The most important tax changes in the 2026 federal budget affect nearly every Australian taxpayer. Income tax rates are dropping, the capital gains tax system is getting a major overhaul, and negative gearing rules for residential property are tightening.
If you run a discretionary trust or a small business, there are a lot of changes here for you, too.
We’ve been covering Australian tax and business policy at Australian Business Magazine for years. The experience helps us identify the budget measures that are likely to have the greatest impact on taxpayers and businesses.
In this article, we’ll explain the major changes announced in the 2026 federal budget. We’ll also look at who’s likely to be affected and when the measures are expected to take effect.
Read on to find out more about the tax changes you’ll need to be aware of in the months ahead.
What Are the Main Budget Tax Changes for Australian Workers?
The main tax change for workers is a reduction in the lowest marginal tax rate. The rate applying to taxable income between $18,201 and $45,000 will fall from 16% to 15% on 1 July 2026, before dropping again to 14% on 1 July 2027.
Once both reductions are in place, Australian taxpayers will receive tax cuts of up to $536 a year compared with the 2024-25 settings.
Here’s a breakdown of the five tax changes that directly affect Australian workers and their take-home pay:
- Lower Income Tax Rate: As mentioned, the cent tax rate on taxable income between $18,201 and $45,000 drops to 15% from July 2026, then to 14% the following year. That’s an extra $268 in the first year and $536 annually after that for a worker on average earnings.
- $1,000 Instant Tax Deduction: You can now claim a flat $1,000 instant tax deduction, instead of itemising every work-related expense. Around 6.2 million workers, or 42% of taxpayers, will benefit from an average tax saving of $205. You can still itemise the usual way if your expenses exceed $1,000.
- $250 Working Australians Tax Offset: Eligible workers will receive a permanent tax offset of up to $250 a year from the 2027–28 income year. The Australian Taxation Office (ATO) will apply it automatically when you lodge your tax return. More than 13 million Australian workers, including sole traders, are expected to benefit from it.
- Higher Effective Tax-Free Threshold: Combined with the legislated tax cuts and WATO, the effective tax-free threshold rises to nearly $19,985. Eligible recipients of the low-income tax offset see that number climb to $24,985. That means more of your income stays in your pocket before you pay tax.
- Medicare Levy Low-Income Threshold Increase: Singles, families, and seniors all get a 2.9% bump to their Medicare levy low-income thresholds from 1 July 2025. If you earn below this new threshold, you won’t owe the Medicare levy at all.
These budget tax changes apply in stages, so you should check which ones affect your next tax return.
How Does Capital Gains Tax Reform Work?
Capital gains tax (CGT) reform will replace the current 50% CGT discount with inflation-based cost-base indexation. From 1 July 2027, investors will pay tax only on capital gains that exceed inflation. This reform will affect individuals, trusts and partnerships.
The proposed changes would represent the reform of Australia’s CGT regime since the introduction of the 50% discount in 1999.
We’ll now explain these changes further below.
Cost-Base Indexation Instead of the 50% Discount
The current 50% CGT discount will disappear for most assets from 1 July 2027. In its place, the ATO will adjust your asset’s cost base using an inflation index. So you’ll only pay tax on the real capital gains, rather than gains inflated by rising prices over time.
That said, new build investors will get a choice. They can stick with the 50% discount or use the new cost-based indexation method (whichever works better for their situation).
The 30% Minimum Tax Rate on Gains
On top of indexation, a 30% minimum tax rate kicks in for capital gains from 1 July 2027. That means even if your other deductions and offsets bring your taxable income down, you’ll still pay at least 30 cents on every dollar of capital gains.
The new method will generally apply to capital gains on assets held for more than 12 months by individuals, trusts and partnerships. According to the budget papers, around 83% of the current CGT discount benefit goes to the top 10% of taxpayers by income.
What Are the New Negative Gearing Rules?
The biggest negative gearing change will affect investors who purchase established residential properties after budget night (7:30 pm AEST on 12 May 2026). Rental losses from those properties will no longer offset salary or wage income. Instead, residential rental losses will be quarantined against residential property income.
The table below shows how the new rules compare for established and new build properties:
| Detail | Established Property (Post Budget Night) | New Build Property |
| Negative gearing from 1 July 2027 | Losses only offset residential property income | Losses offset all income |
| Properties owned before 12 May 2026 | Grandfathered under current rules | N/A |
| Super funds and widely held trusts | Exempt from changes | Exempt from changes |
| Build-to-rent developments | Targeted exemptions apply | Exempt |
The gap between established and new-build treatment is considerable. If you hold an established property bought after budget night, you can still carry forward unused losses. But you can only use them against future residential property income or capital gains from residential properties.
And as we mentioned earlier, new builds sit in a completely different category. Investors who buy or build new housing supply still get full negative gearing and can choose between the 50 per cent CGT discount or cost-based indexation.
The government’s goal here is to push investment toward new housing supply rather than existing stock (particularly in areas with strong population growth).
However, properties in super funds and widely held trusts, like most managed investment trusts, don’t fall under these changes at all.
How Does the Minimum Tax on Trusts Work?
