Australian Federal Budget 2026-27
OneLedger Federal Budget 2026-27 Update
OneLedger is here to bring you the highlights from the 2026-27 Budget.
The 2026-27 Federal Budget has been handed down at a time when Australia continues to face significant economic and structural pressures. With inflation from ongoing conflict affecting energy markets; households continue to feel the impact of elevated living costs, higher interest rates and ongoing affordability pressures. At the same time, the Government is facing increasing long-term expenditure obligations, particularly across the NDIS, aged care, defence spending and interest on government debt.
We have been asking for significant tax reform for years and this budget is without a doubt one of the most ambitious and controversial. It is framed as a budget that tackles generational inequality but at the same time shows the tax take from individuals eventually reaching their highest level in 30 years. To break this down; individuals have not had more income tax paid as a proportion of our income since the introduction of the GST in 2000. Tax brackets have not been indexed and GST remains untouched. There seems to be some easier wins that we flagged last year around labour laws, stamp duties and payroll taxes. Despite some of those being state based taxes, the overall conversation and intersection with federal items like increasing the GST should and need to be had.
Whilst ambitious in some respects, it ignores the impact of AI adoption – something that is at our doorstep and potentially able to deliver substantial productivity benefits. Our country’s value proposition in our industries and exports is in drastic need of innovation. As we have seen recently, our reliance on current policy settings have delivered higher inflation on what is one of the most resource rich countries in the world.
The proposals create a lot of uncertainty and clarity on the details is required. What is clear is that a lot of our tax and structuring conversations are now changing dramatically in light of the direction the Government is going.
Please find some of the key parts of the budget below:
Capital Gains Tax (CGT) Reform
In one of the largest changes to the tax system in years, the budget proposes that from 1 July 2027 the 50% CGT discount will be replaced by cost base indexation for assets held for more than 12 months, combined with a 30% minimum tax on net capital gains. This is a substantial change that applies across the board to all CGT assets, including pre-1985 assets, held by individuals, trusts and partnerships. Noting that this does not include companies (who do not get the CGT discount currently) and superannuation funds. Investors in new residential properties can choose either the 50% CGT discount or the new cost base indexation and minimum tax method.
The new regime only applies to gains arising on or after 1 July 2027. Gains arising before that date continue to use the existing 50% discount where applicable. Pre-1985 assets remain exempt for gains arising before 1 July 2027, but gains after that date are brought into the CGT system. Presumably this will require market valuations to be performed on 1 July 2027 for all assets held.
Gains from 1 July 2027 will have their cost bases indexed each year. Therefore the rate an asset beats the indexed cost base will be taxable at marginal rates. There will be a minimum tax rate of 30% which is aimed at stopping opportunistic tax planning (for example selling in a year of maternity leave or retirement, etc).
Companies appear to not be able to index the cost bases but may receive a lower headline tax rate than an individual.
OL Comment – This change was originally contemplated only for residential property and now captures all CGT assets. It changes the long-term taxation of asset growth for individuals, trusts and partnerships. Clients with large unrealised gains, pre-CGT assets will need to manage the additional tax impost in future years and make decisions based on that. For future purchases we now need to weigh up the benefits of utilizing structures like trusts (see discussion below) and potentially move investments into company or superannuation structures.
Minimum 30% Tax on Discretionary Trusts
From 1 July 2028, trustees will pay a minimum tax of 30% on the taxable income of discretionary trusts. Beneficiaries, other than corporate beneficiaries, will receive non-refundable credits for tax paid by the trustee. Corporate beneficiaries do not receive the non-refundable credit under the Budget Paper wording, so the practical interaction with corporate distributions needs legislative clarity.
The minimum tax does not apply to fixed trusts, widely held trusts, fixed testamentary trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.
There has been rollover relief announced and will be available for three years from 1 July 2027 to support restructuring out of discretionary trusts into another type of entity, such as a company or fixed trust.
OL Comment – This is a monumental change contemplated by the budget. Trusts will still be useful for asset protection, succession and commercial reasons, but their use will be seriously hampered if this proposal is fully undertaken. Distributing income to beneficiaries on lower marginal tax rates will be further limited amongst other considerations.
There is significant uncertainty around the wording that corporate beneficiaries do not receive the 30% credit. This has implications for bucket company structures many of our clients use and has the potential for double taxation. There are also questions around how this intersects with franking credits received by a trust.
We expect a lot of conversations around whether to restructure (especially for trading trusts) into companies, fixed trusts or simpler ownership structures. This measure requires significant consultation prior to being enacted given the far-reaching impacts of this announcement.
Negative Gearing Reforms
In one of the bigger announcements, the budget will limit negative gearing for residential property to new builds that increase the housing supply. Noting this flags no change to non-residential property (such as commercial and industrial property). It appears property losses will be quarantined and applied to future rental income or capital gains on eventual sale.
There are proposed transitional rules are:
- No change to properties acquired before 7:30pm on 12 May 2026, including contracts entered into but not yet settled.
