Negative Gearing, CGT and Trust Tax: the 2026 Budget Reforms

Australia’s 2026-27 Federal Budget, handed down on 12 May 2026, proposed the most significant overhaul of property and investment taxation in more than a decade. Three separate reforms target negative gearing, the capital gains tax discount, and discretionary trust distributions, each with its own implementation timeline and affected investor group.

With start dates set for 1 July 2027 and 1 July 2028, the planning window is already open. Yet none of the three measures has been legislated. No bills have been introduced, no parliamentary committee has considered them, and design details remain incomplete.

This explainer breaks down each proposed reform, distinguishes what is confirmed from what remains subject to legislation, and identifies which investor groups fall within scope, so readers can approach their advisers with informed questions rather than act on incomplete information.

Three tax reforms, one Budget: the big picture for Australian investors

The 2026-27 Budget did not announce a single tax reform. It announced three structurally separate changes that affect different, though overlapping, groups of investors. Negative gearing restrictions reshape the deduction landscape for residential property holders. A capital gains tax discount overhaul alters the after-tax outcome for anyone selling an appreciating asset. A discretionary trust minimum tax changes how family and business trusts distribute income.

Each measure carries a different implementation date, which means the urgency and planning horizon differ by reform.

Announced, not enacted. The Australian Taxation Office (ATO) lists the relevant personal income tax changes from the 2026-27 Budget as “announced measures” on its tax law and policy updates page, a designation that signals no legislation has been passed. This distinction matters for every section that follows.

Negative gearing restricted to new builds from 2027

Under the current framework, an investor who owns a residential property generating a rental loss can deduct that loss against other income, including salary and wages. This is negative gearing, and it applies regardless of whether the property is a newly constructed dwelling or an established home purchased on the secondary market.

The proposed change draws a hard line between the two.

What changes from 1 July 2027

From 1 July 2027, only new-build residential properties would qualify for negative gearing deductions. Investors holding established properties at the implementation date would lose the ability to offset rental losses against other income.

Key distinctions under the proposed rules:

• Eligible: New-build residential properties (construction completed after a qualifying date)
• Not eligible: Established (existing) residential properties, regardless of when they were purchased

No grandfathering provisions are indicated in the official Budget documentation, according to the Australian Government Budget 2026-27 tax reform measures published on 12 May 2026. This means existing property holders cannot assume their current arrangements will be protected.

The negative gearing changes also carry implications for the rental market and new construction pipeline: analyst forecasts point to modest national price softening of 3-5% and upward rental pressure, while new construction is projected to increase significantly from 2028 if state-level planning reforms accompany the federal measures.

What counts as a “new build”?

The official Budget documentation does not define the precise criteria for new-build eligibility. Whether this covers off-the-plan purchases, substantial renovations, or only ground-up construction remains an open question. This detail will depend on the drafting of legislation, and investors should monitor its development closely.

How the CGT discount overhaul works and why the 30% floor matters

For more than two decades, Australian investors selling an asset held longer than 12 months have applied a straightforward calculation: disregard 50% of the capital gain, then pay tax on the remainder at the individual’s marginal rate. The system is simple, and the benefit is identical whether the asset was held for 13 months or 13 years.

The proposed replacement introduces two changes that make the outcome less uniform.

First, the flat 50% discount would be replaced by an inflation-based discount. Rather than halving the gain automatically, the discount would adjust the gain for changes in the price level over the holding period. In a low-inflation environment, this produces a smaller discount than the current 50%; in a high-inflation environment, the adjustment could be more generous for long-held assets.

Second, a minimum 30% tax rate would apply to capital gains. Investors whose marginal rate currently sits below 30% would face a higher effective tax on gains than they do under the existing system.

Small business carve-out. Small business CGT concessions are explicitly preserved under the announced measures. Eligible small business owners selling qualifying assets are not affected by the proposed discount replacement or the 30% floor.

The implementation date is 1 July 2027, the same as the negative gearing restrictions. The precise mechanics of the inflation-based calculation have not been published and will depend on forthcoming legislation.

The CGT discount abolition widens the structural tax advantage of superannuation over personal investment by approximately 20 percentage points on exit, because SMSFs are fully exempt from the new framework and maintain their existing 10% effective CGT rate while personal investors and trusts transition to the new inflation-indexed system with a 30% floor.

Discretionary trusts: the 30% minimum tax explained

A discretionary trust is a legal structure in which a trustee holds assets on behalf of a group of beneficiaries. The trustee has the discretion to decide how much income to distribute to each beneficiary in a given year. This flexibility is the feature that has made discretionary trusts one of the most widely used tax planning structures in Australia.

Under existing rules, a trustee can distribute income to beneficiaries on lower marginal tax rates, reducing the overall tax paid by the family or business group. A trust earning $100,000 could, for example, distribute that income across several adult beneficiaries, each of whom may pay tax at rates well below 30%.