The proposed reforms would introduce a 30% minimum tax on income distributed from discretionary trusts. Trustees will pay this rate on all taxable income distributed from discretionary trusts, regardless of the beneficiary’s marginal tax rate.
More than 900,000 family trusts operate across Australia, so the trust tax reforms could change the tax outcomes available to many families and small businesses.
Let’s get into more detail about which trusts are likely to be affected.
Discretionary Trusts From 1 July 2028
Right now, trustees can distribute income to beneficiaries at lower tax rates. A common example is a family trust distributing profits to an adult child earning under the tax-free threshold. From 1 July 2028, that strategy becomes far less effective.
And the 30% minimum tax rate applies at the trustee level, rather than the beneficiary level. As a result, discretionary trust distributions can’t be taxed at a beneficiary’s lower personal tax rate.
To sum it up, trustees must pay at least 30% tax on discretionary trust income, regardless of who receives the distribution.
Exemptions and Rollover Relief for Small Business
Not every trust structure falls under the new rules. Fixed trusts, charitable trusts, deceased estates, and attribution-managed investment trusts are all exempt. Super funds will also remain unchanged (although some existing arrangements may still warrant a review).
For small businesses that need to restructure, the government is offering three-year rollover relief from 1 July 2027.
And from January 2027, the Australian Small Business and Family Enterprise Ombudsman will help business owners work through their options.
What Did the Budget Change for Small Businesses?
The 2026 federal budget delivered a mix of cash flow relief and compliance savings for small businesses. Loss carry-back is back, the instant asset write-off is now permanent, and startups will get a brand new refundable offset.
Below is a breakdown of these most direct small business budget changes in this year’s package:
- Permanent $20,000 Instant Asset Write-Off: Each eligible asset under $20,000 can be written off immediately in the year you buy it. The five-year re-entry suspension for businesses that opted out of simplified depreciation will also stay paused until 30 June 2027.
- Loss Carry-Back for Companies: Eligible companies can offset a current-year tax loss against tax paid in the previous two income years. The measure is expected to benefit up to 85,000 companies, most of which are small businesses. The amount a company can claim depends on factors including its franking account balance.
- Loss Refundability for Startups: Startup companies in their first two years of operation can convert tax losses into a refundable offset from 2028-29. But your turnover must be below $10 million to qualify. This offset caps at the value of fringe benefits tax and withholding tax you’ve paid on employee wages.
- Monthly PAYG Instalment Flexibility: Small and medium-sized businesses will be able to make PAYG instalments monthly rather than quarterly from 1 July 2027. The Australian Taxation Office (ATO) will support the change through approved calculations integrated into accounting software.
These measures won’t fix every pressure point for small businesses, but they’ll put more cash back in your hands sooner.
What Changed for EV and Investment Tax Benefits?
The 2026 budget changed the tax treatment of electric vehicles, venture capital (VC), and research spending. Specifically, the EV fringe benefits tax exemption is being phased out, VC incentives are expanding, and the R&D development tax incentive gets a full overhaul.
These changes signal a shift in how the tax system supports business investment and productive investment.
We’ll walk you through these changes in the following sections.
Fringe Benefits Tax Discount for Electric Vehicles
Did you know that the full fringe benefits tax (FBT) exemption for electric vehicles is winding down? According to the ATO, EVs valued under $75,000 will keep the full exemption until April 2029, but after that, they’ll receive a permanent 25% FBT discount instead.
However, EVs valued above $75,000 but below the fuel-efficient luxury car tax threshold will receive a 25% FBT discount from 1 April 2027. And if your EV sits above the luxury car tax threshold, you’ll pay the full fringe benefits tax rate with no discount at all.
The new rules will change how businesses calculate EV fleet costs under salary packaging and novated lease arrangements.
Expanded Venture Capital Incentives
The government will expand the investment caps that apply to Early Stage Venture Capital Limited Partnerships (ESVCLPs) and Venture Capital Limited Partnerships (VCLPs) from 1 July 2027. The maximum ESVCLP fund size will rise to $270 million, while the investee business asset cap for VCLPs will increase to $480 million.
The expanded limits will apply to existing and new funds for investments made on or after that date. The government also closed the Early Venture Capital Limited Partnership (EVCI) program to new applications on budget night.
R&D Tax Incentive Reforms From 2028
The government will reform the Research and Development (R&D) Tax Incentive from 1 July 2028. The minimum expenditure threshold will increase from $20,000 to $50,000, which is likely to reduce the number of lower-value claims. Offset rates will also increase for eligible R&D activities.
The refundable offset changes primarily target younger companies. The SME turnover threshold for the refundable offset will rise to $50 million, although refundability will be limited to companies less than 10 years old.
Not only that, but the annual cap on eligible claims will also increase from $150 million to $200 million.
What Should You Do Before These Changes Start?
Most of these budget tax changes don’t land all at once. Income tax cuts will start from July 2026, but the capital gains tax and negative gearing reforms will kick in from 1 July 2027. And the trust minimum tax doesn’t begin until 2028.
This staggered timeline gives you room to plan, but only if you act early. The steps you take now will depend on where your income comes from.
