Theme 04 — Tax Reform

Source: https://budget.gov.au/content/04-tax-reform.htm Primary explainers: New tax cuts for workers · Negative gearing & CGT reform · Minimum tax on discretionary trusts

The 2026–27 Budget delivers the largest single package of personal- and investment-tax reform since the introduction of the GST. The package is presented as broadly revenue-neutral across the forward estimates — money raised from wealthier investors and discretionary-trust users funds the new offsets, instant deduction and bracket cuts for workers.

Hierarchy

04 Tax Reform
├── 4.1  Personal income tax
│   ├── 4.1.1  Legislated bracket cuts (Stage 3 follow-ups)
│   ├── 4.1.2  Working Australians Tax Offset (WATO) — NEW
│   ├── 4.1.3  $1,000 instant work-related-expense deduction — NEW
│   └── 4.1.4  Medicare levy low-income threshold increase
├── 4.2  Investment tax
│   ├── 4.2.1  Capital Gains Tax — return to CPI indexation
│   ├── 4.2.2  30% minimum tax on real capital gains
│   ├── 4.2.3  Negative gearing limited to new builds
│   └── 4.2.4  New-build exemption / transitional rules
├── 4.3  Trusts & structures
│   └── 4.3.1  30% minimum tax on discretionary trusts
├── 4.4  Business tax (cross-ref to Theme 03)
│   ├── 4.4.1  Permanent $20k instant asset write-off
│   ├── 4.4.2  Loss carry back
│   ├── 4.4.3  Loss refundability for start-ups
│   └── 4.4.4  R&D Tax Incentive reform
└── 4.5  Vehicle / FBT
    └── 4.5.1  EV FBT discount tapering

4.1 Personal income tax

4.1.1 Resident personal income-tax scale — three rounds of cuts

The Government completes three sequential bracket cuts to the second-lowest marginal rate.

Annual per-taxpayer savings vs 2023–24 settings (table reproduced from the tax-cut explainer):

Average tax rate across all taxpayers falls from 25.5% in 2023–24 to 24.7% in 2027–28.

4.1.2 Working Australians Tax Offset (WATO) — NEW

• Amount: up to $250 per year, non-refundable, applied to tax on income from work.
• Start: from the 2027–28 income year, automatically through tax returns.
• Effect: raises the effective tax-free threshold for workers by ≈$1,785 to $19,985 (or $24,985 with LITO).
• Coverage: 13 million Australian workers, of whom 97% receive the full $250. 6.3 million women are among recipients.
• Eligible income: wages/salary, plus sole-trader and personal-services income.
• Largest permanent increase in the effective tax-free threshold since 2012–13.

4.1.3 $1,000 instant work-related-expense deduction — NEW

• From 2026–27, employees may deduct up to $1,000 of work-related expenses without receipts.
• Beneficiaries: 6.2 million workers (42% of taxpayers), average tax saving $205 for 2026–27.
• Workers with >$1,000 in work-related expenses may still substantiate the full amount the usual way.
• Charitable donations, union/professional fees and other non-work deductions are claimed on top of the $1,000.
• Estimated to reduce compliance costs by $380 million annually.

4.1.4 Medicare levy low-income thresholds

Thresholds increased by 2.9% from 1 July 2025 for singles, families, seniors and pensioners. Over 1 million Australians on lower incomes continue to pay no Medicare levy or a reduced rate.

4.2 Investment tax

4.2.1 Capital Gains Tax — return to CPI indexation

• From 1 July 2027, the 50% CGT discount for individuals, trusts and partnerships is replaced with CPI cost-base indexation.
• Mechanism mirrors the 1985–1999 regime; ATO will provide guidance tools.
• Applies to all CGT assets (shares, property, etc.) held ≥12 months.
• Asset-class neutral — only limited exemptions (see 4.2.4).

Effective rates (Treasury comparison vs current 50% discount, average past 20 years):

4.2.2 30% minimum tax on real capital gains

• From 1 July 2027, real gains face a minimum effective tax rate of 30% (excludes Medicare levy).
• No impact unless/until the gain is realised.
• Already affects nobody whose marginal rate ≥30%.
• Exemption: recipients of means-tested income support (Age Pension, JobSeeker etc.) are exempt for any financial year in which they receive a payment.
• Worked cameo (Jack, $25k other income + $10k gain in 2029–30): basic tax on gain = $1,400 (14%); minimum tax adds $1,600 to reach 30%.

4.2.3 Negative gearing limited to new builds

• From 1 July 2027, losses on existing residential investment properties can only be deducted against other residential-property income (including capital gains on residential property).
• Excess losses carry forward indefinitely to offset future residential income.
• Grandfathering: properties held at 7:30pm AEST 12 May 2026 keep full negative-gearing rights for life.
• Properties acquired 12 May 2026 – 30 June 2027 can be negatively geared during that window but not after.
• Excluded from changes: widely-held trusts (most MITs), super funds (incl. SMSFs), commercial property, shares, other asset classes.
• Approx 230,000 taxfilers per year (1% of taxfilers) acquire negatively-geared properties.

4.2.4 New-build exemption and transitional rules

• New builds: investors may choose between the existing 50% CGT discount or indexation + 30% minimum tax, and keep full negative gearing.
• "New build" definition (Table 2 of the explainer):

• Subsequent purchasers of a new build cannot access 50% discount or negative gearing in respect of that property.
• Affordable housing 60% CGT discount retained. Main residence remains CGT-exempt. Four small-business CGT concessions unchanged.
• Government will consult on interaction with early-stage / start-up investor incentives.
• Estimated housing impact: ~75,000 additional owner-occupiers over 10 years (≈10 years' worth of declining ownership rate reversed).
• Estimated rent impact: <$2/week increase on the median rent.

4.3 Trusts & structures

4.3.1 30% minimum tax on discretionary trusts

• From 1 July 2028, trustees of discretionary trusts pay tax at a minimum 30% on the trust's taxable income (unless higher rates apply).
• Beneficiaries (non-corporate) get non-refundable credits for trustee-paid tax.
• Corporate beneficiaries receive no credit — closes the "bucket company" loophole.
• Trustees receiving franked dividends must use franking credits first to pay the minimum tax.
• ~810,000 adults (5% of taxfilers) receive discretionary-trust distributions; ~840,000 discretionary trusts in Australia (80% of all trusts).
• Rollover relief (3 years from 1 July 2027) supports restructuring into a company or fixed trust without CGT consequences.
• ASBFEO support available from 1 January 2027.
• Exclusions: fixed/widely-held trusts, complying super funds (incl. SMSFs), special disability trusts, deceased estates, charitable trusts, primary-production income, certain minor income, NRWT income, existing-testamentary-trust assets.

4.4 Business tax (see Theme 03 — Productivity for fuller detail)

4.5 Vehicle / Fringe Benefits Tax

4.5.1 EV FBT discount tapering

Existing salary-packaged arrangements preserved for the life of the arrangement.