13 May 2026
16 min read
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The 2026-27 Federal Budget contains the most significant package of structural tax reform in the last 25 years. Three measures stand out for their breadth of application and their implications for clients across property investment, family business, professional services and corporate structuring:
This article sets out in detail each measure before considering the practical implications for:
From 1 July 2027 the 50% CGT discount under Division 115 of the Income Tax Assessment Act 1997 will be replaced for individuals, partnerships and trusts with two new schemes operating in tandem.
The first is the return of cost base indexation. Indexation will apply to assets held for at least 12 months and will operate in a manner similar to the regime that applied between 1985 and 1999. Indexation will be calculated by reference to the consumer price index, with the Australian Taxation Office (ATO) to provide guidance and calculation tools. The intention is that only the real component of a capital gain is brought to tax.
The second is a 30% minimum tax on real capital gains. The minimum tax operates as a floor. Where the taxpayer's marginal rate applied to the real gain already produces a rate of 30% or more, the minimum tax has no effect. Where the marginal rate falls below 30%, the taxpayer pays additional tax to lift the effective rate on the gain to 30%. The minimum tax is intended to mitigate the long-standing strategy of timing realisations into low-income years such as retirement, sabbaticals, or years in which business losses are available.
The reform applies to all CGT assets held by individuals, partnerships and trusts, not just residential property. Listed and unlisted shares, units in funds, private company scrip, private equity interests, infrastructure interests, business assets and personal investment assets all fall within the new regime. Companies are unaffected because companies were never entitled to the 50% discount.
Several carve-outs and exemptions have been preserved or introduced:
From 1 July 2027, losses from established residential investment properties will no longer be deductible against unrelated income such as salary, wages or business income. Such losses will be quarantined and may only be deducted against other residential property income, including rental income and capital gains arising on the disposal of residential property. Excess losses may be carried forward indefinitely and applied against residential property income in future years.
The change applies to individuals, partnerships, companies and most trusts. Two important categories of vehicle are excluded from the new rules. Widely held trusts, including most managed investment trusts, are excluded. Superannuation funds, including self-managed superannuation funds, are also excluded. Commercial property and other asset classes such as shares remain subject to existing arrangements.
The grandfathering arrangements are critical. Properties held at 7:30pm AEST on 12 May 2026 are exempt from the new rules and may continue to be negatively geared in the ordinary way for as long as they are held. The exemption extends to properties under contract but not yet settled as at the announcement time. Properties acquired between announcement and 30 June 2027 may be negatively geared during that period only, with the new rules applying from 1 July 2027. Properties acquired from 1 July 2027 onwards are subject to the new rules from acquisition.
The new build exemption preserves negative gearing for properties that genuinely add to housing supply. A new build is defined to include dwellings constructed on previously vacant land and dwellings created where existing properties are demolished and replaced with a greater number of dwellings. Knock-down rebuilds that do not increase the number of dwellings, substantial renovations of existing dwellings, and granny flat additions to existing properties are not eligible. A new build cannot have been previously sold, except where it has been first owned by the builder and occupied for less than 12 months. The exemption is available only to the first investor purchaser. Subsequent purchasers of the same property are not eligible for negative gearing or the 50% CGT discount in relation to that property, an approach modelled on state-based stamp duty concessions for new builds.
Two further exemptions complete the picture. Build-to-rent developments are exempt, consistent with the government's broader policy of using tax settings to channel institutional capital into rental supply. Private investors supporting government housing programs, including through the provision of affordable housing, are also exempt.
From 1 July 2028, trustees of discretionary trusts will be liable for a minimum tax of 30% on the taxable income of the trust. Where higher rates would otherwise apply, those higher rates continue to apply. The measure is targeted specifically at discretionary trusts and does not extend to other trust types.
The mechanism preserves the existing present entitlement model for the taxation of trusts. Trustees will continue to determine which beneficiaries are entitled to trust income each year and beneficiaries will continue to include their entitlements in their tax returns. The change is that the trustee pays 30% tax on the taxable income of the trust irrespective of how that income is distributed. Beneficiaries other than corporate beneficiaries receive non-refundable credits for the tax payable by the trustee, which can be applied against their own income tax liability. Where the beneficiary's marginal rate exceeds 30%, top-up tax is paid by the beneficiary. Where the beneficiary's marginal rate is below 30%, the credit reduces their tax to zero on that income but does not produce a refund.
