Federal Budget 2026-2027: tax snapshot: the game has changed, how to pick up the pieces

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

This minimum tax only applies to discretionary trusts, not other trusts, such as:

• fixed and widely held trusts (including fixed testamentary trusts);
• complying superannuation funds;
• special disability trusts;
• deceased estates; and
• charitable trusts. 

Certain types of income will be excluded, including 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. 

Trustees that receive franked dividends will be required to use their franking credits to pay the minimum tax. And corporate beneficiaries will not receive non-refundable credits for tax payable by the trustee, to avoid them converting these to refundable franking credits to avoid the minimum tax

Rollover relief will be available for three years from 1 July 2027. This has been described as supporting small businesses and others that wish to restructure out of discretionary trusts into another entity type, such as a company or a fixed trust. 

This measure removes the ability to distribute income in a tax effective manner to low‑rate beneficiaries (eg adult children, retirees and, it appears, corporate beneficiaries) and instead pushes discretionary trusts towards a company-like tax outcome but without full company style features. A company, with the ability to distribute dividends with refundable franking credits, may end up a superior choice of structure when compared to a discretionary trust with non-refundable credits. 

In our view, the proposed three‑year rollover relief raises structural questions for discretionary trusts that hold shares or business assets. Unlike companies or fixed trusts, discretionary trusts do not have a clearly identifiable beneficial owner. If restructuring out of a discretionary trust into a company or fixed trust is encouraged, the legislation will need to determine who the equity holders of the new structure are. This presumably requires the Government to draw a line around a beneficiary class, potentially by reference to a family group or control concepts, rather than traditional ownership. Clear guidance is needed to ensure that the rollover relief is useable. 

Relatedly, it is unclear whether the expanded rollover relief is intended to align with existing provisions such as Division 122‑A in the Income Tax Assessment Act 1997 (Cth) (trust‑to‑company rollovers). These provisions are narrow and do not generally facilitate rollovers from discretionary trusts into fixed trusts or accommodate the transfer of all assets, for instance trading stock. If the new relief merely expands existing concepts rather than introducing a bespoke regime, restructures may be limited to relatively simple scenarios and fail to address the broader trust ecosystem affected by the measure.

Care will be required in undertaking any rollover as, while a three-year rollover may apply for income tax purposes, there may be other tax impediments to restructuring, such as duty, payroll tax, land tax and GST implications. In particular, there are already circumstances where the income tax rollover relief measures do not have counterparts in the relevant State and Territory duties legislation. Accordingly, to ensure this proposed three-year rollover relief produces an equitable outcome for those with existing discretionary trust structures, support from State and Territory governments will be required – whether this is achievable will remain to be seen. Non-tax impediments may also present, such as a trade-off between tax efficiency and asset protection.

In our view, the term ‘minimum tax’ also raises questions about unresolved mechanics. If trust income is assessed to beneficiaries under section 97 of the Income Tax Assessment Act 1936 (Cth), the proposal appears to contemplate a 30 per cent withholding‑style tax at the trustee level, with beneficiaries receiving non‑refundable credits and paying any top‑up tax where their tax rate exceeds 30 per cent. However, it is unclear how this interacts with trustee assessments, for instance under section 99A and 99B, where the trustee is already taxed at potentially punitive rates. If these provisions continue to apply, the minimum tax may be redundant in retained‑income scenarios, suggesting the new regime will have to be carefully integrated into Division 6 rather than sit outside it.

These changes may push taxpayers toward holding assets directly in companies rather than using trusts at all. But the widely used structure of a discretionary trust owning the shares in a company may also need to be re-thought; possibly leading to a trade-off between tax efficiency and asset protection. 

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

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 per cent CGT discount will continue to apply to gains arising before that date. Capital gains on pre-1985 assets arising before 1 July 2027 will remain exempt from CGT.

Investors in new residential properties will retain the choice of either the 50 per cent CGT discount or cost base indexation and the minimum tax. Income support payment recipients, including age pension recipients, will be exempt from the minimum tax.

This is a significant change to the CGT regime. Under the current regime, an asset held by an individual (and in some cases trusts) for 12 months attracts a 50 per cent discount. Under the new regime, the concession is tied to actual CPI movements. For short-term holding, even applying indexation, the effective tax rate on capital gains will likely be materially higher than the current 50 per cent discount. 

The 30 per cent minimum tax on net capital gains will affect taxpayers who would otherwise pay less than 30 per cent on their gains: this may include, for example, younger individuals on relatively lower incomes investing their savings in capital growth assets with a view to accumulating savings for a future property purchase. 

