25 Budget takeaways you might have missed

Here are the practical key issues and concerns practitioners need to work through.

Negative gearing

1. The quarantine rules catch more than individuals

The quarantining of negatively geared losses (quarantine rules) will apply to any entity that holds or uses a residential dwelling as residential accommodation — individuals, trusts and companies alike. Widely held unit trusts and complying superannuation entities (including SMSFs) are exempt, as are any classes of entity the Minister determines.

2. Quarantined losses aren’t gone, they carry forward

Net rental losses on established residential properties acquired after 7:30 pm AEST on 12 May 2026 (Budget night) will be quarantined from 1 July 2027. That means they can’t be deducted against salary or other non-rental income in the year they arise. But they’re not lost: quarantined amounts can be carried forward and applied against net rental income from residential properties in later years, or against revenue or capital gains on the disposal of such property.

Further, net rental losses from one quarantined property can be applied against net rental income (or the revenue or capital gains from disposal) of another residential property in the same entity’s portfolio. Property-by-property tracking is not required.

3. Quarantined amounts don’t need to be applied against net exempt income first

Under the current rules, a tax loss generally has to be applied against net exempt income before it can be carried forward. The quarantine rules work differently: a quarantined amount can be carried forward without first being applied against net exempt income.

4. What counts as an ‘increase in supply’ of residential property?

A ‘new residential dwelling’ will be defined by ministerial determination. Based on the explanatory memorandum (EM) accompanying the enabling bill, a dwelling must have been constructed and not previously sold, and must genuinely add to the housing supply in Australia. 

If a single dwelling is demolished and a duplex is built in its place, both dwellings in the duplex qualify as new residential dwellings, thereby retaining access to the 50% discount and exemption from the quarantine rules. Demolishing a single dwelling and replacing it with another single dwelling won’t satisfy the requirement. The new build exclusion generally applies only to the first purchaser, not subsequent buyers.

5. Properties acquired before Budget night won’t be caught, even if rented out later

The quarantine rules apply based on when the property was acquired, not how it is used. A property acquired before Budget night, initially used as a main residence and later rented out after 1 July 2027, will not be subject to the quarantine rules; it will be an excluded dwelling. The deemed cost base acquisition rule in section 118-192 of the Income Tax Assessment Act 1997 (Cth) (the first use of a main residence to produce income rule) does not alter this outcome.

Capital gains tax

6. It’s not just property — shares, units and small business interests are all affected

Although the policy rationale is squarely about housing affordability, the core CGT changes — replacing the 50% discount with indexation, the deemed sale and reacquisition just before 1 July 2027, and the minimum 30% tax — apply to all CGT assets held by individuals and trusts. That includes listed and unlisted shares, unit trust interests, small business interests and start-up investments. Many of these assets will have a low cost base, meaning indexation delivers little or no meaningful protection, and the full gain may effectively be taxed on sale.

7. Collectables and personal use assets are also caught

Collectables (artworks, jewellery, antiques, coins, rare books, stamps) are subject to CGT where the original cost exceeded $500. Personal use assets are subject to CGT where the cost exceeded $10,000 (though capital losses on personal use assets are disregarded). Both categories will be subject to the deemed sale and reacquisition rules just before 1 July 2027, will need to be valued to apportion gains between the discount and indexation components, and will be subject to the minimum 30% tax on post-1 July 2027 gains.

8. Every CGT asset held on 30 June 2027 will be deemed sold, but no immediate tax liability arises

Every CGT asset held by individuals and trusts on 30 June 2027 will be taken to be sold at market value (or an apportioned amount, the design of which will be set by the Minister in a legislative instrument) on 1 July 2027 and immediately reacquired for that value. Any gain or loss from the deemed sale is disregarded and deferred until a later actual CGT event. The choice of method doesn’t need to be made until the tax return for the year of actual sale is lodged. 

9. Start thinking about valuations now

Choosing between market value and an apportioned amount when the income tax return for the year of sale is lodged sounds convenient. But valuations become harder — and more contestable by the ATO — the further removed they are from the relevant date. Clients should be discouraged from reconstructing values decades from now. Obtaining contemporaneous valuations around 1 July 2027 should be a standard part of the conversation and is strongly recommended.