Two integrity mechanisms are central to the design. First, corporate beneficiaries do not receive credits for tax payable by the trustee. This is intended to prevent the minimum tax being neutralised by cycling distributions through a private company beneficiary and converting the tax paid by the trustee into refundable franking credits at the corporate or shareholder level. Second, where the trustee receives franked dividends, the trustee must apply available franking credits to the minimum tax liability before any other use. The treatment of any excess franking credits is subject to ongoing consultation.
The minimum tax does not apply to other trust types. Fixed trusts, widely held trusts including fixed testamentary trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts are all excluded. Certain categories of income are also excluded:
Expanded rollover relief is available for three years from 1 July 2027 to assist taxpayers wishing to restructure out of a discretionary trust into a company or fixed trust. The rollover provides relief from income tax consequences including capital gains tax. The Australian Small Business and Family Enterprise Ombudsman will be available from 1 January 2027 to assist small businesses with the options available, and the Australian Securities and Investments Commission will put specific arrangements in place to support small businesses choosing to incorporate. The detailed design of the rollover, the collection mechanism for the minimum tax, and the treatment of excess franking credits will be developed through consultation.
Property investors who hold residential investment property through a discretionary trust face the combined effect of all three measures, and the cumulative impact is far greater than the sum of the parts.
Existing investments held at 7:30pm AEST on 12 May 2026 are grandfathered for negative gearing purposes and may continue to access full negative gearing within the trust until the property is disposed of. The loss must be utilised through the trust but in relation to grandfathered properties the loss can continue to be applied against the trust’s other income.
For any residential property acquired by a discretionary trust after announcement, three layers of tax cost now apply. Negative gearing is quarantined. Capital gains accruing from 1 July 2027 are subject to indexation rather than the 50% discount, with a 30% minimum tax floor. And from 1 July 2028, the underlying trust income of the trust is itself subject to the trustee-level minimum tax.
For property investors with substantial portfolios, the strategic implications are significant. Existing grandfathered properties should generally be retained within the trust to preserve the negative gearing benefit, but capital gains on those properties will be split-taxed at sale. New acquisitions, where the property is residential and not a new build, are better made outside a discretionary trust unless there is a specific non-tax reason to use one. The three-year rollover from 1 July 2027 offers a window to restructure existing portfolio holdings into a corporate vehicle or fixed unit trust, but the rollover protects against income tax and CGT only. State stamp duty consequences will need to be managed jurisdiction-by-jurisdiction, and clients should not assume that any state will follow the Commonwealth lead in providing duty relief on these restructures.
The policy settings indicate a preference for institutional capital in the residential market. The carveouts for widely held trusts and build-to-rent developments, combined with the full retention of the 60% affordable housing CGT discount, suggest that the favoured planning strategy for substantial residential property investment going forward is institutional, supply-creating, or government-aligned. Property investors operating through private discretionary trusts should anticipate that their long-run after-tax returns on existing stock residential investment will be materially lower under the new regime than under the current settings.
The income splitting strategies that have been central to Australian private wealth planning are substantially affected by these reforms. The implications fall on three groups in particular:
For professional services firms operating through service trusts and discretionary distribution arrangements, the trustee-level minimum tax of 30% is broadly neutral where distributions are being made to adult beneficiaries on marginal rates of 30% or higher, which captures most spouses, adult children and key personnel earning above $45,000. The minimum tax does, however, eliminate the benefit of distributions to lower-rate beneficiaries, including adult children studying or working part-time, and beneficiaries with no other taxable income. The government has explicitly identified the income splitting strategy as the target of the reform and the Treasury cameos in the budget papers walk through worked examples of how the strategy is neutralised. Firms that have relied on distributions to lower-rate adult beneficiaries to manage the partner-level effective tax rate will need to revisit their structures before 1 July 2028.
For family groups currently operating bucket company structures, the planning question is what to do with the existing private company and its retained earnings. The company itself is unaffected by the reform. Existing retained earnings, and the franking account balance built up over time, remain available and can be paid out as franked dividends in the ordinary way however if the dividends pass through a discretionary trust, no refund of the franking credits would be available if the shareholder has a marginal rate less than 30%. The strategic options include winding down the discretionary trust over the rollover window and using the expanded rollover relief to move underlying assets into the company directly, retaining the trust for non-income-producing purposes such as asset protection or succession planning, or restructuring the trust into a fixed trust to remove it from the minimum tax regime. Each path has different income tax, CGT, stamp duty and Division 7A consequences and the best path will differ by client.
