Treasurer Jim Chalmers has handed down his 5th Federal Budget, and it is the most groundbreaking in recent decades.  Among the usual tinkering with spending between departments, the Government has announced sweeping changes to Australia’s tax system.

These changes should prompt Australians to review their investment structures and estate planning arrangements as the fundamental assumptions underpinning these decisions may have changed.

Broadly the main changes can be grouped into 3 categories:

• Negative gearing
• Capital gains tax
• Trust distributions

Negative gearing

Many investors will be aware of the favourable tax treatment historically available for investment properties. Negative gearing has allowed property investors to deduct an overall rental loss against other taxable income, such as salary and wages. That loss can include deductible rental expenses such as interest on borrowings, rates, repairs, insurance and management fees, but not the principal component of mortgage repayments.

Under the announced Federal Budget changes, residential investment properties held before 7:30 pm AEST on 12 May 2026 will generally continue to be able to be negatively geared under the existing rules. For established residential properties purchased after that time, rental losses may still be deducted under the current rules until 30 June 2027, but from 1 July 2027 those losses will generally only be deductible against residential property income, including relevant capital gains. Excess losses may be carried forward.

The key exception is for eligible new builds. Investors who purchase eligible new build residential properties will continue to be able to negatively gear those properties, including by offsetting rental losses against salary and wages. To qualify, the property must genuinely add to housing supply.

If you are thinking of purchasing an investment property, or you have inherited an investment property, you should consider carefully how the new tax rules may apply before deciding whether to buy, keep, rent or sell the property.

Capital gains tax

Under the current rules, individuals and trusts who sell a CGT asset after holding it for more than 12 months generally only include 50% of the capital gain in their assessable income.

Under the announced Federal Budget changes, from 1 July 2027 the 50% CGT discount will generally be replaced with an inflation-based method. This means that, for gains arising after 1 July 2027, the cost base of the asset will be adjusted for inflation and tax will generally be paid on the real capital gain, rather than the inflationary component.

The Government has also announced a minimum 30% tax rate on relevant capital gains from 1 July 2027. This means that taxpayers who would otherwise pay less than 30% tax on a capital gain may be required to pay tax at a minimum rate of 30% on that gain.

Transitional rules are expected to apply. Gains accrued before 1 July 2027 should generally continue to be dealt with under the existing CGT discount rules, while gains accruing after that date will be dealt with under the new indexation and minimum-tax rules.

As these are announced changes, taxpayers should obtain advice before selling or transferring assets, particularly where assets have been held for a long time, are owned through a trust, or may qualify for small business or main residence concessions.

Discretionary trust distributions

The final pillar of the Government’s proposed tax changes is a minimum tax rate of 30% on the taxable income of discretionary trust distributions. From 1 July 2028, ttrustees of discretionary trusts will be required to pay tax at a minimum rate of 30% of the trust’s taxable income.

Beneficiaries will still need to include their trust distributions in their own tax returns. However, beneficiaries other than corporate beneficiaries will receive a non-refundable tax credit for the tax payable by the trustee. This recognises the tax already paid at the trust level, while ensuring that the income distributed through discretionary trusts is generally not taxed below 30%.

The Government’s announcement specifically excludes corporate beneficiaries from receiving non-refundable tax credits. This is intended to prevent corporate beneficiaries from effectively converting that credit into franking credits (i.e. refundable credits for corporate income tax paid that can be passed on to shareholders), thereby circumventing the minimum tax. However, denial of the credit for corporate beneficiaries could also lead to double taxation of the same income at both the trust level and the company level. Unless this issue is addressed in the legislation, the measure may significantly reduce the attractiveness of corporate beneficiaries and could effectively bring to an end the use of so-called “bucket companies”.

The changes do not come into effect until 1 July 2028, giving businesses and investors time to adjust. Expanded rollover relief is also proposed for three years from 1 July 2027 to assist taxpayers who restructure out of discretionary trusts into companies or fixed trusts.

The minimum tax will not apply to certain categories of income, including primary production income, certain income relating to vulnerable minors, amounts subject to non-resident withholding tax, and income from assets of testamentary trusts that existed at the time the changes were announced.

Other types of trusts, including fixed and widely held trusts (including fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates and charitable trusts, are excluded from the new minimum tax.

Draft legislation has not yet been released and is expected to be the subject of consultation with stakeholders prior to enactment.

Consequences

As a result of the Government’s proposed tax changes, many Australians will need to revisit their business, investment and estate planning structures.  Discretionary trusts and established residential investment properties may become less tax effective in some circumstances, including income levels, asset type, family arrangements, succession planning objectives, debt levels and the availability of any traditional rules, exemptions and rollover relief. 

If you are concerned about your current arrangements, or are considering buying, selling, restructuring or transferring assets, it may be time to book an appointment with your estate planning lawyer and financial planner.