The inclusion of pre-1985 assets into the tax net is a significant policy shift. For over 40 years, capital gains arising from the disposal of pre-CGT assets have been disregarded: this was an element of the original ‘grandfathering’ of the pre-CGT regime on its introduction in 1985. The transitional protection preserves the exemption for historical gains up until 1 July 2027, but any future capital gains arising on pre-CGT assets after 1 July 2027 will be taxable. Taxpayers holding pre-CGT assets will need market valuations as at 1 July 2027 to establish a tax cost base in the asset on which future CGT liability will be based. Valuers are likely to have a busy time in the lead-up to 1 July 2027! 

Key questions remain regarding the mechanics of the deemed cost base reset for pre-CGT assets and the interaction with existing provisions such as Division 149.

From 1 July 2027, losses from residential properties acquired after 7:30pm AEST on 12 May 2026 will be deductible only against rental income or capital gains derived from the sale of residential properties. Any excess losses can be carried forward and offset against residential property income in future years.  These changes do not apply to commercial property. 

Properties acquired before that time – including contracts entered into but not yet settled – will be exempt. 

Exemptions will also apply to eligible new builds and targeted build-to-rent developments, with the intention of ensuring that negative gearing benefits continue to be directed toward investment that increases housing supply. Properties in widely held trusts and superannuation funds (including SMSFs) will be excluded from the new measure.

Eligible new builds will be those that genuinely add to the housing supply and can include circumstances where existing properties are demolished and replaced with a greater number of dwellings. 

While the Government may be clear on the intention of the proposed measure, the devil will be in the detail (or, in this case, exposure draft legislation), and there are a number of open matters as follows:

• While negative gearing is traditionally understood to be a tool used by individual taxpayers, the proposed measure will apply to all taxpayers (other than widely held trusts and superannuation funds).
• The proposed measure seems to clearly delineate between residential property and other types of property (ie commercial property). However, it does not define what constitutes a ‘residential property’ nor whether that will be determined based on use, zoning, or some other means. In the duty context, whether property is commercial or residential is a fact that is often the subject of dispute.
• A new legislative definition will be required to address the concept of ‘residential property income’, which is suggested will comprise both rental income and capital gains.
• The proposal for excess losses to be carried forward and only able to be offset against ‘residential property income’ will likely require the introduction of a new class of loss (perhaps akin to the existing rules for losses from collectable assets).
• Superannuation funds are a big winner, avoiding this measure as well as the proposed new minimum tax on discretionary trusts. This may shift the balance on the use of superannuation funds as an investment vehicle notwithstanding the new Division 296 Tax.
• The exclusion of widely held trusts will mean that property investment funds and their investors will be shielded from the measure.
• Properties acquired after 7:30pm AEST on 12 May 2026, but before the reforms commence on 1 July 2027 may be negatively geared during this period but will need to be ready for a transition to the new regime if it is enacted.

There are a series of changes to the R&D tax incentive that will be implemented from 1 July 2028.  

There will be an increase in the R&D tax offset rate by 4.5 per cent, which is a 25-50 per cent increase (depending on your turnover and level of expenditure). 

In addition, the maximum expenditure threshold will increase from $150 million to $200 million, allowing companies to include a larger amount of expenditure in the claim. 

The Government intends to support growing R&D businesses by allowing entities with a turnover of less than $50 million to access the refundable tax offset (which was previously capped when the R&D entity had a turnover of no more than $20 million). 

Other changes include lifting the minimum threshold of spending required to claim the R&D tax offset from $20,000 to $50,000 such that any entity with expenditure below this amount is required to conduct their R&D with a Research Service Provider or Cooperative Research Centre.

While these benefits are encouraging, the new measures are not all positive for businesses and will also see the removal of supporting R&D activities from the R&D tax incentive. This means businesses will only be able to claim the R&D tax incentive for core R&D activities.

In addition, a refundable tax offset will only be available for businesses that have been operating for less than 10 years, which skews the benefit to start-ups. 

It is encouraging that the Government is supporting innovation and incentivising companies to undertake their R&D activities in Australia. It also provides a benefit to those commencing start-ups to soften the impact of the loss of the CGT discount. The increase in the percentage of the R&D tax offset, along with lifting the maximum expenditure threshold and refundable offset threshold will give businesses a greater scope to claim their R&D expenditure.

However, the net impact will differ depending on the types of activities conducted by the business. While there is an increase in the maximum expenditure threshold, which appears to allow businesses to include more expenses in their claim, the removal of being able to claim expenditure for supporting activities may mean that benefit is negated. 

The benefit of the measures may also be limited by the administration of the R&D system. The Budget announcement also refers to the ATO undertaking additional targeted compliance activities over the two years from 2026-27 including claims under the R&D regime. If the ATO keeps up the high level of scrutiny we are currently seeing of R&D activities, businesses will need to take care that they are correctly applying and documenting their activities and expenditure claims.

