Australia’s Tax System Enters the ‘Redistribution 2.0’ Era: The Shift from Income Taxation to Capital Taxation

On Tuesday 12 May 2026, Treasurer Jim Chalmers handed down the 2026-27 Federal Budget. Several of the most significant announcements have been framed as part of a broader plan to help young Australians access the property market. While acknowledging that the key to housing affordability is supply, the Government clearly sees changes to negative gearing and the CGT discount as important pieces of the puzzle.

The Government has described this as its most ambitious budget. If the proposed measures are implemented, the impact will be felt across a wide cross-section of Australian society — individual taxpayers, investors, businesses, employers, and people with disability.

The Budget has been released against a backdrop of global fuel price shocks, persistent inflation, rising interest rates and growing concerns around housing affordability. These themes are reflected in the announced measures.

While there are significant changes to the tax system, the superannuation system appears to have been left alone this year.

Important: Unless otherwise noted, the measures discussed below are announcements only at this stage. There is no guarantee they will be implemented as announced (or at all). We will keep you up to date as developments progress.

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1. Individuals and families

1.1 A new "Working Australians Tax Offset"

Start date: 1 July 2027 (from the 2027-28 income year)

A new $250 "Working Australians Tax Offset" will be a permanent feature of the tax system. It is aimed at taxpayers who derive income from work — employees on salary or wages, and sole traders carrying on a business.

In practical terms, the offset increases the effective tax-free threshold on work income by nearly $1,800 to $19,985 (or up to $24,985 for workers also eligible for the Low Income Tax Offset).

1.2 $1,000 instant tax deduction for workers

Start date: 1 July 2026

During the 2025 federal election campaign, the Labor party committed to a $1,000 instant tax deduction for work-related expenses. Treasury released draft legislation for public consultation on 20 April 2026.

Key feature: Australian residents will be able to claim a standard deduction from the 2026-27 income year onwards for work-related expenses, capped at the lower of $1,000 and the individual's assessable labor income. The normal substantiation rules will not apply to the standard deduction.

Charitable donations, union fees and professional association membership fees can be claimed on top of the standard deduction. Taxpayers with qualifying work-related expenses exceeding $1,000 can instead claim their actual expenditure, but will need to substantiate it.

The draft legislation also contains additional changes to the tax system:

•       Depreciating assets mainly used to generate labour income will not qualify for the low-value pooling rules.

•       Modified rules will apply to determine the tax impact on the sale of assets used in producing labour income.

•       An FBT exemption that currently applies when certain work-related items are provided under a salary packaging arrangement will be removed.

1.3 Personal income tax cuts

Start date: 1 July 2026

Legislation has already been passed to ensure that the 16% tax rate on taxable income between $18,201 and $45,000 will drop to 15% from 1 July 2026, and to 14% from 1 July 2027. This was announced in the 2025-26 Federal Budget.

1.4 Medicare levy low-income thresholds increased

Start date: 1 July 2025

The Medicare levy low-income thresholds will be increased for singles, families, seniors and pensioners:

•       Singles: from $27,222 to $28,011

•       Families: from $45,907 to $47,238

•       Single seniors and pensioners: from $43,020 to $44,268

•       Senior and pensioner families: from $59,886 to $61,623

•       Per-dependent-child/student uplift: from $4,216 to $4,338

2. Investors — the most consequential reforms

For high-net-worth and property-investor clients, this is the section that demands attention. Three interlocking reforms will fundamentally reshape the after-tax economics of Australian investment from 1 July 2027.

2.1 Negative gearing — limits introduced

Start date: 1 July 2027

"Negative gearing" refers to the situation where a rental property owner claims deductions for holding costs that exceed the rental income received in the income year. The loss is typically offset against other income (including salary, wages and net capital gains) to reduce overall taxable income, or carried forward as a tax loss.

From 1 July 2027, the existing negative gearing rules will only be available in connection with new builds. Losses from established residential properties acquired from 7:30pm AEST on 12 May 2026 will only be deductible against rental income or capital gains from residential properties. Excess losses will be carried forward to be offset against residential property income in future years.

"New builds" are residential properties which genuinely add to supply — for example, dwellings constructed on vacant land, or established properties demolished and replaced with a greater number of dwellings. Knock-down rebuilds or substantial renovations that do not increase supply will not be treated as new builds.

