Australian Federal Budget 2026-27

The winners and losers from the 2026-27 Federal Budget

The 2026-27 Federal Budget on 12 May 2026, is looking to be one of the largest tax reform packages in recent years and been positioned by the Government as focussing on inter-generational fairness.

However attention is also turning to potential productivity measures. Our earlier 2026-27 Federal Budget posts (see below) on the proposed CGT changes, negative gearing  and a proposed 30% minimum tax on distributions from discretionary trusts examined measures that, if implemented, are expected to result in increased tax for affected investors and family groups.

The overall picture, however, is unlikely to be one-sided. Based on recent reporting, the Government’s productivity package is expected to deliver potential benefits for employers of research and development (R&D) talent and those in the start-up sector – most notably an expansion of the Research and Development Tax Incentive (RDTI), which the Government has positioned as supporting Australia’s international competitiveness as a destination for R&D-intensive investment. Separately, the Government is reported to be considering a more measured phase-down of the fringe benefits tax (FBT) exemption for electric vehicles (EVs) than had earlier been foreshadowed, would preserve a meaningful incentive for employers offering EV salary packaging on lower-priced vehicles.

What is being proposed?

In addition to the measures already discussed in our earlier posts, recent reporting suggests that the Budget may include the following further measures:

• an expansion of the RDTI, reportedly including a material lift in the existing $150 million cap on eligible R&D expenditure as part of a broader productivity package; and
• a phased reduction in the FBT exemption for new electric vehicles purchased from 1 March 2027.

How does the current system work?

Under the current regimes:

• the RDTI provides eligible companies with a refundable tax offset (for entities with aggregated turnover below $20 million) or a non-refundable offset (for larger entities), with eligible R&D expenditure currently capped at $150 million per year; and
• employees who acquire an eligible electric vehicle valued below $91,387 through a novated lease are exempt from FBT on the cost of the vehicle and associated running expenses. For earlier adoptors, this also included plug-in hybrid electric vehicles.

What would change?

As part of the Government's productivity package, the Treasurer is expected to lift the existing $150 million cap on eligible R&D expenditure. The Department of Industry, Science and Resources’ “Ambitious Australia” report (released on 17 March 2026) recommended removing the cap altogether, although industry sources suggest that Treasury may instead raise the cap to between $250 million and $300 million. The cost of any uplift is reportedly to be partially offset by lifting the minimum claim threshold from $20,000 to $150,000, with the Government’s stated objective of refocusing the incentive on more ambitious, high-impact R&D activity. If implemented, the changes would deliver an immediate benefit to Australia’s largest R&D claimants and employers of R&D talent. The changes are also aimed at making Australia a more internationally competitive destination for R&D-intensive investment, which the Government has positioned as central to driving innovation, job creation and a stronger pipeline of high-growth companies in the start-up sector. Other recommendations from the Ambitious Australia report (including the proposed 100-point eligibility test and a shift to quarterly advance refunds) are reportedly to be dealt with separately following further consultation, rather than being addressed in the Budget itself.

On the FBT side, recent reporting indicates that the current FBT exemption on EVs costing more than $75,000 would be replaced with a 25% discount from 1 March 2027. EVs priced below $75,000 would be expected to retain the full FBT exemption until 1 April 2029, after which all vehicles under the luxury car tax threshold would also move to the 25% discount. The changes are not expected to affect drivers who have already entered into novated leases under the current regime. Australian Taxation Office data reportedly indicates that around 30% of novated leases under the FBT exemption have been entered into by motorists earning above $190,000, and a further 24% by those earning between $135,000 and $190,000. The Government has indicated that the retention of an exemption for lower-priced EVs reflects, in part, continued cost-of-living pressures and ongoing volatility in global fuel prices.

What are the key questions?

The detailed design of any RDTI and FBT reforms will be critical to their commercial impact. Key implementation questions to monitor include:

• the precise quantum of any uplift to the existing $150 million R&D expenditure cap, and whether the broader scope of eligible R&D activity (including development, deployment, early commercialisation, user testing and adoption research) recommended in the Ambitious Australia report will be progressed in, or after, the Budget;
• whether the proposed increase in the minimum claim threshold from $20,000 to $150,000 will be accompanied by transitional or grandfathering arrangements for existing smaller claimants;
• whether transitional rules will apply to novated leases entered into between the Budget announcement and the 1 March 2027 commencement date for the FBT changes;
• how the new $75,000 EV price threshold will interact with the luxury car tax threshold over time, and whether either threshold will be indexed;
• how the productivity package and FBT changes will interact with the Government’s broader tax reform agenda, including the proposed CGT, negative gearing and discretionary trust changes.