10. Indexation can’t produce or increase a loss

Where the indexed cost base exceeds the capital proceeds for a CGT event, no capital gain or loss arises. Also, when calculating a capital loss, the reduced cost base does not include the third element and cannot be indexed. This is consistent with the current rules; indexation cannot generate or increase the amount of a loss.

11. The choice between frozen indexation and the 50% discount disappears

For assets acquired before 21 September 1999, taxpayers currently have the choice between frozen indexation and the 50% discount. That choice is removed for CGT events on or after 1 July 2027. Only the 50% discount will apply to the pre-1 July 2027 component of any gain.

12. Working out the cost base will get more complicated

Indexation applies on a quarterly basis to each parcel of cost base expenditure. The final cost base could therefore comprise multiple amounts from different quarters, each indexed using a different factor, plus any amounts incurred less than 12 months before the CGT event (which are not indexed). Calculating the resulting gain will be noticeably more complex than the current regime.

13. Indexation won’t increase the cost base in the first quarter of 2027–28

Indexation on the deemed cost base arising from the deemed CGT event just before 1 July 2027 commences on that date. Indexation is calculated using quarterly CPI. For CGT events happening in the September 2027 quarter, the indexation factor will be the CPI for that quarter divided by the CPI for the same quarter, which equals one. So, the indexed cost base will equal the deemed cost base, resulting in no uplift of the cost base for CGT events happening in the first quarter of 2027–28.

14. Four new categories of capital gain

The legislation creates four new categories: deferred residential capital gains, deferred non-residential capital gains, residential capital gains and non-residential capital gains. This enables gains from residential property to be properly identified for the purposes of the quarantine rules and capital loss allocation.

15. Capital losses will be allocated in a mandatory order from 1 July 2027

Currently, taxpayers can choose which capital gains to apply losses against. That choice is going. From 1 July 2027, current year and carried forward capital losses must be applied in this order: first against deferred non-residential capital gains, then deferred residential capital gains, then non-residential capital gains, and finally residential capital gains.

The practical sting of this ordering rule is significant. Losses will be forced to be applied first against deferred capital gains (those accruing before 1 July 2027), which may still be eligible for the 50% discount. This means the worth of some capital losses could effectively be halved, as taxpayers will no longer be able to choose to apply losses first against non-discount gains.

16. Pre-CGT assets are being brought into the tax net for the first time

Assets acquired before 20 September 1985 have been entirely exempt from CGT since its introduction. From 1 July 2027, all pre-CGT assets will be deemed to be sold at market value (or an apportioned amount) on 1 July 2027 and immediately reacquired for that same amount. Gains accruing before that date will continue to be disregarded, even where the CGT event happens after 1 July 2027, but any gains accruing from 1 July 2027 will be fully taxable under the new regime, subject to indexation. This applies to all entities, including companies.

17. The minimum 30% tax applies only to gains accruing from 1 July 2027

The minimum tax on capital gains applies only to the post-1 July 2027 (indexed) portion of a gain. It does not apply to any gain that accrued before that date.

18. Low-income earners will pay a minimum 30% tax on capital gains

The new minimum 30% tax will apply to capital gains accruing from 1 July 2027 for Australian resident individuals. Recipients of certain income support payments, including the Age Pension, Disability Support Pension, JobSeeker and certain DVA payments, are exempt.

But a lower-income earner who invests in shares, managed funds or cryptocurrency and does not receive an income support payment will have their gains taxed at a minimum of 30%, even where their marginal rate is lower. The minimum tax applies to all CGT assets, not just residential property.

19. There is no averaging mechanism

Before the 50% discount was introduced from 21 September 1999, a five-year averaging mechanism smoothed the tax impact of lumpy capital gains over time. The new indexation regime does not reintroduce averaging. A large gain realised in a single year could push an average-income earner into a higher marginal tax bracket with no smoothing mechanism to moderate the rate of tax.

20. Even one day of non-residency will disqualify the entire indexation benefit

For indexation to apply, an individual must have been an Australian resident for the entire period they held the CGT asset, starting from 1 July 2027 (or the date of acquisition, if later) through to the date of the CGT event. Unlike the current 50% discount, there is no apportionment for part-year residency. A single day of non-residency during the testing period will entirely disqualify the individual from indexation. The EM acknowledges that future amendments may be considered to address this.

