Federal Budget 2026: Back To The Future

Introduction

The quote sometimes attributed to Vladimir Lenin that “there are decades where nothing happens; and there are weeks where decades happen” seems particularly appropriate in relation to the 2026 Federal Budget. The last few years have lulled tax advisors into a state to not expect major announcements on the second Tuesday in May.

This year, however, Treasurer Chalmers has sought to fundamentally re-shape the taxation of private taxpayers, particularly in relation to capital gains tax and discretionary trusts.

While there are some corporate tax proposals, the personal tax side is where the focus was under the guise of intergenerational equity. It will take some time for the dust to settle to determine what impact this has on investment going forward.

Changes to CGT regime

In one of the most widely anticipated tax changes in this year’s Budget, the government has announced the abolition of the CGT discount and a return to the pre-1999 indexation of capital gains. More surprising were the announcements that:

• all pre-CGT assets will be brought into the tax net from 1 July 2027; and
• capital gains will be subject to a minimum 30% tax rate, subject to limited exceptions.

Consultation is proposed in relation to the impact of these changes in the early-stage and start-up space.

The return of indexation

For individuals and trusts (other than superannuation funds), the 50% CGT discount will be phased out from 1 July 2027 and replaced with the indexation of cost base under rules similar to those which applied prior to the introduction of the CGT discount in 1999. The changes are also stated to apply to partnerships, but the intention of that aspect of the change is unclear as CGT consequences arise at the partner level, not the partnership level. It would seem that no changes are intended for partners who do not currently access the 50% CGT discount (i.e. companies and superannuation funds), but this will need to be confirmed.

A number of transitional approaches were speculated, but the announcement provides taxpayers with a choice:

• apply the 50% discount to any gain accrued up to 1 July 2027 and indexation to any gain accrued thereafter – this will require some kind of valuation support; or
• use a specified apportionment formula to estimate the asset’s value on 1 July 2027, based on its growth rate over the asset’s holding period.

Since indexation will replace the 50% discount, it will not be available for companies (unlike the position up to 1999 when companies could index their cost base).

It also appears that the Government will not be re-introducing the 5 year averaging of gains to smooth one-off capital receipts. Rather, the Government plans to introduce a minimum tax on capital gains to deter any massaging of gains into years with lower rates.

Minimum tax

Where indexation applies, the minimum rate of tax applicable to the net capital gain will be 30%, except for tax payers receiving means-tested income support payments (such as the Age Pension or JobSeeker). The stated purpose is to reduce the incentive to defer realisation of gains to years where marginal tax rates are low (ie retirement). However, the 30% personal income tax rate applies for income above $45,000 so the minimum tax is likely to only affect low income earners making modest capital gains.

The minimum tax will only apply for periods in which indexation applies, such that it will only apply in respect of the increase in value of an asset after 1 July 2027.

The death of pre-CGT assets

Pre-CGT status will effectively be lost on 1 July 2027, with any gains on pre-CGT assets accruing after that date being subject to indexation and the minimum 30% tax rate. While this change is likely to only affect a small group of taxpayers, it is a substantial shift in tax policy to remove grandfathering which has been in effect for more than 40 years where continued eligibility is subject to a number of existing integrity rules.

Exceptions

The changes are not limited to residential property assets and instead apply to all CGT assets for which a 50% CGT discount would otherwise apply. However, some exceptions will apply:

• Investors who buy newly constructed residential property will be able to choose to apply the 50% CGT discount, or indexation and the minimum tax rate.
• The changes won’t affect existing concessions which reduce the amount of a net capital gain, including the main residence exemption and the small business CGT concessions.
• Consultation will be undertaken in relation to the interaction of the reforms with incentives for investment in early-stage and start-up companies – see the section on Impact on Private Equity and Venture Capital sector below.

Other issues

As with a number of changes announced in the Budget, the devil will no doubt be in the detail of the proposed legislation. Some of the issues which will need to be considered and resolved are:

• How do the indexation and minimum tax changes apply for gains made by trusts. As per the current CGT discount rule, will the effect of indexation essentially be reversed in calculating the amount to be included by a beneficiary with the beneficiary then applying indexation, the CGT discount or neither based on their own circumstances?
• Will the 30% minimum tax rate be applied only to any net capital gain remaining after application of revenue losses and deductions?
• In applying the minimum 30% tax rate where a large (say $200,000) capital gain is made, will regard be had to the overall effective tax rate applied to the gain, or will an increase in tax be triggered if any part of the gain is taxed at a rate below 30%?