- From 1 July 2027, losses from established residential properties acquired after announcement will only be deductible against rental income or residential property capital gains
Widely held trusts and superannuation funds are excluded as well as build-to-rent developments.
Example – An individual buys an established residential investment property on 1 August 2026. In the 2027-28 income year the property has $20,000 of rental income and $30,000 of deductible costs, leaving a $10,000 rental loss. Under the new rules, James cannot offset that $10,000 loss against his salary. The $10,000 is carried forward and can be used against future residential rental income or residential property capital gains. If in 2028-29 the property produces $6,000 of net rental income, James can apply $6,000 of the carried-forward loss and still have $4,000 carried forward.
OL Comment – This is a major shift for property investors. It is welcome to see that existing arrangements will be grandfathered given the number of clients who relied on the tax breaks when they made their investment decisions at the time of purchase. Going forward, residential property as an asset class will need to be reviewed given the shifting tax treatments by both State (via land taxes) and Federal governments (via CGT and negative gearing). New builds appears to not include knock down and rebuild homes but only where the housing supply has been increased – such as a duplex.
Loss Carry Back and Small Start-Up Refundability
The Government will provide tax relief to businesses and start-ups by reforming the treatment of tax losses through two methods. The policy is claimed to have been designed to encourage investment, sensible risk-taking and improve resilience when firms experience temporary shocks.
The first method is the reintroduction of the loss carry back. For tax years commencing 1 July 2026, companies with aggregated annual global turnover under $1 billion can carry back a tax loss and offset it against tax paid up to two years earlier. The loss must be a revenue loss and the refund is limited by the company’s franking account balance. This is similar in operation to the temporary COVID-era loss carry back rules.
The second part is targeted at start-ups. For tax years commencing 1 July 2028, small start-up companies with aggregated annual turnover under $10 million that make a loss in their first two years can convert the loss into a refundable tax offset. The eligible refund under this policy is capped by FBT and PAYG withholding on Australian employee wages for that loss year.
Example – ABC Pty Ltd has turnover of $4 million. In the 2025-26 year it makes taxable profit of $100,000 and pays company tax of $25,000. In the 2026-27 year it makes an $80,000 revenue loss. Assuming it has sufficient franking account balance, ABC Pty Ltd can carry back the $80,000 loss and receive a refund of $20,000 of prior year tax paid.
Separately, XYZ Pty Ltd is a first-year start-up in 2028-29 with turnover below $10 million, a $120,000 tax loss, $18,000 of PAYG withholding on Australian employee wages and $2,000 of FBT. Its refundable offset is capped at $20,000, being the FBT and PAYG withholding paid for Australian employees in that loss year.
OL Comment – This is one of the better measures in the Budget and very welcomed. It is practical cash flow support rather than just a theoretical tax concession, helping businesses that may experience an outlying tough year by some tax relief and cash flow. The additional support for start-ups is also very welcomed. This measure recognizes that early-stage companies often need staff and investment before profits and attempts to assist with cash flow during the hard start up period.
Electric Vehicle / FBT Changes
This budget adjusts the Electric Car Discount to maintain incentives for the shift to electric vehicles whilst limiting its application. The full FBT exemption is being wound back and replaced with a permanent 25% discount of the FBT payable for eligible electric cars.
The below transitional arrangements are proposed:
- Eligible electric cars retain the FBT discount rate that applied when the arrangement commenced
- So no change to existing arrangements
- Cars up to $75,000 acquired before 1 April 2029 continue with the 100% FBT discount.
- Eligible electric cars, above $75,000 but not above the fuel-efficient luxury car tax threshold, move to a 15% statutory formula rate if acquired between 1 April 2027 and 1 April 2029.
- After 1 April 2029 any eligible electric cars under the fuel-efficient luxury car tax threshold will get a 15% statutory FBT rate
Example – An individual enters into a novated lease for an eligible electric car valued at $70,000 before 1 April 2029. Under the transitional rules, the car can continue to receive a 100% FBT discount, meaning a 0% statutory formula rate applies and no FBT is payable.
Another individual salary packages an eligible electric car valued at $85,000 between 1 April 2027 and 1 April 2029 (it is still below the fuel-efficient luxury car tax threshold). The statutory formula rate is reduced from 20% to 15%. On a $85,000 car, that reduces the statutory taxable value from $17,000 to $12,750 before gross-up and employer FBT calculations.
That means that the car goes from having zero FBT payable under previous settings to potentially $12,465 in FBT payable.
OL Comment – This EV FBT discount was a popular scheme utilized by a lot of our clients given it effectively gave access to a personal EV using pre-tax money. This was best used where clients were in the higher tax brackets. The wind back was well published and with the addition of newer and cheaper EV’s on the market, is still able to be accessed albeit to a lesser extent. Our opinion is the 25% discount from 1 April 2029 will not be enough to entice clients to make the move unless infrastructure and policy changes in relation to EVs is brought in.