Key carve-outs: Properties acquired before 12 May 2026 are exempt from the changes (grandfathered). The changes do not apply to managed investment trusts or superannuation funds, and do not affect other asset classes such as commercial properties or shares.

Source: Treasury factsheet "Negative Gearing and Capital Gains Tax Reform" — budget.gov.au/content/factsheets/download/tax-explainers-negative-gearing-capital-gains-tax.pdf

2.2 CGT discount and pre-CGT exemption replaced by indexation plus a minimum tax rate

Start date: 1 July 2027

The CGT discount has enabled individuals, trusts and complying superannuation funds to reduce the taxable capital gain on disposal of an asset held for more than 12 months. The standard discount is 50% for trusts and individuals (lower rates can apply to non-residents and temporary residents), and 1/3 for superannuation funds.

From 1 July 2027, the Government is planning to revert to an indexation system based on the Consumer Price Index (CPI) — much like the system that applied between 1985 and 1999. Indexation will only be available for assets held more than 12 months.

In addition, a minimum tax rate of 30% will apply to capital gains accruing from 1 July 2027. There will be some exceptions for recipients of means-tested income support payments (e.g. Age Pension, JobSeeker).

Assets acquired before 20 September 1985 (pre-CGT assets) have historically been exempt from CGT. This exemption will no longer apply from 1 July 2027.

Transitional rules will limit the impact for existing investments: the existing CGT discount and pre-CGT exemption will continue to apply to gains that accrued before 1 July 2027. Taxpayers will need to determine the value of existing assets on 1 July 2027 to enable CGT calculations.

The CGT changes apply to all asset classes — including property and shares — and to individuals, trusts and assets held by partnerships.

Note: Investors in new residential properties will be able to choose to apply either the 50% CGT discount or cost-base indexation plus the minimum tax.

Source: Treasury factsheet "Negative Gearing and Capital Gains Tax Reform" — budget.gov.au/content/factsheets/download/tax-explainers-negative-gearing-capital-gains-tax.pdf

2.3 Minimum tax on family trust distributions

Start date: 1 July 2028

The Government has announced that a minimum 30% tax rate will apply to distributions made by discretionary trusts.

Discretionary trusts (often called family trusts) are widely used for both investment and business activities. The trustee typically has power to decide how to allocate income and capital gains across family members and related entities — making the structure an effective tax planning tool.

From 1 July 2028, the trustee of a discretionary trust will pay a minimum 30% tax on the taxable income of the trust. Individuals and other non-corporate beneficiaries will receive a non-refundable tax credit for the tax paid by the trustee.

The non-refundable credit will not be available for corporate beneficiaries — often referred to as "bucket companies". It appears the changes are intended in part to discourage trustees from distributing income to corporate beneficiaries.

The Government has indicated that a limited form of rollover relief will be available for three years from 1 July 2027, for small businesses and others wishing to restructure out of a discretionary trust into a company or fixed trust. Rollover relief may help to minimise CGT and other income tax implications, but broader issues such as stamp duty will need to be carefully considered before any restructure is undertaken.

The minimum tax will not apply to fixed and widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.

Certain types of income are also excluded: primary production income, certain income relating to vulnerable minors, amounts subject to non-resident withholding tax, and income from assets of testamentary trusts in existence at 12 May 2026.

2.4 Foreign resident CGT concession

Start date: the first day of the next quarter after receiving Royal Assent

The Government will provide a concession in the foreign resident CGT regime for investment in the renewables sector. The transitional arrangement will apply to foreign investors disposing of certain renewable energy infrastructure assets, from the start date until 30 June 2030.

Source: 2026-27 Federal Budget announcement

2.5 Venture capital tax incentives

Start date: 1 July 2027

The Government will expand the scope of existing tax incentives relating to venture capital limited partnerships (VCLPs) and early stage venture capital limited partnerships (ESVCLPs).

3. Business and employers

3.1 Instant asset write-off — permanent at $20,000

Start date: 1 July 2026

The cost threshold for the instant asset write-off for small business entities will be permanently increased to $20,000 from 1 July 2026.

The instant asset write-off allows eligible small business entities with aggregated turnover of less than $10 million to claim an immediate deduction for the full cost of depreciating assets below the threshold. While the default threshold is $1,000, higher temporary thresholds have been implemented on a year-by-year basis since 2015, often causing confusion and uncertainty. A permanent $20,000 threshold should give small business taxpayers greater confidence in planning capital expenditure.