Corporate tax changes

(Re)introducing the company loss carry back

The Government has announced its intention to reintroduce loss carry-back for companies with an aggregated annual global turnover of less than $1 billion, with effect for income years commencing on or after 1 July 2026.

Under the current rules, a company that incurs a tax loss in an income year may only utilise that loss by carrying it forward – subject to satisfying the applicable loss carry-forward integrity rules – and offsetting it against taxable income in a future income year.

For income years commencing on or after 1 July 2026, eligible companies will be able to carry a tax loss back and offset it against tax paid in either of the two preceding income years, effectively generating a cash refund of tax already paid. The carry-back applies to revenue losses only – capital losses remain quarantined against future capital gains under the existing rules. The quantum of the carry-back is capped by the company's franking account balance, ensuring that a company cannot receive a refund in excess of the value of corporate tax it has actually paid and not yet distributed to shareholders as franking credits.

This is not the first time Australia has had loss carry-back. The measure was most recently introduced as part of the COVID-era tax package – aimed at supporting investment and increasing business cash flow – which allowed companies with aggregated turnover of less than $5 billion to carry losses back to profitable years as far back as the 2018-19 income year, generating a refundable tax offset. That measure ceased to operate after the 2022-23 income year.

The new proposal differs from the COVID-era regime in several important respects:

• Permanent operation: Unlike the COVID regime, which was expressly time-limited, the new measure does not have an express sunset date.
• Narrower eligibility: The turnover threshold is reduced from $5 billion to $1 billion aggregated annual global turnover.
• Fixed look-back window: The look-back is fixed at two preceding income years. Under the COVID regime, the look-back had a fixed starting point (the 2018-19 income year) rather than a rolling window, meaning that in its final year the regime provided an effective look-back of up to four years.
• No dollar cap: Consistent with the COVID regime – and in contrast to the original 2012-13 loss carry-back regime, which capped the amount at $1 million – neither the COVID measure nor the new proposal caps the dollar amount of losses that can be carried back. The franking account balance serves as the effective practical limit.

The measure is estimated to decrease receipts by $2.3 billion over the five years from 2025-26. Legislation has not yet been introduced and the precise design parameters – including the detailed integrity rules, excluded entities, and return-lodgement conditions – will require careful review once an exposure draft is released.

Loss refundability for start-ups

The loss carry-back measure described above will, however, be of little assistance to a start-up company in its formative years. A start-up that has no prior-year taxable income has nothing against which to carry a loss back.

The Government has separately announced a start-up refundability measure.

For tax years commencing on or after 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. 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.

The mechanism is therefore not a general loss refund. Rather, it appears to be intended to function as a targeted employment-linked subsidy: the quantum of the refundable offset is capped by reference to actual employment related costs – specifically, FBT and PAYG withholding on wages attributable to Australian employees – incurred during the relevant loss year. A start-up that employs staff will receive a greater benefit than one that does not.

Several features of the measure warrant careful attention:

• Eligibility period: The refundability mechanism is available only in respect of losses incurred in the first two years of operation. The budget paper does not specify how ‘first year of operation’ is to be determined, which will be an important definitional question to be resolved in the legislation.
• Turnover threshold: The $10 million aggregated annual turnover threshold is consistent with the ‘small business entity’ concept used across the income tax legislation.
• Employment-linked cap: The cap by reference to FBT and wage withholding taxes rewards start-ups that employ people early. Whilst this is a deliberate policy choice, it may disadvantage capital-intensive, technology-driven or founder-only start-ups with minimal payroll in their early years. Such entities may receive little or no benefit under the measure regardless of the magnitude of their losses.

Introducing loss refundability for small start-up companies is estimated to increase administered payments by $410.0 million over the five years from 2025-26.

R&D Tax incentives

From 1 July 2028, the Government will:

• Increase the offset for core R&D expenditure by around 25 to 50 per cent, through a 4.5 percentage point increase in core R&D offset rates;
• Reduce the intensity threshold from 2 per cent to 1.5 per cent, enabling more firms that engage in substantial core R&D to qualify for higher offset rates;
• Remove eligibility of supporting R&D expenditure for the R&DTI;
• Enable growing firms to retain access to the refundable tax offset for longer by increasing the turnover threshold for the highest offset rate from $20 million to $50 million;
• For firms below the $50 million turnover threshold, maintain older firms’ eligibility for the higher offset rate while limiting refundability to firms under 10 years of age;
• Lift the maximum R&DTI expenditure threshold from $150 million to $200 million; and
• Improve assurance on smaller claims by lifting the minimum expenditure threshold from $20,000 to $50,000, with research activities valued below this amount required to be undertaken with a registered Research Service Provider or Cooperative Research Centre to be eligible for the R&DTI.