Broader tax reform agenda - Productivity wins, design questions remain

Taken together, the productivity package and the broader tax reform agenda appear to be shaping up to deliver a mix of ‘winners’ and ‘losers’ on Budget night, with investors, family groups, employers and the start-up sector among the groups potentially affected by the proposed tax changes.

On the productivity side, start-ups and high-growth innovators stand to benefit from a more internationally competitive R&D environment, while companies with material R&D programmes – particularly those constrained by the existing $150 million expenditure cap or considering significant new R&D investment in Australia – are best placed to capture the benefits of any RDTI uplift. Separately, EV salary packaging on lower-priced vehicles should remain a meaningful incentive offered by employers under the more measured design, preserving a cost-of-living benefit for the majority of employees entering novated leases on vehicles priced below $75,000.

Important design questions remain. Smaller R&D claimants will need to consider the impact of the proposed lift in the minimum claim threshold from $20,000 to $150,000, and founders and employees holding equity should also factor in the separately proposed CGT changes when assessing the overall reform package. Companies with material R&D programmes should monitor the design of any RDTI reforms closely and consider an early assessment of their eligibility and potential entitlements under any revised scheme. Employers with EV salary packaging arrangements, and employees considering novating an EV lease, should factor the proposed FBT changes into the timing and structuring of any new arrangements and remain alert to further changes to eligibility criteria.

The Treasurer has described the Budget as a balancing act between productivity, intergenerational equity and Budget sustainability, and the precise scope of any reforms will only be confirmed on 12 May 2026.

A comprehensive analysis of the Budget’s tax and non-tax measures will be released on the evening of 12 May 2026. For further information, please contact the Mallesons Tax Team.

Discretionary Trusts in the Crosshairs — A New Minimum Tax on Distributions

As we discussed in our earlier posts on CGT changes (see below) and negative gearing (see below), the Government's 2026-27 Federal Budget tax reform agenda has been steadily taking shape. Based on recent commentary, it now appears that Treasury's tax reform trio could include a minimum tax on distributions from discretionary funds alongside the expected return to indexation for capital gains and changes to negative gearing.

What is being proposed?

While recent reporting indicates that changes to the taxation of discretionary trusts are expected to feature in next week's Budget, the specific mechanism has not been confirmed. Treasury is reportedly considering options to impose a minimum 30% baseline tax on distributions from discretionary trusts, aimed at addressing practices commonly referred to as "income splitting" — where discretionary trusts distribute income amongst beneficiaries to take advantage of their respective lower marginal tax rates. This practice has been the subject of increased ATO scrutiny in recent years.

How does the current system work?

Under the current regime, distributions from discretionary trusts are taxed at the marginal tax rates of individual beneficiaries. This means a trustee can allocate income to beneficiaries who are on lower marginal rates — including adult children, spouses or other family members — thereby reducing the overall tax burden for the family group. There is currently no minimum tax rate applicable to trust distributions.

What would change?

If a minimum tax on trust distributions were introduced at 30%, it would establish a tax floor broadly aligning trust distributions with the company tax rate. The benefit of distributing income to beneficiaries on lower marginal rates would be significantly reduced or, in many cases, eliminated. For example, a distribution to a beneficiary whose marginal rate is currently below 30% could be subject to a top-up tax to bring the effective rate up to the new minimum.

With over 900,000 family trusts now in Australia, the proposed change would represent a significant departure from the existing framework and would be particularly impactful for:

• family groups and privately held businesses that rely on discretionary trusts for succession planning, asset protection and tax efficiency;
• SMEs that commonly use trust structures to allocate income and manage tax outcomes; and
• investors who may have used discretionary trusts for flexibility in holding assets.

What are the key questions?

The detailed design of any trust reform will be critical. Key implementation questions include:

• whether the minimum tax will apply to all discretionary trusts or only to certain categories (e.g. with exemptions for primary production income and/or distributions from charitable, deceased estate and testamentary trusts);
• how transitional arrangements will operate, including whether accumulated trust income will be affected; and
• how any reform would interact with the proposed CGT and negative gearing changes.

Applying higher rates of tax to trust distributions shifts the tax burden onto SMEs and family groups that commonly use these structures, with a direct impact on how income is allocated and how these structures are used in practice. Private wealth groups and family businesses that rely on discretionary trusts for income distribution, succession planning or asset protection should monitor Budget developments closely. If the anticipated tax reform package proceeds, the detailed design of the trust changes — and how they interact with the proposed CGT and negative gearing changes — will be critical for family groups, privately held businesses and property investors assessing their options post-Budget.

