On 12 May 2026 the Federal Government announced significant changes in the areas involving Capital Gains Tax (CGT), negative gearing and the taxation of trusts (‘The Reform’). It is important to note, the measures are not yet law, but the Government have provided firm start dates, warranting early planning.
This announcement explains the changes, what they mean for our clients and how KPA Lawyers can help you prepare.
CONTEXT AND OVERVIEW
Three measures sit at the heart of the reform:
- From 1 July 2027 – the 50% discount for individuals, trusts and partnerships is to be replaced with a cost base indexation and a 30% minimum tax rate on real capital gains;
- From 1 July 2027 – negative gearing on residential investment property is restricted to new builds. Properties already held at 19:30 (AEST) at the time of announcement are fully grandfathered; and
- From 1 July 2028 – a 30% minimum tax will apply to the taxable income of discretionary trusts, paid by the trustee, with non – corporate beneficiaries receiving a non – refundable credit.
Alongside this proposed reform, the Government has also introduced a time limited (3 year) restructure rollover relief that runs from 1 July 2027 to 30 June 2030.
WHAT DOES THIS MEAN?
The Reform is significant in scope, but its impact on any client depends on three variables:
- when the asset was acquired;
- the type of structure through which they are held; and
- the nature of the income or gain involved.
As a result, this reform creates 4 main takeaways:
Existing positions are largely, but not entirely, protected
Residential investment properties held at or before 19:30 (AEST) on 12 May 2026 will be fully exempt from the negative gearing changes that are taking place. Existing deductions will continue exactly as before. Similarly, capital gains accrued before 1 July 2027 will also retain their 50% discount.
The structuring decisions of the last twenty years need to be revisited
Discretionary trusts have been the default vehicle for family wealth, small businesses, and investment portfolios ever since the 1990s. However, from 1 July 2028, the longstanding benefits of income streaming, and flexibility currently provided to discretionary trusts are to be materially reduced.
Timing matters
The Government has provided a rollover relief period that allows restructuring out of a discretionary trust before the new reform takes effect, but the window is finite. It is only a three (3) year window between 1 July 2027 and 30 June 2030. After this date, any restructure carries the full income tax and CGT cost of the transfer.
Estate planning requires active review
The new reform materially alters the longstanding tax advantages associated with testamentary discretionary trusts. Importantly, discretionary testamentary trust that have not come into effect before 12 May 2026 (i.e. the Testator has passed away) will be caught by the 30% minimum tax, removing a significant taxation advantage currently afforded to those trusts
This represents a significant shift in taxation of private wealth and the longstanding tax advantages associated with testamentary discretionary trusts, and in particular the ability to distribute income to minors and tax beneficiaries on lower tax brackets. In practice, this may result in higher overall tax outcomes for families who have traditionally relied on income splitting through these structures, and will disproportionately disadvantage trusts established to support vulnerable beneficiaries such as minor children, low income earners, retirees, carers or students.
This remains subject to further consultation, with peak professional bodies indicating that the formal consultation process is expected to commence once draft legislation is released.
It is important to note that there are many advantages associated with having a testamentary trust in place when circumstances warrant, such as asset protection and generational wealth creation, and the taxation position remains unchanged in respect of beneficiaries earning over $45,000 of other income.
THE RETURN OF INDEXATION
From 1 July 2027, the 50% CGT discount that has applied to assets held for at least 12 months since 1999 will be replaced by two mechanisms operating together. The Government re-introduces:
- Cost base indexation – the cost base of an asset will be indexed to the Consumer Price Index, broadly mirroring the regime applied between 1985 and 1999, so that gains attributable to inflation are not taxed; and
- 30% Minimum tax floor – where the taxpayer’s marginal rate when applied to the real gain would otherwise be below 30%, additional tax is payable to bring the effective rate to 30%. Where the marginal rate is already above or otherwise equal to 30%, no change would occur.
Worked Example:
Sarah is an individual taxpayer subject to a 37% marginal rate (i.e., the rate of tax applying to the next dollar of their taxable income). She purchases an investment property in July 2024 for $800,000 and sells it in July of 2034 for $1,400,000, realising a nominal capital gain of $600,000. Assume the Consumer Price Index (CPI) over the period rises by a cumulative 25%.
|
Under the current law (50% CGT discount) |
Under the new law applied post 1 July 2027 (indexation + 30% minimum rate) |
|---|---|
|
Nominal Gain: $600,000 |
Original Cost Base: $800,000 |
|
Less 50% CGT discount: $300,000 |
Indexed Cost Base (up lifted by 25% CPI): $1,000,000 |
|
Discounted gain included in assessable income: $300,000. |
Gain after indexation: $1,400,000 – $1,000,000 = $400,000 |
|
Tax at 37%: $111,000 |
Tax at 37% on Gain: $148,000 |
The changes as seen in the above sample apply to all CGT assets held by individuals, trusts, and partnerships, including residential and commercial property, shares, units in unit trusts, private company scrip and business assets.