The cost of the asset must be less than $20,000 after subtracting any GST credits that can be claimed.

The threshold applies on an asset-by-asset basis — an immediate deduction can apply to multiple assets purchased for less than $20,000 in the same income year, even if their aggregated cost exceeds $20,000.

Reminder: Assets costing $20,000 or more can continue to be added to a small business pool. The threshold for the current income year ending 30 June 2026 had already been increased to $20,000.

Source: Treasury factsheet "Backing small businesses to grow, compete and build resilience"

3.2 FBT on electric cars — phased back

Start date: 1 April 2027

On 5 May 2026, the Government announced that the FBT exemption for electric cars will be gradually scaled back over the next few years. The FBT exemption was introduced in the 2022-23 income year as part of a broader initiative to reduce the cost of electric vehicles and increase uptake.

The exemption has already been phased out for plug-in hybrid electric vehicles from 1 April 2025 (with pre-existing arrangements still qualifying in some cases). A full FBT exemption currently applies to battery electric vehicles and hydrogen fuel cell electric vehicles where certain conditions are satisfied.

The Government is planning to progressively reduce the scope of the FBT exemption as follows:

•       The FBT exemption will continue in its current form until 31 March 2027.

•       From 1 April 2027 to 31 March 2029: full FBT exemption only for cars costing $75,000 or less. Electric cars priced above $75,000 but below the luxury car tax (LCT) threshold for fuel-efficient cars will receive a 25% FBT discount.

•       From 1 April 2029: all electric cars costing less than the LCT threshold will receive a 25% FBT discount.

Existing lease arrangements will not be impacted by these changes.

Important practical point: When an electric car qualifies for concessional FBT treatment, employers must still calculate the reportable fringe benefits amount as if the exemption or discount did not apply. This can impact other areas of the tax and social security systems.

3.3 Loss carry-back for companies

Start date: 1 July 2026

For income years commencing on or after 1 July 2026, companies with aggregated annual global turnover of less than $1 billion will be allowed to carry back a tax loss and offset it against tax paid up to two years earlier.

The carry-back will apply only to tax losses (not capital losses) and will be limited by the company's franking account balance.

3.4 Loss refunds for small start-up companies

Start date: 1 July 2028

Start-up companies with aggregated annual turnover of less than $10 million that generate a tax loss in their first two years of operation will be able to utilise the loss to generate a refundable tax offset.

Cap on the offset: the offset will be limited to the value of fringe benefits tax and withholding tax on wages paid in respect of Australian employees in the loss year. (Verbatim from the source.) The cap operates as a proxy for the Australian labour footprint.

3.5 PAYG instalments

Start date: 1 July 2027

The Government will provide funding to the ATO to expand its pilot of dynamic PAYG instalment calculations.

From 1 July 2027, small and medium businesses will be able to opt in to reporting and paying PAYG instalments monthly, and will be able to use an ATO-approved calculation embedded in accounting software to calculate and vary instalments.

3.6 R&D tax incentive

Start date: 1 July 2028

The Government will reform the Research and Development (R&D) Tax Incentive, which provides a tax offset for eligible companies undertaking R&D activities.

While the Government is planning to increase the tax offset rate for core R&D expenditure, supporting R&D expenditure will no longer qualify, and the minimum amount of expenditure that must be incurred in an income year to qualify for the offset will be increased from $20,000 to $50,000 (with some limited exceptions).

3.7 Minimum tax for multinationals

Start date: 1 January 2026

The Government will amend Australia's global and domestic minimum tax legislation as part of broader reforms to the international corporate tax system.

4. Government and regulators — protecting the tax system against fraud

Start date: 1 July 2026

The Government will provide $86.3 million over four years to help detect and prevent fraud in the tax system.

The Government will also strengthen the ATO's ability to combat fraud by tax agents and other intermediaries. The ATO will be given powers to pause the recovery of tax debts of taxpayers who are victims of fraud by tax intermediaries, and waive those debts in appropriate circumstances, and to recover the debts from the tax intermediaries.

The ATO will undertake additional targeted compliance activities to further address fraud in the system, including in relation to the R&D Tax Incentive.

Our team

Our team is available to help you understand how the budget and any enacted measures might impact on you. We can assist you to capitalise on any opportunities or minimise your risk.

As always, the detail is important — please let us know if we can assist.

Source of information: Your Knowledge May 2026 - 2026-27 Federal Budget Brief.

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