Insights

The 2026–27 Federal Budget, handed down on 12 May, marks a decisive shift in the taxation of investment income in Australia. Rather than a single headline change, the Budget introduces a coordinated package of reforms across capital gains tax (CGT), negative gearing, and discretionary trust taxation.

Together, these measures represent the most significant reset of investor tax settings in decades. As with many Budget measures, the detail and transitional rules will matter far more than the headlines.

Capital Gains Tax: From Discounts to Real Gains

What is changing?

From 1 July 2027, the long‑standing 50% CGT discount for individuals and trusts will be removed. In its place, the Government will introduce a new model that taxes real capital gains, combined with a minimum tax rate of 30%.

Under the new framework:

• Capital gains will be indexed for inflation, adjusting the cost base to reflect CPI
• The resulting real gain will be taxed at marginal rates, subject to a minimum effective tax rate of 30%
• The changes will apply to investment properties, shares, managed funds, and other CGT assets
• The main residence exemption remains unchanged
• Superannuation funds are not currently included in the announced Budget reforms

This approach reintroduces indexation in an attempt to narrow the gap between the tax treatment of capital gains and ordinary income.

Transitional Rules: Timing and Valuations Matter

The Government has confirmed that the CGT reforms will apply prospectively, with transitional rules to protect gains already accrued.

In practice:

• Assets sold up to 30 June 2027 will remain eligible for the existing 50% discount
• Assets purchased 1 July 2027 onwards will fall under the new indexed system and not have access to the 50% discount.
• Assets acquired before 1 July 2027 and sold after that date will have access to:
  • The 50% discount can be applied to the capital gain from purchase to 30 June 2027. A market valuation at 1 July 2027 will be required or a specific apportionment formula provided by the ATO that estimates the value
  • The indexed system will apply for the capital gain from 1 July 2027 to date of sale.

The capital gains tax liability will arise on date of sale of an asset.

Negative Gearing: A Shift Toward Cashflow Discipline

What is changing?

Significant changes to negative gearing will take effect alongside the CGT reforms. Under the announced measures:

• Investment properties owned before 7:30pm on 12 May 2026 will be exempt (“grandfathered”) from the negative gearing changes from 1 July 2027
• Investment properties owned after 7:30pm on 12 May 2026:
  • New builds can continue to be negatively geared after 1 July 2027. New builds must increase supply and include dwellings constructed on vacant land or demolished dwellings replaced with a great number of dwellings (i.e. house replaced with a duplex)
  • Rental losses will no longer be deductible against salary or other non‑property income. Instead, losses will generally be quarantined and carried forward to offset future rental income or capital gains from residential property
• Changes to negative gearing do not apply to commercial property and other asset classes such as shares

Investors will no longer be able to rely on negative gearing to reduce their personal taxable income from wages, other investments, etc.

The Combined Impact of the above Reforms on Property Investment

The interaction between negative gearing limits and CGT reform materially alters the economics of leveraged property investment.

Historically, many investors accepted short‑term cashflow losses in exchange for reduced taxable income and discounted capital growth. Under the new settings:

• After‑tax outcomes will depend more heavily on sustainable rental income
• Real (after‑inflation) capital growth will matter more than nominal price appreciation
• Holding periods, debt levels and interest rate sensitivity will take on greater importance

This shift places renewed emphasis on property selection and diversifying investments, portfolio balance, rather than tax‑driven strategies.

Discretionary Trusts: The 30% Minimum Tax

What is changing?

From 1 July 2028, discretionary trusts will become subject to a minimum tax rate of 30%.

Where a discretionary trust realises income or capital gains:

• The trustee will pay tax at the minimum rate of 30%
• Beneficiaries (not including corporate beneficiaries) will receive non‑refundable tax credits for tax paid at the trust level

This reform directly affects beneficiaries who are:

• Individuals with lower taxable income who pay tax on trust distributions at less than 30%.
• Companies as they will not be allowed to claim the 30% non-refundable tax credit.  The budget provided no clear indication of how this will work in practice. There is a potential double taxation implication as the company would pay tax at 25% or 30% on this income in addition to the 30% tax already paid by the trustee. We will await further information on this reform before they come into effect from 1 July 2028.

Interaction with CGT Reform

When combined with the removal of the CGT discount, the trust minimum tax can significantly increase the effective tax rate on capital gains realised within discretionary trusts.

In particular:

• Trustees will no longer be able to distribute capital gains to lower‑tax beneficiaries to achieve a materially reduced outcome
• The benefit of deferring gains within a trust structure will diminish
• Family groups will need to reassess whether existing trust arrangements remain fit for purpose

Trusts that have historically played a central role in investment and intergenerational planning will require careful review under the new rules.

A Coordinated Policy Shift

These measures do not operate in isolation. The Budget deliberately aligns:

• CGT reform (indexation and minimum tax)
• Negative gearing limitations
• Discretionary trust minimum tax rules
• Broader personal tax and integrity measures

Taken together, they signal a clear policy direction away from tax‑driven investment strategies and toward cashflow resilience, diversification and structural efficiency.

Planning Implications for Investors

From a broader planning perspective, the alignment of CGT, negative gearing and trust taxation changes represents a structural reset rather than a marginal adjustment.

Investors may increasingly need to prioritise:

• After‑tax cashflow over deferred capital gains
• Diversification across asset classes and structures
• Asset location, including the role of company structures

What Should You Do Next?

While most of these changes do not take effect immediately, they will influence long‑term investment decisions well before their start dates.

If you are considering selling assets, rebalancing portfolios, reviewing trust structures or reassessing property strategies, now is the right time to model outcomes under the new rules. Speaking with your adviser can help ensure your investment strategy remains aligned with your objectives in a materially different tax environment.

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