Minimum 30% tax on discretionary trusts

21. Around half of all discretionary trusts will be affected

The minimum 30% tax on the taxable income of discretionary trusts is proposed to apply from 1 July 2028. Based on government estimates, Australia has more than one million trusts, approximately 840,000 of which are discretionary trusts, and roughly half of those are expected to be impacted. The tax will be imposed on the trustee, with a non-refundable credit available to non-corporate beneficiaries whose marginal rate exceeds 30%. For beneficiaries taxed below 30%, the minimum tax operates as a final tax.

22. Distributions to corporate beneficiaries could face effective tax rates of 63% to 70%

No credit will be available to corporate beneficiaries for the minimum tax paid by the trustee. Modelling by the National Tax & Accountants’ Association of a $1,000 trust distribution to a corporate beneficiary — with $300 minimum tax paid by the trustee, the company assessed on the $700 net distribution, and the resulting dividend paid to an individual shareholder who is taxed at the top marginal rate — produces an effective rate of 62.9%. If the company is instead assessed on the full $1,000, the effective rate reaches 69.7%. Either way, these rates materially exceed the top marginal rate. The practical implication is stark: the use of corporate beneficiaries becomes unviable from 1 July 2028.

23. The three-year rollover has serious practical limitations

A three-year rollover is proposed from 1 July 2027 to 30 June 2030, allowing discretionary trusts to restructure to a company or unit trust. However, this may provide limited relief in practice. Western Australia and Queensland do not provide stamp duty relief on transfers of business assets. Outside South Australia, the transfer of business real property attracts stamp duty.

The Commonwealth’s position is that stamp duty is a state matter; state governments’ position is that this is for the Commonwealth to resolve. Bridging that gap before 1 July 2027 would require extraordinary intergovernmental negotiations, and for many businesses, the stamp duty liability will run into the millions.

It is also unclear at this stage whether the rollover will be available to trusts that do not carry on a business; that is, trusts engaged in passive investment.

24. Discretionary testamentary trusts are caught, at significant cost to minor beneficiaries

The minimum tax will not apply to fixed testamentary trusts. But discretionary testamentary trusts will be caught, with an exclusion only for trusts that existed before Budget night. This effectively overrides the excepted trust income concession in Division 6AA for minor beneficiaries whose marginal rate would otherwise be below 30%. The beneficiaries most directly harmed — children who have lost a parent, students, and young adults not yet earning income — are precisely those the current testamentary trust concession was designed to protect.

25. Charitable beneficiaries will face reduced distributions

Charitable trusts are proposed to be excluded from the minimum tax. But a discretionary trust that distributes to a charitable organisation will be required to pay the 30% tax before making the distribution. A non-refundable credit is of no use to a tax-exempt entity.

Where the organisation is a deductible gift recipient (DGR), the trust can make a deductible donation to reduce trust income before the minimum tax applies. For non-DGR charitable beneficiaries, the result is a straightforward reduction in funding equal to 30% of the distribution. These distributions should be exempted from the new tax.

What to do now

These measures do little to simplify the tax regime and do everything to add substantial layers of complexity. Any one of them would have been a significant change. Collectively, they will challenge even the most seasoned and experienced practitioners.

The CGT and negative gearing changes are contained in a bill already before Parliament. Some key design criteria have been deferred to ministerial determination by legislative instrument. The trust minimum tax remains at the announcement stage, with significant design questions still unresolved.

Practitioners should begin identifying affected clients now, particularly those with:

• pre-CGT assets of any kind

• negatively geared residential property portfolios

• discretionary trust structures

• low-cost base investments in shares, units or small business interests

The 1 July 2027 deemed sale date for CGT assets will come around quickly. Obtaining contemporaneous valuations before that date, not reconstructing them years later, is the single most important practical step practitioners can take right now.

About the Author

Robyn Jacobson is the Senior Advocate at the National Tax & Accountants’ Association Ltd (NTAA). She is a Fellow of NTAA, CA ANZ and CPA Australia, and is a Chartered Tax Adviser of The Tax Institute.

About NTAA

NTAA is a prominent not-for-profit association, established in 1992 to support tax agents, accountants and tax advisers. For more than 30 years, NTAA has advocated on behalf of its members and supported them through its highly regarded tax seminars, products and hotline service. NTAA is a major representative voice for the tax community, representing more than 45,000 practitioners.

Read more at ntaa.com.au