2026 Federal Budget Australia: Key Tax Changes Explained

The Australian Government announced the 2026–27 Federal Budget on 12 May 2026, outlining proposed tax changes affecting individuals, property investors, discretionary trusts, small businesses and electric vehicle tax concessions.

Key measures announced in the 2026 Federal Budget include personal income tax cuts, capital gains tax reforms, negative gearing changes, discretionary trust tax changes, small business tax measures and updates to electric vehicle fringe benefits tax concessions.

Many measures announced in the 2026–27 Federal Budget still require legislation before becoming law. The proposed changes could affect tax returns, investments and business obligations.

2026–27 Personal Income Tax Changes

Income Tax Rate Cuts Confirmed from 1 July 2026

The Government has confirmed previously legislated personal income tax cuts for Australian taxpayers.

From 1 July 2026, the 16% tax rate on taxable income between $18,201 and $45,000 will reduce to 15%.

From 1 July 2027, the same tax rate will reduce further to 14%.

Every Australian taxpayer will receive a tax cut of up to $268 from 1 July 2026, then up to $536 every year from 1 July 2027, compared to 2024–25 tax settings.

The individual income tax brackets for 2026–27 are therefore expected to be:

Taxable Income	Tax Rate
$0–$18,200	0% (tax-free threshold)
$18,201–$45,000	15%
$45,001–$135,000	30%
$135,001–$190,000	37%
$190,001+	45%

For most taxpayers, the Medicare Levy of 2% applies in addition to these rates.

H&R Block Tax Experts can help you understand how the proposed income tax changes may affect your tax return, withholding amounts and future tax planning strategies.

Working Australians Tax Offset (WATO) from 2027–28

The Federal Budget announced a new Working Australians Tax Offset (WATO).

The WATO is a permanent, annual tax offset of up to $250 from the 2027–28 income year for all Australian workers. This increases the effective tax-free threshold for Australian workers by nearly $1,800 to $19,985, or up to $24,985 for workers eligible for the Low Income Tax Offset.

Of the 13 million Australian workers who receive the WATO, 97% are expected to receive the full $250 offset.

$1,000 Instant Work-Related Deduction from 2026–27

The Budget includes a proposed $1,000 instant deduction for eligible work-related expenses.

Under the proposal, workers would be able to claim up to $1,000 in work-related deductions without keeping receipts when lodging their tax return.

Treasury estimates:
 

• 6.2 million workers could benefit 
• Around 42% of taxpayers may use the measure 
• Average tax savings could be approximately $205 for 2026–27 

The deduction applies to eligible work-related expenses only.

Understanding which expenses remain eligible and when records may still be required can become complex. H&R Block Tax Experts can help ensure you correctly claim eligible deductions while staying compliant with ATO requirements.

Medicare Levy Threshold Increase

The Medicare levy low-income threshold will increase by 2.9% from the 2025–26 financial year to provide tax relief for over 1 million low-income individuals, families, seniors and pensioners.

Capital Gains Tax Changes for Property Investors

Capital Gains Tax Reform from 1 July 2027

The Federal Budget announced major proposed changes to Australia’s capital gains tax (CGT) rules. These changes represent the most significant CGT reform since the Howard government introduced the 50% discount in 1999.

The new regime replaces the 50% discount with two new elements:

1. Inflation Indexation of Cost Base

Cost-base indexation will ensure only real capital gains are subject to tax. This means the cost base is adjusted upward for CPI inflation over the holding period, so only gains above inflation are taxable.

2. 30% Minimum Tax Rate on Capital Gains

The Government has proposed a minimum 30% tax to apply to real capital gains accruing from 1 July 2027 to deter taxpayers from deferring capital gains to income years in which they are subject to lower marginal tax rates. This is a floor not a ceiling; anybody whose marginal tax rate is higher than 30% will still pay at the higher rate, however, taxpayers with taxable income below $45,000 may face additional tax on capital gains to bring the effective rate on those gains up to 30%. 

