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2026 Federal Budget: Negative Gearing, CGT & Trust Tax Changes Explained
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2026 Federal Budget: What Busselton Businesses Need To Know
The 2026-27 Federal Budget was announced on Tuesday 12 May 2026, and for small business owners across Australia it's one of the most consequential budgets in recent years. Since then, two of the three major reforms covered in this article have passed Parliament and are now law. The third — the discretionary trust minimum tax — has not yet passed and remains a proposed measure. We've updated this article to reflect the latest status of each change.
The Three Big Changes — At a Glance
The 2026-27 Federal Budget delivered three major tax reforms that will reshape property investment, business structuring and family wealth planning in Australia. They don't all hit at once, and as of late June 2026, they don't all carry the same legal status either.
Part 1 — Negative Gearing: What Changed and What Didn't
What is negative gearing?
Negative gearing occurs when the costs of owning an investment property — interest on the loan, maintenance, property management fees, depreciation — are higher than the rental income you receive. The resulting loss can currently be offset against your other income, such as your salary, reducing your overall tax bill.
What changed on Budget night?
From 1 July 2027, negative gearing for established residential properties is restricted to new builds only. If you purchase an established investment property after 7:30pm AEST on 12 May 2026, any rental losses can no longer be offset against your wages or salary. Instead, those losses are quarantined — they can only offset future rental income or capital gains from rental properties.
The critical cutoff: 7:30pm AEST, 12 May 2026
This is the most important date for existing investors. Properties purchased or under a binding contract before 7:30pm on Budget night are fully grandfathered — nothing changes for those properties until you sell them. The contract signed date counts, not the settlement date.
What does "quarantined" mean in plain English?
If you buy an established investment property after Budget night and it runs at a loss of $15,000 per year, you can no longer deduct that $15,000 against your salary. Instead, it carries forward and can only offset income from other rental properties or future capital gains when you sell. The loss doesn't disappear — but you lose the immediate tax benefit of offsetting it against your wages.
What counts as a new build?
The following qualify as new builds and retain full negative gearing:
- A newly constructed apartment purchased off-the-plan
- A duplex constructed through a knock-down rebuild replacing a single dwelling (net increase in properties)
- Any residential construction on previously vacant land
- A newly built property occupied for less than 12 months before first sale
What is not affected by the negative gearing changes?
Your main residence is not affected. Commercial properties are not affected. Shares and other investments are not affected. If you already own an investment property, nothing changes for that property until you sell it.
Part 2 — Capital Gains Tax: The Biggest Change Since 1999
How CGT worked before Budget night
Under the system that applied for the past 27 years, when you sold an asset you'd owned for more than 12 months — an investment property, shares, or a business — the capital gain was simply cut in half. You then paid tax on that reduced gain at your marginal rate.
What changes from 1 July 2027
The 50% discount is replaced with two new elements: cost base indexation and a 30% minimum tax floor on real capital gains. These changes apply to gains accruing after 1 July 2027.
How cost base indexation works — explained simply
Indexation adjusts your original purchase price for inflation, so you only pay tax on the real growth above inflation — not the portion of your gain that simply reflects the dollar losing value over time.
Imagine you bought something for $500,000 in 2020. By 2030, inflation means that $500,000 in 2020 dollars is equivalent to $620,000 in 2030 dollars. Indexation steps up your cost base to $620,000. If you sell for $900,000, you only pay tax on $280,000 — not the full $400,000 gain. The $120,000 that's just inflation is not taxed at all. Then the 30% minimum applies to that $280,000.
The transitional rules for properties already owned
For properties owned before Budget night, the gain is split into two portions:
Period 1 — from your purchase date to 1 July 2027. This portion of the gain gets the old 50% CGT discount.
Period 2 — from 1 July 2027 to your sale date. This portion is subject to cost base indexation and the 30% minimum tax.