Steps for Employees and Sole Traders
Your take-home pay is about to change in stages. But a good understanding of the new rates, deductions, and offsets can help you avoid surprises at tax time.
Here are four things you should sort out before your next tax return:
- Check Your New Tax Rate: It’s important to confirm your updated withholding amounts with your employer or payroll software before July 2026. The lower tax rate should flow through to your pay automatically, but it’s worth double-checking.
- Choose Your Deduction Method: You can claim the $1,000 instant tax deduction without receipts, or keep itemising if your work expenses run higher. One option will save time, but the other could save you more money.
- Plan for the WATO: The Working Australians Tax Offset (WATO) will provide eligible workers with a tax offset of up to $250 a year from the 2027-28 income year. The ATO will apply the offset automatically when you lodge your tax return, and eligible sole traders will qualify for it.
- Review Your Income Mix: If you earn income from multiple sources, the new tax measures could affect your tax position in different ways. You should review how the legislated tax cuts, WATO, and the instant deduction apply to your circumstances.
Even small adjustments to your withholding or deduction method can add up over the financial year. As the new tax measures begin to take effect, a review of your tax position could help you prepare for tax time properly.
Steps for Property Investors and Trust Holders
Property investors and trust holders face serious changes under the proposed reforms. The new rules could affect how investment income, capital gains and trust distributions are taxed in the years ahead.
These five steps can help you stay ahead of the 2027 and 2028 deadlines:
- Audit Your Property Portfolio: We recommend looking at your negative gearing exposure on any established residential property purchased after budget night. From 1 July 2027, those losses won’t offset your salary anymore.
- Check Grandfathering Rules: Properties you owned before 7:30 pm on 12 May 2026 keep their current tax treatment. That includes contracts exchanged but not yet settled.
- Reassess Trust Structures: If you hold investments through a discretionary trust, the 30% minimum tax from 2028 could change your distribution strategy entirely. Don’t wait until the last minute.
- Model Your CGT Position: You should run the numbers on how cost-based indexation affects your capital gains compared to the old 50% discount. The answer may vary depending on how long you’ve held the asset and how much it’s grown.
- Get Professional Advice: The proposed changes could affect your investment and tax planning decisions for years to come. That’s why a discussion with a qualified accountant may help you evaluate restructuring options, rollover relief, and the impact of the new rules on your broader financial plan.
The worst time to review your investment structure is after the new rules are already in place. If you hold property or run a trust, start those conversations with your adviser now.
Planning Ahead for the New Tax System
The 2026 federal budget introduced a broad package of tax reforms with implications for workers, investors and businesses. Income tax cuts and the $1,000 instant tax deduction are among the headline measures. The reform package also includes changes to capital gains tax, negative gearing, and discretionary trust taxation.
While some of these changes are already in effect, others don’t start until 2027 or 2028. That gives you time to plan, but not forever.
If you’re an employee, check your new withholding amounts and decide how you’ll handle work-related deductions. And if you hold residential property or run a discretionary trust, start reviewing your structures now.
The best thing you can do is talk to a registered tax professional who understands how these budget tax changes apply to your specific situation.
And if you want to dig deeper into how this budget affects Australian businesses, browse our other articles on the 2026 federal budget over at Australian Business Magazine.
Frequently Asked Questions (FAQs)
While the headline budget measures have attracted most of the attention, many Australians still have questions about how tax policy works and what future reforms could mean.
Here are answers to some commonly asked questions.
What Is the Combined Benefit of Tax Support and Income Support Payments?
Some households may qualify for assistance through multiple government programs at the same time. Eligibility depends on factors such as income, family circumstances, and the specific program requirements.
Why Do Governments Consider Future Generations When Designing a Sustainable Tax System?
Policymakers often assess whether current revenue settings can support long-term economic growth, public services, and fiscal stability without creating excessive burdens for tomorrow’s taxpayers.
How Can Governments Reduce Compliance Costs Without Cutting Taxes?
Administrative simplification, digital reporting tools, and clearer regulations can lower paperwork burdens. These changes may help businesses and individuals spend less time meeting their obligations.
What Role Does Payroll Tax Administration Play in Business Compliance?
It generally covers how employers register, report wages, and meet state or territory payroll tax obligations. Effective processes can improve accuracy and reduce the risk of reporting errors.
How Do Existing Housing Reforms Support Responsible Economic Management?
Supporters argue that measures aimed at affordability and supply can strengthen market stability while helping governments balance economic objectives and budget priorities.
What Happens When a Treasury Laws Amendment Creates Fairer Tax Arrangements?
Legislative updates may be intended to improve consistency, close loopholes, or clarify existing rules. The practical effects depend on the specific provisions passed by Parliament.
Can an Income Tax Rates Amendment Result in an Ongoing Annual Tax Cut?
Legislative changes can adjust thresholds or rates over multiple years, potentially resulting in recurring savings rather than a one-off benefit.
Can Income Support Recipients Qualify for an Annual Tax Offset?
Potentially. Eligibility for a tax offset depends on the rules governing the particular offset, as well as a person’s income and circumstances.