From 1 July 2026, companies with aggregated annual global turnover of less than $1 billion will be able to carry back tax losses to offset against tax paid from up to two prior years. The measure applies to revenue losses only and is limited by the company’s franking account balance. 

From 1 July 2028, eligible start-up companies will be able to access loss refundability. Companies with aggregated turnover below $10 million that generate tax losses in their first two years of operation will be able to convert those losses into a refundable tax offset. The offset will be capped at the value of fringe benefits tax and withholding on wages paid to Australian employees in the relevant loss year. 

The loss carry-back regime is not a new concept in the Australian taxation system. It was first introduced in the 2012-13 Federal Budget, repealed in 2014, then later revived as a temporary measure during COVID-19 to provide liquidity support to businesses experiencing declines in profitability. 

Its return will provide relief to companies during periods of economic volatility, where otherwise profitable businesses experience short-term downturns. The loss refundability measure will assist those companies that are loss-making in their start-up phase when liquidity is crucial. The measures also signal a broader policy shift toward more flexible loss utilisation for companies. 

Both measures provide a timing benefit by allowing immediate refunds, rather than waiting to offset losses against future profits. However, this benefit will need to be weighed up against the impacts on a company’s franking account and the ability to pay franked dividends in the future. Additionally, the utility of loss carry-back may be limited where companies have previously distributed franked profits.

Counter Fraud Strategy, Phase 2

As part of Phase 2 of the Counter Fraud Strategy, the Government has announced that substantial additional funding will be allocated to the ATO to enhance its ability to detect, prevent and mitigate risks of fraud to the tax and superannuation systems. $86.3 million will be allocated over four years from 1 July 2026 to 30 June 2030, followed by $9.7 million per year ongoing from 1 July 2030. 

This is paired with the introduction of new powers and expansion of existing powers for tax regulators, including:

• the expansion of the ATO’s existing garnishee powers to include recovery of tax debts from jointly held assets in arrangements used to frustrate recovery actions; and

• enhancements to tax regulators’ information-gathering powers along with targeted exceptions to tax secrecy provisions.

On top of the expanded ATO powers, the ATO will specifically undertake additional targeted compliance activities over two years from 1 July 2026 to 30 July 2028 to address fraud. 

CGT and trust reforms

The ATO will receive significant funding to support the implementation of significant reforms to the CGT regime and the taxation of discretionary trusts announced in this Budget. $90.7 million will be provided over five years for the implementation of the CGT reforms and $66 million over the same period for the implementation of the trust reforms. 

The Counter Fraud Strategy announcements build on the measures introduced and funding allocated in the 2024-25 Federal Budget for Phase 1 of the Government’s Counter Fraud Strategy.  The new and expanded powers being granted to ‘tax regulators’ is framed at strengthening the ATO’s ability to combat fraud by tax agents and other intermediaries, and to ‘support integrity, compliance and effective administration of the tax system’. This seems to suggest a proposal for increased information gathering and sharing, and collaborative enforcement activities, by the ATO and Tax Practitioners Board. These measures add to the increased pressure on tax agents following recent changes to the Tax Agent Services Act 2009.

The ATO’s targeted anti-fraud compliance programs are specifically noted to include enforcement of the Research and Development Tax Incentive, in parallel to the substantial changes to these concessions set out above.

We expect that the funding allocated to support the implementation of the CGT and trust taxation reforms will be primarily allocated towards broad-based education of taxpayers’ advisers and targeted enforcement activities.

As part of a package of measures intended to protect the tax system against fraud, the ATO will be given powers to pause the recovery of tax debts of taxpayers who are victims of fraud by tax intermediaries, to waive those debts in appropriate circumstances and to recover the debts from the tax intermediaries. 

This is a welcome announcement. 

There are currently material limitations on the express legislative powers that the Commissioner of Taxation (and by extension the ATO) is given to assist taxpayers that are victims of fraud. For instance, the basis to waive a debt due to serious hardship does not extend to debts arising from GST, PAYG withholding, the super guarantee charge, or a director penalty notice. 

This limitation is recognised by the ATO in its recently Vulnerability Framework, where it states:

And while the Framework cannot change tax obligations – for example, the law does not allow us to waive tax debts – it will serve as a guiding approach for how we listen, communicate, and connect people to the right support.

The Commissioner’s position raises the question about why he cannot use his general power of administration to help taxpayers who are clearly subject of fraud and abuse. Nevertheless, the introduction of an express legislative power to assist taxpayers who are victims of fraud by tax intermediaries will alleviate the need for the Commissioner to use his general power of administration.

However, we consider the proposed measure should be expanded to include not just fraud committed by tax intermediaries that lead to tax debts, but also fraud by any other person.