Property investors may wish to review their investment strategy and future asset sales in light of the proposed CGT reforms. H&R Block Tax Experts can help explain how the proposed rules may apply to your investment property portfolio.

CGT Transition Rules and Grandfathering Arrangements

The Budget includes several transition arrangements for existing property investors.

According to the announcement:
 

• The reforms would apply only to gains arising after 1 July 2027 
• The existing 50% CGT discount would continue to apply to gains arising before 1 July 2027 
• Investors in new housing would be able to choose either the current 50% CGT discount or the new proposed rules when selling the property 

What Is Not Affected by the CGT Changes?

The Budget states that the following arrangements would remain unchanged:
 

• The CGT discount within superannuation 
• Existing CGT concessions for eligible small businesses, allowing them to halve or completely disregard CGT on the sale of eligible assets 
• The main residence exemption 

The Government also confirmed that income support recipients such as pensioners would be exempt from the proposed minimum tax rate.

Who Is Expected to Be Most Affected?

The Budget papers state that approximately 83% of the benefit from the current CGT discount goes to the top 10% of taxpayers by income.

The Government also noted that approximately 83% of investor loans in 2025 were for existing properties rather than new housing.

Negative Gearing Changes from 1 July 2027

Negative Gearing Restricted to New Builds

The Budget proposes limiting negative gearing for residential property investments to new builds from July 2027.

According to the announcement:
 

• Properties owned on 12 May 2026 will be exempt, so existing investors won’t be affected 
• Investments supporting government housing programs, including affordable housing, would also be exempt 

Changes for Investors Purchasing Established Properties

For investors purchasing established residential properties after Budget night:
 

• Property losses would remain deductible against residential property income 
• Unused losses could still be carried forward to future income years 
• Losses would no longer be deductible against salary and wage income 

This is a significant change to the current rules, as the ability to offset property losses against salary and wages income is effectively ended for new purchases of established property.

Negative Gearing Rules for New Housing

For eligible investors purchasing new builds:
 

• Negative gearing deductions against all income, including wages, would remain available 

Changes to negative gearing rules can significantly affect cash flow, tax deductions and long-term investment returns. H&R Block Tax Experts can help investors understand the potential tax implications of these proposed reforms.

Discretionary Trust Tax Changes

New 30% Minimum Tax for Discretionary Trusts from 1 July 2028

The Federal Budget announced proposed changes to the taxation of discretionary trusts.

From 1 July 2028, trustees would generally pay a minimum 30% tax on taxable trust income unless higher tax rates apply.

Under the proposed system:
 

• Trustees would still determine beneficiary entitlements 
• Beneficiaries would still include trust distributions in their own tax returns
• Beneficiaries would receive non-refundable tax credits for the tax payable by the trustee, which reduces their income tax payable

The proposed credit mechanism is intended to ensure trust income is not taxed below an effective rate of 30%.

Trusts and Income Not Affected

The proposed minimum tax would not apply to:
 

• Fixed trusts 
• Widely held trusts 
• Charitable trusts 
• Special disability trusts 
• Complying superannuation funds 
• Deceased estates 
• Primary production income 
• Certain income relating to vulnerable minors 
• Income from assets of discretionary testamentary trusts existing at the announcement date 

Small Business Restructure Relief

The Budget states that around 350,000 active small businesses currently operate under discretionary trusts.

Of those, 40% are not expected to pay any further tax as a result of the reform, or face the need to restructure.

Rollover relief will ensure there are no income tax consequences, including CGT implications, for businesses moving out of discretionary trust structures.

This relief will be available from 1 July 2027, giving three full years before the tax takes effect.

The Australian Small Business and Family Enterprise Ombudsman will be empowered to assist businesses considering their options.

Practical Impact of the Proposed Trust Changes

Under the proposed framework, the strategy of distributing trust income to lower-income family members to access lower marginal tax rates will effectively be neutralised because trust distributions would generally be subject to a 30% minimum tax floor.

