The 2026-27 Federal Budget, announced on 12 May 2026, has attracted attention because it includes major proposed changes to negative gearing, discretionary trusts, and capital gains tax (CGT). These changes could impact business owners, property investors, and families who use discretionary trusts. It is crucial to remember that these changes are only proposals at this stage. They are not yet law and could still change before they are passed by Parliament. Although some legislation has already been introduced, there is no guarantee it will be passed in its current form. Because these proposals have caused confusion and concerns for many people, we have outlined what we know so far.
Negative Gearing Changes – Proposed from 1 July 2027
The Government plans to limit negative gearing for established residential properties bought after 7:30 pm AEST on 12 May 2026. Under the proposed rules:
- Rental losses can only be used to minimise rental income or capital gains from other residential properties.
- Any unused losses must be carried forward and used against future residential rental income or capital gains.
Existing Property Owners
If you already owned an established residential property or had signed a contract to buy one before Budget night, the current negative gearing rules will continue to apply. This means you can still use rental losses to reduce other income, such as business income or salary, until the property is sold.
The Government has also indicated that current negative gearing rules should still apply to properties bought before Budget night, even if they were not being rented out at that time.
For instance, if you currently live in a property as your main residence and later rent it out, you may still be able to use the existing negative gearing rules. However, this area is complex, and there are some technical issues that may affect the outcome.
What Is Not Affected?
The proposed restrictions only apply to residential property. Investments such as:
- Commercial property
- Shares
- Other investment assets
will not be affected.
There are also exemptions for commercial residential properties such as hotels, motels, and boarding houses.
New Builds
New residential properties will continue to qualify for the current negative gearing rules, both before and after 1 July 2027.
However, the Government has not yet provided full details on what will qualify as a “new build.”
Additional exemptions will apply to build-to-rent developments and certain government-supported housing projects.
Capital Gains Tax (CGT) Changes – Proposed from 1 July 2027
Currently, individuals who own an asset for more than 12 months can generally reduce their taxable capital gain by 50% through the CGT discount. A similar outcome can also apply when a trust distributes a capital gain to an individual beneficiary. Under the proposed changes, the 50% CGT discount for trusts and individuals would be replaced with:
- Cost base indexation (adjusting the asset’s cost for inflation), and
- A 30% minimum tax on capital gains.
These changes would apply to:
- Residential property
- Commercial property
- Shares
- Business assets
- Pre-CGT assets
Existing Gains Protected
Capital gains that build up before 1 July 2027 will still receive the current CGT discount or existing pre-CGT exemptions. Because of this, assets may need to be valued as at 1 July 2027 so future CGT calculations can be made correctly.
Special Rules
Investors in new residential properties will be able to choose either:
- The existing CGT discount, or
- The new indexation and minimum tax method.
Companies will not have access to indexation. Complying superannuation funds will continue to receive the existing one-third CGT discount.
Indexation will also not be available to individuals who were foreign residents or temporary residents for tax purposes during the ownership period of the asset.
Discretionary Trust Changes – Proposed from 1 July 2028
The Government has proposed introducing a 30% minimum tax rate on the taxable income of discretionary trusts. This would be a major change to the current tax system.
Under the proposal:
- The trustee would initially pay the 30% tax.
- Beneficiaries (other than companies) would receive a non-refundable tax credit for the tax already paid by the trust.
The main purpose of this change is to reduce income splitting between family members and the use of corporate beneficiaries, often called “bucket companies.”
Exemptions
The proposed rules would not apply to certain trusts, including:
- Fixed trusts
- Widely held trusts
- Superannuation funds
- Special disability trusts
- Deceased estates
- Charitable trusts
- Certain primary production income
- Some other specific trust types
Testamentary Trusts
The Government has stated that existing discretionary testamentary trusts would be exempt from these changes. However, there is uncertainty about how the rules would apply to testamentary trusts created after Budget night. Media reports suggest the Government may reconsider this aspect of the proposal, but no final decision has been made.
Transition Relief
To help people adjust to the new rules, the Government has proposed 3 years of rollover relief for trust restructures into companies or fixed trusts.
Other Measures Worth Noting
$250 Working Australians Tax Offset (from 2027–28)
This measure would increase the effective tax-free threshold for employees and sole traders.
$1,000 Standard Deduction for Work-Related Expenses (from 2026–27)
This $1,000 standard deduction for work-related expenses makes tax time simpler for many taxpayers.
Small Business Measures
The Government proposes making the $20,000 instant asset write-off for eligible plant and equipment a permanent measure for small businesses.
What Should You Do?
These proposed reforms are significant, but their impact will depend on your personal circumstances. As the measures are still being debated and may change before becoming law, it is important not to make major decisions based solely on the current proposals.
If you are concerned about how these changes may affect you, it may be worth reviewing your situation, seeking professional advice, and considering the possible impacts on your investment, business, or trust structures.