The franking credit ordering rule introduces a further complication for trusts holding franked equity portfolios. Where the trust receives franked dividends, the trustee must apply available franking credits to satisfy the minimum tax liability in priority to any other use. For trusts that have historically streamed franked distributions to specific beneficiary classes, including to corporate beneficiaries to facilitate later franked dividend payments, the streaming flexibility is materially reduced. The treatment of excess franking credits, where franking credits exceed the minimum tax liability, is subject to consultation and will be a critical design issue.
The three measures, taken together, fundamentally alter traditional planning strategies for small and medium businesses in Australia.
Suppose a discretionary trust operates a business, with a corporate trustee and a network of distributions to family members, key employees, and a bucket company. The structure delivers asset protection through the trust, income splitting through discretionary distributions, retention of remaining earnings through the bucket company taxed at 30%, and access to the small business CGT concessions on sale. The minimum tax reform substantially undermines the income splitting and retention elements of this planning strategy, while leaving the asset protection and small business CGT concession benefits intact.
From a pure tax-rate perspective, the comparative advantage of the discretionary trust is substantially diminished. A trust paying 30% at the trustee level, with no credit available to a corporate beneficiary, compares unfavourably with a base rate entity company paying 25% on retained earnings and providing fully franked dividends to shareholders. For new businesses being established from this point onwards, the default vehicle is likely to be a Pty Ltd company unless there is a specific non-tax reason to choose otherwise. Asset protection can be achieved through holding company structures, careful contracting, and personal asset planning. Succession planning can be achieved through share transfers and shareholders agreements. Although, a discretionary trust still affords greater flexibility. A fixed trust may still present an attractive alternative to a company to preserve flow-through treatment, for example, on foreign income tax offsets, and allow for tax deferred distributions.
For existing businesses operating through a discretionary trust, the three-year rollover window from 1 July 2027 to 30 June 2030 is the planning runway. The rollover is bespoke to this reform and operates more broadly than the existing Subdivision 328-G small business restructure rollover and the Subdivision 122-A company rollover. Income tax and CGT consequences are deferred on the transfer of business assets from a discretionary trust into a company or fixed trust. The detail of the rollover, including eligibility conditions and integrity rules, will be developed through consultation. Clients should not, however, assume that the rollover will be a simple administrative election. Past restructure rollovers have carried strict requirements around ownership continuity, business continuation and the form of the resulting structure, and there is no reason to expect this one will be different.
State stamp duty remains the single largest practical impediment to restructuring. The Commonwealth rollover does not bind state revenue authorities. Each state and territory has its own concessions, exemptions and apportionment rules for trust-to-company transfers and these vary materially in their scope and conditions. A restructure that is income tax neutral at the Commonwealth level may attract substantial stamp duty in Victoria, New South Wales or Western Australia, particularly where the trust holds land or substantial business assets. Clients planning to take advantage of the rollover should engage state stamp duty advice early in the planning process and may need to time the restructure to align with state concession windows.
For businesses considering the move into a corporate structure, the non-tax advantages of companies become more apparent once the tax-rate differential between trusts and companies is reduced. Companies retain earnings cleanly without Division 7A or unpaid present entitlement complexities. Companies access debt financing more easily because lenders are familiar with corporate borrowers and security arrangements. Companies attract equity investment without the trust law complications that often deter incoming investors. Companies are sold under share sale agreements that the market prefers. Employee share schemes and equity-based incentive arrangements operate effectively through companies and with greater difficulty through trusts. Each of these advantages have always existed but the narrowing of the tax-rate differential increases their relative significance in the structuring analysis.
A final point bears emphasis. The reforms preserve the four small business CGT concessions in Division 152. Businesses operating through a discretionary trust that meet the small business CGT concession conditions on sale will continue to access the 15-year exemption, the 50 per cent active asset reduction, the retirement exemption and the rollover. The minimum tax on annual trust income does not affect the concessions available on the eventual sale of the business. For businesses approaching a sale or succession event in the medium term, the cost of restructuring out of a trust must take into account the value of the small business CGT concessions, the value of any built-up retained earnings planning strategy, the costs of restructure and the state stamp duty exposure. For businesses many years from sale, the case for restructuring during the rollover window will generally be stronger.
The window closes on 30 June 2030. Clients who do not restructure between now and then will face either paying 30% at the trustee level on an ongoing basis or bearing the full income tax and CGT cost of restructure without rollover protection. Three years is a reasonable planning horizon, but the time required for valuations, financier consents, state stamp duty applications and processing by the ATO should not be underestimated.
If you have any questions regarding taxation changes in the 2026 federal budget, please contact us here.
Disclaimer
The information in this article is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.
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