Business owners operating through discretionary trusts may wish to review their current structure and future tax planning strategies. H&R Block Tax Experts can help explain the proposed trust tax changes and potential restructuring considerations.

Small Business Tax Measures in the 2026–27 Federal Budget

$20,000 Instant Asset Write-Off Made Permanent

The Government has announced it will make the $20,000 instant asset write-off permanent from 1 July 2026.

Small businesses with turnover under $10 million will be able to immediately deduct eligible assets costing less than $20,000 in the year of purchase.

This measure is estimated to improve cash flow for small businesses by around $890 million over the next five years and save around $32 million per year in compliance costs.

Previously, this measure had been renewed annually. Making it permanent provides certainty for investment planning.

Loss Carry-Back Rules Reintroduced from 2026–27

From 2026–27, eligible companies that make a loss in the current income year will be able to use that loss to get a refund against tax paid in the prior two income years.

This will benefit up to 85,000 companies, mostly small businesses.

This mirrors the temporary scheme introduced during COVID-19 and is now being made permanent.

Budget Example

The Budget example states that:
 

• A small business paying $12,500 in tax in 2025–26 
• Then making a $15,000 loss in 2026–27 
• Can claim a $3,750 refund based on the 25% small business tax rate 

Start-Up Loss Refundability from 2028–29

The Budget proposes allowing eligible start-ups in their first two years of operation to receive refunds for tax losses.

The refunds would be capped at the value of:
 

• Fringe benefits tax paid 
• PAYG withholding tax paid on employee wages 

The measure is intended to support cash flow for approximately 25,000 young companies each year.

PAYG Instalment Flexibility from 1 July 2027

Businesses will have flexibility to opt in to monthly PAYG instalments and will have expanded access to the ATO’s dynamic instalments pilot, which uses business software to more accurately calculate PAYG instalments as conditions change.

This reduces the risk of overpaying or underpaying instalments.

Payroll Tax Administration Reform

The Government also announced plans to work with state governments on payroll tax administration reforms.

According to the Budget announcement, the goal is to reduce compliance burdens across multiple jurisdictions.

For small businesses, understanding how these proposed tax measures may affect deductions, cash flow and reporting obligations is important. H&R Block Tax Experts can help businesses prepare for potential changes and stay compliant with evolving tax rules.

Electric Vehicle Fringe Benefits Tax (FBT) Changes

Electric Vehicle FBT Exemption Transition Rules

The Federal Budget announced changes to the fringe benefits tax exemption for eligible electric vehicles (EVs).

The current full exemption will gradually transition to a permanent 25% FBT discount.
 

Period	EV Cost	FBT Treatment
Now – 31 Mar 2027	All eligible EVs	Full exemption (0% FBT)
1 Apr 2027 – 31 Mar 2029	Up to $75,000	Full exemption
1 Apr 2027 – 31 Mar 2029	$75,001 – $91,387	25% FBT discount (i.e., 75% of normal FBT applies)
From 1 Apr 2029	All eligible EVs	25% FBT discount only

Electric vehicles under $91,387 will no longer be fully exempt from fringe benefits tax, with the Government gradually phasing out the incentive to a 25% discount over a two-year period.

Arrangements commencing before 1 April 2029 on vehicles under $75,000 retain the full exemption.

Businesses and employees using salary packaging arrangements for electric vehicles may wish to review how the proposed FBT changes could affect future costs and tax outcomes. H&R Block Tax Experts can help explain the proposed EV tax changes and salary packaging implications.

Need Help Understanding the 2026–27 Federal Budget Tax Changes?

The 2026–27 Federal Budget includes significant proposed tax changes that could affect tax returns, investment properties, business structures, capital gains tax outcomes, negative gearing deductions and small business obligations.

Whether you are an employee, investor, sole trader or business owner, understanding how these proposed measures may apply to your situation can become complex.

H&R Block’s Tax Experts can help you understand the proposed Budget changes, review your tax position and help you prepare for upcoming tax obligations.