Electric Vehicles – Fringe Benefits Tax Changes:

The tax breaks for electric vehicles under the Fringe Benefits Tax regime will be adjusted, with changes rolling out in three phases through to 1 April 2029.

The current full FBT exemption for eligible electric cars remains in place until 31 March 2027. From 1 April 2027 the concession is progressively wound back, so that from 1 April 2029 there is no full exemption, only a 25% FBT discount for eligible EVs under the fuel‑efficient Luxury Car Tax (LCT) threshold.

Existing leases will be grandfathering for current novated and other lease arrangements.

Impact on Private Equity and Venture Capital sector

The good: change to VCLP and ESVCLP rules

There are several changes to the VCLP and ESVCLP regime from 1 July 2027 as follows:

• VCLP: the maximum permitted entity value of a company before an investment is made will increase from $250 million to $480 million.
• ESVCLP: the maximum permitted entity value of a company before an investment is made will increase from $50 million to $80 million.
• Gains made by an ESVCLP investors will remain exempt from tax where he sum of the values of the assets of the investee and its connected entities do not exceed $420 million, up from $250 million.
• The maximum committed capital for ESVCLPs will increase to $270 million, up from $200 million.

The bad: impact of changes to CGT discount

Subject to possible carveouts that might come from consultation (see below) the change from the 50% CGT discount to indexation of cost base will have the following impacts for the PE and VC sector:

This will have a big impact for PE and VC as follows:

• Managed investment plans in PE backed companies: the loss of the 50% discount for MIP participants is likely to push MIPs further into loan funded share plans given at least there will be some cost base to index. However, indexation is still likely to be a worse outcome than the 50% CGT discount
• Founders: With only a nominal cost base in their shares they are likely to be effectively taxed at sale at 47%
• Employees of startup companies: The loss of the 50% CGT discount will negate any benefit of the startup concessions.
• VC/PE fund managers: The loss of the 50% CGT discount will mean that deeming carry from a VCLP/ESVCLP to be on capital account will be worthless.
• MIT fund structures: The loss of the CGT discount is likely to make the deemed capital account election for funds structured as MITs less beneficial, particularly for family office investors. How the indexation of gains will flow through to super fund investors entitled to the 33% discount is yet to be explained.

The Budget papers did state that “Given the unique characteristics of the tech and start up sector the Government will consult on the interaction of the capital gains tax reforms and incentives for investment in early-stage and start-up businesses”. However, it remains to be seen how open the Government is to creating further exceptions to the Government’s overarching principle that “income from assets is taxed more fairly and consistently” via the means of indexation and the 30% minimum tax.

Other personal tax changes

The key personal income tax changes are:

Negative Gearing:

The Government will limit negative gearing for residential property to new builds. From 1 July 2027, losses from established residential properties will only be deductible against rental income or the capital gains from residential properties. Excess losses will be carried forward and able to be offset against residential property income in future years.

These changes will apply to established residential properties acquired from 12 May 2026. Properties acquired prior to this time (including contracts entered into but not yet settled) will be exempt from the changes until disposed of.

Eligible new builds will be exempt from the changes, ensuring the benefits of negative gearing are directed to investment that increases the housing stock.

Properties in widely held trusts and superannuation funds will be excluded, alongside targeted exemptions for build-to-rent developments and private investors supporting government housing programs.

Minimum tax on discretionary trusts

From 1 July 2028, trustees of discretionary trusts will pay a minimum tax of 30% on the income of the trusts, and beneficiaries (other than companies) will receive non-refundable credits for the tax paid – presumably similar to the current arrangements for trusts with non-resident beneficiaries, save that the credits will not be refundable.

The carve-out of companies from obtaining non-refundable tax credits is to prevent the 30% minimum tax itself generating refundable franking credits. The fact sheet suggests that for corporate beneficiaries tax will be paid by both the trustee and the corporate beneficiary.

For example, $30 trustee tax will be payable on $100 of trust income being paid to a corporate beneficiary. Its unclear whether the remaining $70 actually received by the company will be subject to further tax or whether a notional $100 will be taxed. Assuming that the $70 is taxed, then a company with a corporate tax rate of 30% will pay a further $21 meaning an overall tax rate of 51%.