The following concessions, however, have been preserved:
- The main residence exemption;
- The four small business CGT concessions;
- The existing 60% CGT discount when applying to qualifying affordable housing; and
- Recipients of means tested income support payments such as Age Pension or JobSeeker.
NEGATIVE GEARING
Negative gearing – this is when an investor borrows money to purchase an income producing asset and the costs of owning that asset is greater than the income it generates.
From 1 July 2027, losses will only be deductible against residential rental income or capital gains from residential property, and excess losses may be carried forward.
The Reform creates three distinct categories of property, depending on when the property was acquired:
Properties held at or before 19:30 on 12 May 2026
All properties negatively geared prior to 19:30 AEST on announcement day may continue to claim the current concession under the existing laws indefinitely.
Properties acquired between 19:30 12 May 2026 and 30 June 2027
All properties acquired after 19:30 AEST on announcement date can continue to claim the current concession under the existing laws up until 30 June 2027 but not beyond. From 1 July 2027, the new laws will apply.
Properties acquired from 1 July 2027
All properties acquired from 1 July 2027 cannot claim negative gearing unless the property qualifies as a new build. The new build exemption, which refers to dwellings constructed on previous vacant land and dwellings created where existing properties are demolished and replaced with a greater number of dwellings, entitles investors to continue to claim negative gearing deductions.
Eligible investors who purchase new builds will then be able to choose either the 50% CGT discount or indexation and the minimum tax when they sell the property. This means that, if they make a rental loss on a new build, they can still use that to reduce their taxable income.
MINIMUM TAX ON DISCRETIONARY TRUSTS
From 1 July 2028, trustees of in – scope discretionary trusts will pay a minimum tax of 30% on the taxable income of the trust, regardless of how that income is distributed. The trustee remains responsible for determining beneficiary entitlements and beneficiaries will continue to declare trust distributions in their own returns.
The Government provides that this new tax operates as a floor:
For Non – corporate beneficiaries – they will receive a non – refundable credit for the trustee’s tax. Where the beneficiary’s marginal rate is at or above 30%, the credit is fully utilised and there will be no cost. Where it is below 30%, the credit is wasted and the 30% paid by the trustee becomes an effective rate, eliminating the traditional benefit of streaming to low-rate family members; and
For Corporate beneficiaries – they are assessed on the trust income to which they are entitled without being able to claim a credit for tax payable by the trustee.
It must be noted that the minimum tax only applies to discretionary trusts, not other trusts such as:
- Fixed and widely held trusts (including fixed testamentary trusts);
- Complying superannuation funds;
- Special disability trusts;
- Deceased estates; and
- Charitable trusts.
Certain types of income will also be excluded, including:
- Primary production income;
- Income related to vulnerable minors;
- Amounts subject to non – residential withholding amounts; and
- Income from assets of testamentary trusts existing at announcement date.
Worked Example:
Kurt operates a small business through a discretionary trust with himself alone as trustee. He earns $300,000 in profits and pays himself a $100,000 salary. The remaining $200,000 is retained in the trust and he distributes $50,000 to each of his four extended family members with no other income.
- Under current law, Kurt’s family pays a combined $42,010 in tax.
- Under the new law, the trust itself would pay 30% on the $200,000 retained regardless of how it is distributed. Kurt’s total bill becomes $86,002 – an approximate $44,000 increase per year.
In comparison, Kurt’s neighbour Loretta operates an identical business through a company, paying herself a $100,000 salary and retaining the remaining $200,000 at the 25% base corporate rate, her total tax would be $72,002. This captures the underlying logic behind the three-year rollover relief period, allowing trading trusts to restructure into more efficient vehicles without triggering income tax or CGT on the transfer.
HOW KPA LAWYERS CAN HELP
The Reform is broad and complicated, but our clients do not have to navigate it alone. KPA Lawyers’ legal practitioners have substantial experience in property law, trust structuring, family business arrangements and succession planning. Our team is well placed to assist clients across each aspect of the reform. Here’s how we can help:
- Review – existing trust deeds, partnership agreements and shareholder arrangements to identify exposure under the new minimum tax;
- Advise – on restructure options during the 1 July 2027 to 30 June 2030 rollover window, including the transition from discretionary trust to company or fixed structures, as well as negative gearing categorisation of residential investment properties;
- Coordinate – with accountants and valuers on transitional cost base elections for assets held at 1 July 2027, ensuring a defensible valuation position is recorded before the transition;
- Act – on the pre-1 July 2027 sale window for clients contemplating the disposal of a business or investment asset, who will retain the existing 50% CGT discount on disposals settled before that date; and
NEXT STEPS
The Reform represents one of the most significant changes to the taxation of investment property and family wealth structures in a generation. The staggered commencement dates and finite rollover window mean that planning decisions made over the next eighteen months will materially affect outcomes for many years to come.
Should you require advice on how the Reform affects your particular circumstances, please do not hesitate to contact our office to discuss.