What the proposed minimum tax changes

From 1 July 2028, a minimum 30% tax rate would apply to discretionary trust income distributions. The mechanics, based on the Budget announcement, work as follows:

1. The trust earns income during the financial year
2. The trustee resolves to distribute that income to beneficiaries
3. A minimum 30% tax rate applies at the distribution level, regardless of the beneficiary’s individual marginal rate

This would reduce the effectiveness of distributing income to beneficiaries on lower marginal rates, which is the structural advantage that made income-splitting through trusts attractive in the first place.

Rollover relief and exceptions: what is and is not yet known

The Budget announcement confirms that exceptions to the minimum tax will apply and that rollover relief provisions are included in the announced measures. However, the scope of both remains subject to draft legislation. Which categories of trusts or distributions may be exempted, and how rollover relief would operate in practice, are details that have not yet been published.

Investors and advisers should treat this as a known unknown. The 1 July 2028 implementation date provides a longer planning runway than the other two reforms, but it also extends the period of uncertainty about design.

Announced but not yet law: understanding the legislative gap

The phrase “Budget announcement” carries less legal weight than readers may assume. A measure announced in the Budget is a statement of Government policy intent. It becomes law only after a bill is introduced to Parliament, debated, passed by both houses, and given Royal Assent.

As of late May 2026, none of the three tax reforms has reached even the first stage of that process. No bills have been introduced. No parliamentary committee consideration has been reported.

The ATO tax law and policy updates page designates both the negative gearing restrictions and the CGT discount replacement as announced measures that are not yet law, confirming that neither reform has passed Parliament as of the 2026-27 Budget announcement date.

What “announced measure” means on the ATO’s website. The ATO lists Budget measures separately from enacted law on its tax law and policy updates page. An “announced measure” is one the Government has committed to pursuing but that has not yet passed Parliament. It is not yet the law, and its design may change during the legislative process.

The gap between announcement and legislation matters because each reform carries open design questions that could materially affect the final rules:

• Negative gearing: What qualifies as a “new build” has not been defined in published material
• CGT discount: The precise mechanics of the inflation-based discount calculation have not been released
• Trust minimum tax: The scope of exceptions and the mechanics of rollover relief remain subject to legislation

Professional tax commentary from firms including KPMG and PwC, published between March and May 2026, consistently notes the unlegislated status of all three measures and advises clients to plan with flexibility rather than certainty.

For investors whose tax planning relies on retirement-timing strategies or testamentary trust structures, our dedicated guide to the proposed 30% CGT floor examines these specific scenarios in depth, including why testamentary trusts cannot be grandfathered by any living person today and the risks of restructuring portfolios before the measure is legislated.

What to do before July 2027: a practical framework for affected investors

The two implementation dates, 1 July 2027 and 1 July 2028, serve as planning anchors rather than action deadlines. Professional commentary from major tax advisory firms recommends a sequenced approach calibrated to specific circumstances.

1. Monitor legislative progress as a first priority. Until bills are introduced and debated, the announced design could change. Tracking the parliamentary timetable and ATO updates provides the foundation for any planning decision.
2. Seek personalised professional advice on timing decisions. The reforms create timing-sensitive questions that differ by investor group:

• Residential property investors: Whether to acquire new-build versus established property before or after the negative gearing changes take effect
• Capital gains-exposed investors: Whether to crystallise CGT events before 1 July 2027 under the current 50% discount or after that date under the new framework
• Trust beneficiaries and trustees: Whether to review distribution strategies ahead of the 1 July 2028 start date for the minimum trust tax

1. Plan ahead of implementation dates, not at them. With more than 12 months before the first reforms commence, decisions made methodically and with professional input are more likely to reflect individual circumstances than reactive responses in the final weeks before commencement.

For investors and early employees holding startup equity or low-cost-base shares, our deep-dive into CGT indexation for founders explains why the inflation adjustment provides negligible relief when the original outlay is minimal, with a $10,000 cost base on a $5 million exit generating an indexation benefit of only around $3,400 over a decade, and how Canada and the United Kingdom have addressed this with entrepreneur-specific CGT carve-outs that Australia’s reform does not replicate.

This article is for informational purposes only and should not be considered financial advice. Investors should conduct their own research and consult with financial professionals before making investment decisions.

These statements relate to announced Government policy that has not yet been legislated. The final design and implementation of these measures are subject to change based on the parliamentary process.

The reforms are proposed, the planning window is real

The 2026-27 Federal Budget proposed three distinct tax reforms: negative gearing restricted to new builds from 1 July 2027, the 50% CGT discount replaced by an inflation-based mechanism with a 30% minimum tax floor from the same date, and a 30% minimum tax on discretionary trust distributions from 1 July 2028. Each is significant in scope. None is yet law.

The distinction between announcement and legislation is not a technicality. It is the single most relevant fact for any investor deciding how to respond. The planning window is open, but it should be used for preparation, not premature action.

Readers affected by any of the three reforms should seek qualified tax advice tailored to their specific asset holdings, structures, and circumstances before the implementation dates arrive.