If that company then pays a franked dividend of $70 (cash of $49 plus franking credit of $21) to an individual on the top marginal tax rate of 47% then further tax of $11.90 will be payable. That would amount to an overall tax rate of 62.9%.

There are a number of uncertainties as to how these rules will operate, including:

• What happens to distributions through a chain of trusts – will the 30% tax be imposed at each level?; and
• Will distributions to charities be subject to the 30% tax?

Expanded tax rollovers will be available for 3 years from 1 July 2027 for small businesses ‘and others’ who wish to restructure out of discretionary trusts. However, this is likely to trigger a liability for stamp duty if this involves any land transfers, landholder entities, Qld business assets or WA business assets. It will be interesting to see whether States extend a similar roll-over or simply collect the additional stamp duty revenue.

The minimum tax will not apply to primary production income of farms, certain income relating to vulnerable minors, amounts to which non-resident withholding tax applies and income from assets of testamentary trusts existing at announcement. Other types of trusts, such as fixed and widely held trusts, complying superannuation funds, special disability trusts, deceased estates, and charitable trusts will be excluded from the minimum tax.

Still waiting on…

There is a long list of announced but unenacted measures on which we are still awaiting legislation, including:

Main current income tax measures

Expansion of Part IVA - proposal to expand the general anti‑avoidance rule for income tax for income years commencing on or after Royal Assent, announced in the 2023‑24 Federal Budget, with no enacted legislation to date. Those changes are flagged to:

• The first change will expand Part IVA to extend to schemes that result in a taxpayer “accessing a lower withholding tax rate.” Presumably the scenario Treasury has in mind is arranging to extract income from Australia at a rate of 10% (interest, MIT distributions from green building MITs), rather than 15% (MIT distributions to exchange of information countries), or even 30% (unfranked dividends, royalties, non-concessional MIT income, and MIT distributions to non-exchange of information countries).
• The second change will amend the idea of an offending purpose to refer to schemes that achieve an Australian tax benefit even though the dominant purpose of the actor was to reduce foreign income tax. This measure takes off the table the “defence” that, the dominant purpose of the scheme was to save $100m foreign tax; the $10m Australian tax saving was just a happy coincidence. It mirrors similar rules already in the Multinational Anti Avoidance Law and the Diverted Profits Tax which allow a scheme to be struck down if it is undertaken to obtain both an Australian tax benefit “and to reduce one or more of the relevant taxpayer's liabilities to tax under a foreign law.”

New penalties for mischaracterised/undervalued royalties, dividends and interest (large businesses) - penalties for multinationals mischaracterising or undervaluing cross‑border payments, announced across the 2024‑25 Budget and MYEFO.

Strengthening foreign resident CGT - Consultation on the exposure draft released in April 2026 has now closed. The measure was reannounced in the Budget and unfortunately confirmed:

• the retrospective effect of some of the changes to the introduction of the current definition of taxable Australian real property in 2006; and
• the very limited transitional period during which disposals of interests in some renewable energy assets will qualify for a reduced 15% tax rate on disposal – in particular, the lower rate will only apply to disposals which occur on or before 30 June 2030 making the concession largely irrelevant for new investments and incentivising a race to the exit.

Excluding gambling/tobacco from the R&D tax incentive - Consultation on the exposure draft released in December 2025 has now closed.

Clarifying deductibility of interest on foreign bail‑in bonds - Consultation on the exposure draft released in July 2025 has now closed.

Managed investment trusts and withholding

MIT eligibility clarification - proposal to clarify access to the MIT regime for widely‑held investors, announced 13 March 2025 following ATO Taxpayer Alert TA 2025/1, with no enacted law yet.

Clean building MIT extension to data centres/warehouses - extension of the 10% MIT withholding concession to data centres and warehouses meeting energy standards, announced in the 2023‑24 Budget and subsequently deferred with no implementing legislation.

Older / legacy announced, but stalled. income tax items

Reforms to individual tax residency rules - wholesale re-write of the statutory residency tests for individuals, announced by the former Government and never legislated.

Reforms to corporate tax residency rules - follow‑on clarification of corporate residency following the Board of Taxation review, announced but not progressed.

Division 7A reform package - long‑running proposal to modernise and simplify Division 7A (deemed dividend rules), with multiple announcements but no enacted bill.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.