The Mallesons Tax team advises on trust taxation, private wealth and business structuring and will be reviewing these developments closely as part of their analysis on Budget night.

Negative Gearing – The next Chapter

As we discussed here, it appears increasingly likely that the capital gains tax (CGT) discount on all asset classes will be replaced with a return to the pre-1999 system of indexing capital gains to inflation, while the one-third discount for complying superannuation funds is reportedly to remain untouched. This is asserted to address intergenerational fairness and housing affordability for working-aged people.

Negative gearing arrangements allow deductions for investment losses to be made against non-investment income. It is relevant to both businesses and non-business (e.g. individuals) that claim deductions  – however it is expected that based on prior Government proposals that changes would be confined to non-business arrangements and in particular investment properties. This would mean losses from negative geared investment properties may be quarantined against income from the property and potentially carried forward and offset against future capital gains.

Another option may be to limit the number of properties for which negatively geared taxpayers may claim deductions (there is currently no limit).  It is expected that newly built homes would be exempted so as to not affect housing supply.

Any changes to negative gearing, coupled with potential changes to the CGT discount and the prospect of a minimum tax on trust distributions, would have meaningful implications for investors, property owners and existing structures relying on trusts.  Affected taxpayers and particularly those with multiple investment properties may find reason to reassess their investment strategies. A cap on the number of properties eligible for negative gearing deductions could be reason to consider disposing of lower-yielding assets.

Much like any changes to the CGT discount, the critical question for investors is again how existing investments will be treated.  Any changes to negative gearing would likely raise complex transitional questions, including whether existing arrangements would be grandfathered and how taxpayers with current negative gearing claims would be treated in the transition period. Taxpayers with significant property investment holdings should monitor developments closely and may wish to consider seeking advice if negative gearing changes do emerge in the Budget. The detailed design of any such reform will be important for investment planning and structuring decisions.

For investors, changes to either the CGT discount, negative gearing, or both, could signal an opportunity to consider alternative means of investing or structuring such as   utilising superannuation to make purchases or converting investment properties into owner-occupied residences. However, the viability of these approaches will depend on the precise design of any reforms, including whether anti-avoidance provisions are incorporated. Notably, any strategy involving trusts may itself become less attractive if the Government proceeds with a minimum tax on trust distributions.

Back to the future – a return to indexation for capital gains?

With speculation intensifying ahead of the 12 May 2026-27 Federal Budget, it appears increasingly likely that the capital gains tax (CGT) discount on all asset classes will be replaced with a return to the pre-1999 system of indexing capital gains to inflation to address intergenerational fairness and housing affordability for working-age people, while the one-third discount for complying superannuation funds is reportedly to remain untouched.

Currently, the CGT discount allows a capital gain from the sale or disposal of an asset to be reduced by up to 50% (or 33.33% in the case of complying superannuation funds), provided the asset was held for 12 months or more.  Earlier reporting suggested that Treasury was considering reducing the 50% discount to as low as 25%. However, it is now expected that the Government will announce the reinstatement of indexation, which would effectively eliminate the discount in its current form, but with superannuation funds being exempted from the changes.  Under the pre-1999 indexation system, the cost base of an asset was adjusted to reflect actual inflation, such that taxpayers would only be liable for tax on the "real" gain rather than nominal appreciation.

Unlike the CGT discount, indexation was available to companies.  This may provide benefits for family office and other longer-term investments housed in corporate vehicles.  In times of higher-than-average inflation, there may also be other ‘winners’ from a return to indexation.

Further, if the changes do not apply to superannuation funds, capital that may have previously been held directly may shift to superannuation funds where the discount would remain at 33 1/3%.  Of course, an individual’s ability to do so might be impacted by the recently legislated addition tax on individuals with very high superannuation balances. The impact is likely to be most pronounced in sectors traditionally held for capital growth – in particular, residential and commercial real estate, infrastructure, and managed funds, where the differential between a 33.33% superannuation discount and indexation-only relief for individual and trust investors will be most keenly felt.

The critical question for investors is how existing investments will be treated.  Whilst the Treasurer has signalled that any changes will be grandfathered for existing asset holders, the precise mechanism of how existing investments will be grandfathered will be of utmost importance to taxpayers.  For example, would the return to indexation only apply for assets acquired by affected taxpayers after the date of the Budget?  For disposals after the commencement date, will taxpayers be able to access the CGT discount for gains made before that date, with gains made after that time subject to indexation (with the likely effect that taxpayers would need to value assets as at the Budget date)?  The detailed design of any such reform will be important for investment planning and structuring decisions.