession as the Australian labour market remains tight and inflation remains above the 2.5% target. The Middle East conflict has seen energy prices rise sharply, with the potential for still much higher prices and potential supply interruptions to petrol, diesel, fertiliser and other products if a peace deal cannot be reached soon and the Strait of Hormuz remains closed for an even more extended period. Continuing developments in AI are something of a double-edged sword, boosting investment in data centre construction and selected commodities in the near term, but creating uncertainty about employment prospects and business models in the medium-term.

Budget strategy and measures

In spite of these challenges, commendably, the government has delivered a budget that seeks to address five policy priorities:

• Fuel security.
• The cost of living and intergenerational inequality.
• Tax reform.
• Savings.
• Productivity.

There were very significant, useful and mostly defendable changes in a number of these areas, including fuel security, tax reform and intergenerational inequality, but arguably less progress improving Australia’s overall government financial position in the near term. Nor were perhaps the most necessary and significant tax reforms addressed, namely the very low level at which the top marginal tax rate applies and the rate and coverage of the GST.

Considerations for households and businesses 

The most significant changes in the budget were the package of measures relating to negative gearing, the capital gains tax discount and the taxation of discretionary trusts. The changes were designed to both improve access to the housing market for first home buyers, but also to tighten tax rules to ensure all Australians pay a reasonable minimum rate of tax.

People should seek professional tax advice and consult with their trusted advisors to consider the implications of the changes for their businesses and personal situation, noting key changes announced were as follows.

• Negative Gearing: from 7.30PM on 12 May 2026, full negative gearing (the deductibility of property losses against other income sources) applies to only newly built properties, not to new purchases of existing properties. Existing owned properties arrangements are grandfathered (i.e. full negative gearing still applies, though the capital gains tax discount will be changing on 1 July 2027).
• Capital Gains Tax Discount: From 1 July 2027, the current 50% discount on capital gains for assets held for more than twelve months will be abolished and replaced by a system that taxes after-inflation gains. A minimum 30% tax rate will apply to real capital gains and the changes apply to all assets (e.g. also to shares), not just to residential property. Assets acquired before 1 July 2027 keep the 50% capital gains tax discount for gains accrued up until that date, but gains after that date are subject to the new rules.
• Taxation of Discretionary Trusts: from 1 July 2028, a minimum 30% tax on income distributed from discretionary trusts will apply.

There were other measures introduced including loss-carry back provisions, a new $250 pa Working Australians Tax Offset (from 2027-28), red tape reductions and the $20,000 instant asset write off was made permanent, but the three measures detailed above are clearly the most notable. It will be interesting to see the impact of the changes on the availability of rental properties and indeed on rents. Housing affordability is a very complex and multi-faceted problem of which tax settings are only one aspect.