The budget announcement this week has left all of us with plenty to digest!

We are yet to see the legislation, and given the devil is always in the detail, understanding this legislative detail will be crucial before making any vast changes or casting any final opinions.

This said, what we do know is the budget offers little encouragement for many investors and business owners right now. Honestly speaking, apart from lifting taxes and removing some of the tax benefits of investing in residential investment property, there doesn’t appear to be a whole lot of reform in what’s been announced. In fact, what the budget seems to have done is add a whole lot more tax and complexity, without fixing some the structural imbalances that are causing a problematic overreliance on income tax to fund the budget in Australia. We are hoping in the lead up to the next federal election further personal income tax cuts may come back onto the agenda.

For regular investors, one thing this budget does is reinforce the crucial role of superannuation. Whilst many other structures, including family trusts, are set to take somewhat of a hit, the favourable conditions for superannuation thankfully remain untouched (outside of the extra tax on $3m balances previously legislated), and continue to offer an appealing investment structure.

There is time

Before getting into the details of the proposed changes, it is important to reinforce the message that there is time.

The media noise around the budget is loud right now, and understandably so. However, we need to wait for the detail in the legislation before making any decisions or recommendations. There is time to thoroughly digest and consider what it all means before making any rash changes, and we can’t emphasise the importance of this enough.

In many cases, the proposed changes will require a rework of some of your strategies. Your adviser will be proactively reviewing these and will work through these with you at your next review meeting, or perhaps during relevant end of financial year discussions, if required. If you have any questions or concerns in the meantime, we encourage you to get in touch.

This all said, here is a summary of the key take-outs you should understand from this week’s budget:

Capital Gains Tax (CGT) discounts

Current rule (which will continue to apply on gains up to 1 July 2027):

• For investments held for more than 12 months, a flat 50% discount on the gain applies (no discount for investments held less than 12 months)

New rule (which will start for gains earned from 1 July 2027):

• General rule will be that instead of a flat discount, you only pay CGT on the ‘real’ returns (ie inflation is added to the cost base).
• For assets held prior to 1 July 2027, the flat 50% discount will apply on gains earned up until 1 July 2027. Gains after this date will move to the new ‘indexed cost base’ system.
• For ‘new’ residential property, investors can choose the better of the 50% flat discount or the new method.
• Assets bought prior to 1985, which were previously exempt from CGT, will become liable for CGT on gains earned from 1 July 2027.
• For investments held less than 12 months, no change (i.e. no CGT discount applies).

Minimum 30% tax on discounted capital gains

Current rule:

• Discounted capital gains are added to an investor’s tax return and taxed as if the investor had earned that money at work.
• As a result, tax on the discounted net capital gain could be between 0% and 47%.

New rule (from 1 July 2027):

• Assets owned prior to 1 July 2027 and sold on or after 1 July 2027 will be treated under current arrangements on gains made prior to 1 July 2027 (ie the 50% discount and no minimum 30% tax), and under the new arrangement where realised gains (net of inflation) from 1 July 2027 will be taxed at between 30-47%.
• There will be some exemptions, including if the investor is receiving at least part Age Pension.

Minimum 30% tax on discretionary trust (eg Family Trust) distributions

Current rule:

• Trust distributions are added to a beneficiary’s tax return and taxed as if it were normal work income.
• Beneficiaries can benefit from the tax-free threshold, and marginal tax rates apply so the applied tax rate ranges from 0-47%.

New rule:

• For discretionary family trusts only, from 1 July 2028, the trustee will pay 30% tax on distributions and then pass a tax credit to individuals.
  • Importantly, a tax credit is not passed to a corporate beneficiary (ie no franking credit), which could lead to double taxation applying to corporate beneficiaries. We need more information on this point.
• The minimum 30% tax for trusts also includes new trusts created via a Will, ie Discretionary Testamentary Trust.

By way of illustration, for an adult child studying at university who lives at home and receives no other income, other than $45,000 of trust distributions:

• Under the current rule, they would pay a total of $4,288 tax (the first $20,000 being tax free, then the balance being at the lower tax bracket)
• Under the new rule, they would pay $13,500 in tax, being a flat 30% rate.

Negative Gearing changes

Negative gearing occurs when expenses are higher than income from an investment. The changes to negative gearing apply only to residential real estate investments (not main residences, commercial properties, or other investments such as shares).

Rule for residential property with existing arrangements before 7.30pm on 12 May 2026:

• No change. Investors will remain able to deduct net rental income losses against other income.

Rule for existing residential property that is purchased from 13 May 2026 onwards:

• There will be no ability to use net rental income losses to reduce other income, therefore removing the immediately income tax benefits that previously existed with negative gearing.
• The losses are not lost, however. Instead, they are rolled into calculations for capital gains when a property is sold or offset against other property rental income. It is important to note that whilst some relief, this does not give the same tax effectiveness as the current rules.

Rule for newly built residential property that is purchased from 13 May 2026 onwards:

• Current negative gearing rules apply for brand new builds, apartments bought off the plan and knockdown rebuilds where more dwellings are added to the block (eg dual key or converting from house to townhouses).

Electric vehicle FBT changes

Current rule:

• Electric vehicles first driven after 1 July 2022 and priced under the low-emission luxury car threshold can be provided by employers to employees without Fringe Benefit Tax (eg via novated leases).
• Existing leases will continue unchanged.

New rule:

• For electric cars delivered after 1 April 2027:
  • If the cost is under $75,000, the full FBT exemption will remain.
  • If the cost is over $75,000, but under the luxury car threshold, a 25% reduction in FBT will apply.
• For eligible electric cars first used on or after 1 April 2029, a flat 25% reduction in FBT will apply.

Please note, while this seems like only a small change, losing the full FBT exemption substantially reduces the benefit of buying an EV under a salary packaging arrangement. Please also note timing is important with the cut-off dates being the delivery date, not when the employee signs up for a lease.

Instant tax deduction for taxpayers

Current rule

• Proof of payment for work-related expenses needs to be kept and entered into a tax return, with personal vs work usage apportioned.
• Limit of $300 for expenses without a receipt.

New rule:

• From 1 July 2026, a short-cut method is available for work related expenses, where no proof needs to be kept up to a limit of $1000. This effectively forms an instant tax deduction for taxpayers.
• Individuals with work related expenses exceeding the $1000 instant deduction would still be able to claim those expenses under the ordinary deduction rules. Non-work-related deductions, such as charitable donations, unions or professional association fees, would remain separately claimable in addition to the instant tax deduction.

Final thoughts

While it seems likely that the proposed changes will be legislated, we need to see the detail to understand the full picture. The various changes and implications, and how these relate to your current strategies, will be individually worked through. We look forward to discussing this you in your upcoming review meetings, but as always, please don’t hesitate to reach out if you have any questions in the meantime.

Any information in this article is general in nature and does not consider any of your personal objectives, financial situation and needs. It is as intended, to be of a general nature only and NOT a recommendation to you. You should consider whether the information is appropriate to your needs, and where appropriate, seek personal advice from a registered financial adviser.