2026–27 Federal Budget | Tuesday 12 May 2026
The 2026 Federal Budget is shaping up as one of the most consequential in a generation. Treasurer Jim Chalmers has signalled a budget focused on intergenerational fairness and long-term fiscal sustainability, and for investors, business owners, and families, the implications could be significant.
While final details won't be confirmed until Budget night, the policy direction is increasingly clear. Here's what we're watching closely, and what it could mean for you.
1. Capital Gains Tax — A Return to Indexation?
This is the headline reform. The government is widely expected to overhaul the longstanding 50% CGT discount for individuals and trusts, potentially replacing it with an inflation-indexation model, similar to the system that applied between 1985 and 1999.
Under indexation, the cost base of an asset would be adjusted for CPI over the holding period, and CGT would apply only to the real (inflation-adjusted) gain. Other options reported include reducing the discount to 25–33%.
What’s being reported:
- Changes are expected to apply to property, shares, and other investment assets not just residential property
- A form of grandfathering is likely, but it may be partial — old rules preserved for gains already accrued, with new rules applying to future gains on existing assets
- This would materially change after-tax returns for all types of capital investments, particularly for assets held over long periods in low-inflation environments
What this means: If you hold significant investment assets or are considering a sale, the timing and structure of any transaction could be directly affected. This is the single biggest area to be watching on Budget night.
2. Negative Gearing — Restrictions on the Horizon
Changes to negative gearing are now widely confirmed as part of the Budget package, aimed squarely at housing affordability.
What's being reported:
- Negative gearing for existing investment properties is expected to be fully grandfathered, current arrangements protected
- Future acquisitions may face tighter rules, with a two-property cap the most widely reported option, though limiting gearing to newly built properties is also on the table
- Rental losses on affected properties could be quarantined, only offsettable against future rental income, not salary or wages
What this means: For clients invested in property, the cash flow dynamics of holding multiple investment properties could shift. Portfolio cash flows and debt structures should be reviewed under various scenarios.
3. Taxation of Trusts — A Minimum Tax Rate
Less publicly discussed but now confirmed as part of the package, reforms to how discretionary and family trusts are taxed are expected to feature in the Budget.
What's being reported:
- A minimum 30% tax rate on trust distributions is being considered, broadly aligned with the corporate tax rate
- Farmers and certain estate planning trusts are expected to be exempt
- The change is aimed at limiting income streaming to low-tax beneficiaries, a strategy currently used by many family and business groups
What this means: Trusts are a cornerstone of business and wealth structuring in Australia. A minimum tax rate would reduce the flexibility of income distribution strategies, particularly for families with adult children or retired beneficiaries. Trust structures should be reviewed well before any commencement date.
4. Electric Vehicle FBT Exemption: Scaling Back
The current full fringe benefits tax (FBT) exemption for electric vehicles is set to be wound back.
What's being reported:
- The exemption will move to a 75% discount (effectively taxing 25% of the benefit), rather than a full exemption
- Existing leases entered into before 1 April 2027 are expected to be largely grandfathered
- The change is positioned as budget repair and a response to the benefit disproportionately favouring higher-income earners
What this means: EVs may still be more attractive than ICE vehicles for salary packaging, but the tax efficiency will reduce over time. Fleet and remuneration strategies should be revisited.
5. Cost-of-Living Measures — Tax Relief for Workers
Alongside the reform measures, the government is expected to deliver targeted relief:
- $1,000 standard deduction for work-related expenses from 2026–27, available as an alternative to itemising and substantiating individual claims
- Earned income tax offset of $200–$300 - a one-off offset for wage and salary earners, similar in design to the former LMITO. This applies only to earned income, not investment or business income
- Already legislated income tax cuts remain on track. The lowest marginal tax rate ($18,201 to $45,000) drops from 16% to 15% from 1 July 2026, saving most taxpayers $450 in the 2026-27 financial year
6. Division 296 — Extra Tax on Large Super Balances
Unlike the measures above, Division 296 has already been legislated and is locked in:
- An additional 15% tax on superannuation earnings for balances exceeding $3 million (increasing to an additional 25% tax for balances exceeding $10 million)
- Commences 1 July 2026
7. Fuel Excise
Temporary fuel excise reductions are unlikely to be extended, which may add to cost-of-living pressures, particularly given current petrol prices.
What Comes Next
Prosperity's tax team will be watching Budget night closely and will provide a detailed analysis of confirmed measures the morning after the announcement. In the meantime, if any of the areas above are relevant to your circumstances, now is a good time to start thinking about your position.
We'll keep you informed as the picture becomes clearer.