To determine the split, you'll need to know what your property was worth at 1 July 2027. You can either obtain a formal valuation or use the ATO's formula that estimates the value based on growth rate and holding period. Talk to LKB well before that date.
The 30% minimum tax — when does it actually bite?
This is the question we get asked most, so let's be precise about it.
The 30% minimum is a floor on the marginal rate applied to your real capital gain specifically — not your overall effective tax rate across your whole tax return.
If your marginal rate on the gain is already above 30%, nothing changes. You pay your normal marginal rate, calculated the same way it always has been.
If your marginal rate on the gain would otherwise be below 30% — for example in a low-income year or early retirement — the floor lifts the rate to 30% on that gain.
One important detail: deductions can reduce your marginal tax rate on ordinary income below 30%, but they cannot push the rate on a capital gain below the 30% floor. This closes off the strategy of timing an asset sale to land in a year where your income, and therefore your tax rate, happens to be low.
Below are two worked examples showing both sides of this — one where the floor makes no difference, and one where it does.
Part 3 — Discretionary Trust Minimum Tax: The Change That Hits Family Businesses
Why do people use discretionary trusts?
Discretionary trusts are one of the most common structures used by Australian family businesses and investors. The trustee distributes income to beneficiaries each year, and those beneficiaries pay tax at their own marginal rate. This allows families to legally spread income across members who may be on lower tax rates — a spouse who works part-time, adult children studying at university, or other family members.
What's proposed to change from 1 July 2028
From 1 July 2028, the trustee of every discretionary trust must pay a 30% minimum tax on the taxable income of the trust — regardless of how that income is distributed to beneficiaries.
No grandfathering — all existing trusts we be captured
Unlike the negative gearing and CGT changes, no grandfathering has been proposed for existing discretionary trusts. As announced, every discretionary trust in Australia — regardless of when it was established — would be subject to the 30% minimum tax from 1 July 2028 if the legislation passes as currently outlined.
Who is exempt from the trust minimum tax?
The following are NOT captured by the new rules:
- Fixed trusts and unit trusts — not affected
- Complying superannuation funds including SMSFs — excluded
- Charitable trusts and special disability trusts — exempt
- Deceased estates — exempt
- Primary production income — carved out (important for South West WA farming businesses)
- Discretionary testamentary trusts that were already in existence on 12 May 2026 are exempt. Testamentary trusts created after Budget night — including trusts set up under wills made after that date — are not exempt and would be subject to the 30% minimum tax if the measure becomes law.
The proposed rollover relief window
The government has proposed a 3-year rollover relief window from 1 July 2027 to 30 June 2030, intended to allow eligible taxpayers to transfer assets out of a discretionary trust into a company or fixed trust without triggering capital gains tax consequences on the transfer itself. As this measure isn't law yet, the exact conditions of this rollover are also not finalised.
What should you do right now?
If you own investment properties before Budget night: Review whether to get a property valuation as at 1 July 2027 to lock in the split calculation and potentially reduce future CGT.
If you're considering buying an established investment property: Model the impact of quarantined losses before committing. The financial case for negative gearing has changed significantly for new purchases.
If you operate through a discretionary trust: The proposed changes aren't law yet, so there's no need to act immediately. But it's worth starting the conversation with us now, particularly if your will includes or might include a testamentary trust.
If you're a primary producer: Your trust may be partially protected through the proposed primary production income carve-out. Get specific advice on your situation.
If you hold your main residence: Nothing changes. The main residence exemption is fully preserved.
General Advice Disclaimer
This article is prepared by LKB Accountants for general information purposes only. It does not constitute financial, tax or legal advice. The budget measures were announced on 12 May 2026 and require legislation to pass Parliament before they become law. Worked examples are illustrative only and use simplified assumptions. Individual circumstances vary significantly. Before making any financial decisions, please speak with a registered tax agent. Lachlan Bailey is a Registered Tax Agent (Tax Practitioners Board) and Chartered Accountant (CA ANZ).