Instant Asset Write-Off
From 1 July 2026 the Government will permanently extend the $20,000 instant asset write-off for small businesses with turnover up to $10 million. This gives small businesses certainty rather than needing to wait each year to see whether the temporary threshold is extended again.
The write-off allows eligible businesses to immediately deduct the cost of eligible assets below the threshold, rather than depreciating those assets over several years. For assets valued at $20,000 or more, businesses can continue to use the small business simplified depreciation pool.
Example – A small company buys a piece of equipment for $18,000 after 1 July 2026 and installs it ready for use in that income year. If the company tax rate is 25%, the immediate deduction produces a tax saving of $4,500 in that year. If instead the asset was depreciated over five years on a straight-line basis, the first year deduction might only be $3,600, giving a first year tax saving of $900. The immediate write-off improves first year cash flow by around $3,600 compared with that simple depreciation example.
OL Comment – This is very welcome for small business and should have been made permanent earlier. That said, the $20,000 threshold is still relatively low for many industries where useful business equipment, vehicles, machinery and fit-out costs are well above that amount. It is helpful, but not generous. Businesses should still buy assets for commercial reasons first, not just for a deduction.
$1,000 Instant Tax Deduction
The Government will introduce an instant tax deduction of up to $1,000 from the 2026-27 income tax year onwards, as a measure attempting to make the tax system simpler while also delivering more cost-of-living relief.
The key point is that this applies to work-related deductions. It does not replace all deductions. If a taxpayer has less than $1,000 of work-related expenses, they can claim the instant deduction rather than itemising those expenses. If they have more than $1,000 of work-related expenses, they can still claim actual deductions in the usual way. Donations, union fees, professional association fees and other non-work-related deductions can still be separately claimed on top of the instant deduction.
Australian residents that earn income from any work type we expect are eligible to utilise the instant deduction method, although, we are awaiting further clarification regarding what items are deemed covered under the instant $1,000 work-related tax deduction.
Example – Barry has $450 of work-related expenses for the year and no interest in keeping receipts. Instead of itemising the $450, he claims the $1,000 instant deduction. If Barry is on a 30% marginal tax rate plus 2% Medicare levy, the additional deduction compared with claiming $450 could save around $176 in tax (($1,000 – $450) x 32%). By contrast, if Olivia has $2,800 of legitimate work-related expenses, she should continue to claim the actual $2,800 rather than limiting herself to the $1,000 instant deduction.
OL Comment – This is a sensible simplification measure and will make small individual tax returns easier. However, it should not be confused with a $1,000 refund. It is a deduction, not a refundable tax offset, so the benefit to the individual is directly related to the taxpayer’s marginal tax rate. Clients with higher actual work-related expenses should still keep records and claim actual deductions as this will provide a better result.
Working Australians Tax Offset (WATO)
The Government is proposing a new tax offset for working Australian taxpayers by introducing the Working Australians Tax Offset (WATO) of $250. This is described as a permanent annual tax offset for Australians from 1 July 2027. It should apply to all individuals including sole traders and appears to not be income tested like other offsets. It will lift the effective tax free threshold to $19,985.
OL Comment – This is a relatively modest tax cut. Similar to last years change to the 19% tax bracket to 16%, any tax saving is welcome however these do very little to blunt the impact of cost of living pressures currently being faced.
Research & Development Tax Incentive (R&DTI) Changes
The government has announced significant changes to the R&D system that will come into affect from 1 July 2028. Some of these key changes are touched on below:
- Core R&D offset rates increase by 4.5 percentage points, which Budget Paper No. 2 describes as an increase of around 25 to 50% for core R&D expenditure.
- R&D intensity threshold reduces from 2% to 1.5%.
- Supporting R&D expenditure will no longer be eligible for the R&DTI.
- Turnover threshold for the highest offset rate increases from $20 million to $50 million.
- For firms below the $50 million turnover threshold, older firms keep eligibility for the higher offset rate but refundability is limited to firms under 10 years old.
- Maximum R&DTI expenditure threshold increases from $150 million to $200 million.
- Minimum expenditure threshold increases from $20,000 to $50,000, with activities below that needing to be undertaken with a registered Research Service Provider or Cooperative Research Centre to qualify.
The reforms are aimed at shifting support toward experimental core R&D and younger firms, while reducing support for activities that merely support R&D.
The reforms materially change both eligibility and value. Core R&D becomes more valuable through a 4.5 percentage point increase in offset rates and a lower intensity threshold. However, supporting R&D expenditure is removed, smaller claims face a higher minimum expenditure threshold and refundability is narrowed for older firms.
OL Comment – This is a mixed measure. Genuine early-stage innovators may benefit, especially younger companies with meaningful core R&D spend. However, businesses with broad R&D claims that include supporting activity will need to be much more careful. Highlights the importance of utilizing specialists in this area. We are seeing more scrutiny from the ATO in this area already and would expect this to ramp up further following these changes.
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