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2026 Federal Budget: What It Means for Your Tax Return (and Your Next Five)

Treasurer Jim Chalmers handed down the 2026-27 Federal Budget at 7:30pm AEST on Tuesday 12 May 2026. It is the biggest set of changes to Australian personal tax in decades. Some changes start on 1 July 2026 and affect the return you lodge from July 2027. Others start on 1 July 2027 or 1 July 2028. A few apply retrospectively to the current 2025-26 year.

Most Australian workers will pay less tax overall. Property investors who buy established homes after Budget night, and beneficiaries of discretionary trust distributions, will pay more. This guide explains what changes, when, and what to do about it before 30 June 2026.

Important: most of the measures below are proposed legislation, not law. The 2025-26 Medicare levy threshold increase has been legislated, and the 1 July 2026 tax rate cut was previously legislated and confirmed in the budget. The other measures, including the 50% CGT discount reform, negative gearing changes, $1,000 instant deduction, $250 Working Australians Tax Offset, and the trust minimum tax, are announced policy that still needs to pass Parliament. We have written this guide on the basis that the budget measures will be legislated as announced. Final form may change. We will update this article as the bills progress.

TL;DR

• Tax rate on income between $18,201 and $45,000 drops from 16% to 15% on 1 July 2026, then to 14% on 1 July 2027. Up to $268 per year from 2026-27, up to $536 per year from 2027-28.
• $1,000 instant tax deduction available from 2026-27 for work-related expenses. No receipts needed if you claim under $1,000.
• $250 Working Australians Tax Offset from 2027-28 for 13 million workers including 1.5 million sole traders. Applied automatically.
• Medicare levy low-income thresholds increased retrospectively for 2025-26.
• 50% CGT discount replaced by inflation-based indexation with a 30% minimum tax from 1 July 2027. Existing assets held before that date keep the 50% discount on gains up to 30 June 2027.
• Negative gearing on established residential property limited to losses against rental income only, from 1 July 2027. Properties contracted before 7:30pm AEST 12 May 2026 are grandfathered.
• 30% minimum tax on discretionary trust distributions from 1 July 2028.
• $20,000 instant asset write-off made permanent for small business from 1 July 2026.

The four-minute version

The 2026 Budget does two things at once. It cuts tax for workers, and it raises tax on certain investment activities.

For the average PAYG employee, the budget is good news. You pay a lower marginal rate on income between $18,201 and $45,000 from 1 July 2026. You can claim a $1,000 instant deduction from the same date without keeping receipts. From 1 July 2027 you also get a $250 Working Australians Tax Offset. According to the Treasury, an Australian worker on average earnings ($81,245) will receive a tax cut of $1,978 in 2026-27 and $2,496 from 2027-28 compared to 2023-24 tax settings.

For investors in shares, established property, or discretionary trust structures, the budget tightens the rules. The 50% CGT discount that has applied since 1999 is being replaced by an inflation-based indexation system with a 30% minimum tax rate from 1 July 2027. Negative gearing losses on newly-purchased established homes can no longer be deducted against wage income from the same date. Discretionary trusts will pay a 30% minimum tax on distributions from 1 July 2028.

For sole traders, the news is mixed. You get the worker tax cuts, the $1,000 instant deduction, and the WATO. You also keep the small business CGT concessions and get a permanent $20,000 instant asset write-off. If you operate through a discretionary trust structure, the new trust rules will affect you from 1 July 2028.

The rest of this guide walks through each change, who it affects, when it starts, and what to do before 30 June 2026 if it applies to you.

Income tax cuts: the rate on $18,201-$45,000 drops twice

Most attention has gone to the property and CGT changes, but the personal income tax cuts are the largest single benefit for most readers.

The current tax rate of 16% on income between $18,201 and $45,000 was previously legislated to fall to 15% from 1 July 2026 and to 14% from 1 July 2027. The 2026 Budget confirmed these cuts are going ahead.

What that means in practice: every Australian who earns more than $18,200 receives a tax cut. The maximum benefit at this bracket is $268 per year from 1 July 2026 and $536 per year from 1 July 2027, compared to 2024-25 settings. Higher-income earners receive the same dollar benefit on the portion of their income inside that bracket.

The first cut applies to income earned from 1 July 2026, which means you will first see the benefit on the return you lodge from July 2027. Your PAYG withholding from your employer should adjust from the first pay run after 1 July 2026, so you may see a small increase in take-home pay before you lodge.

There is nothing you need to do. The change happens at the ATO. Your job is to make sure your other income, deductions, and offsets are accurate so you actually receive the lower rate on your real taxable income, not an over-stated one.

$1,000 instant tax deduction (from 2026-27)

This is the simplification headline. From the 2026-27 income year, Australian tax residents who earn employment income can claim a flat $1,000 deduction for work-related expenses without itemising or keeping receipts. Treasury estimates 6.2 million workers will benefit, with an average tax saving of about $205 in 2026-27.

The mechanics:

• The $1,000 is a flat deduction, not a tax credit. It reduces your taxable income by up to $1,000.
• You do not need receipts to claim the $1,000.
• If your actual work-related expenses are more than $1,000, you can still claim the full amount in the ordinary way, with substantiation. You do not have to choose the lower number.
• Charitable donations, union and professional association fees, and other non-work-related deductions are not included in the $1,000. You can claim those separately on top.

The benefit is biggest for workers with small, hard-to-substantiate work expenses, such as occasional protective items, a phone bill where the work percentage is hard to calculate, or a few work-related online courses. Workers with significant work expenses (often higher-paid PAYG roles, mobile trades, hybrid-working professionals, and sole traders) will continue to itemise because the actual claim is larger.

The $1,000 deduction starts in 2026-27. It does not apply to your 2025-26 return. For this tax time, the existing substantiation rules still apply in full. If you have lost receipts, our lost receipts guide walks through what the ATO accepts as evidence.

$250 Working Australians Tax Offset (from 2027-28)

Effective from 1 July 2027, the Working Australians Tax Offset (WATO) provides up to $250 as a permanent annual offset against income from work. Treasury says 13 million Australians will be eligible, including 1.5 million sole traders, and 97% will receive the full $250.

The WATO is:

• An annual offset, not a one-off rebate. It applies every year from 2027-28 onward.
• Limited to income from work, including wages, salaries, and sole-trader business income. Passive income such as rental, dividends, and most interest is not eligible.
• Applied automatically by the ATO when you lodge your return.
• A non-refundable offset, meaning it can reduce your tax payable to zero but does not generate a refund on its own.

For workers, the WATO effectively raises the tax-free threshold from $18,200 to $19,985, or $24,985 for workers also eligible for the Low Income Tax Offset.

Medicare levy thresholds increased (retrospective to 2025-26)

This one is small but worth knowing because it applies retrospectively. The Medicare levy low-income thresholds are being increased by 2.9% for 2025-26:

• Singles: $27,222 → $28,011
• Families: $45,907 → $47,238
• Single seniors and pensioners: $43,020 → $44,268
• Senior and pensioner families: $59,886 → $61,623
• Family threshold uplift per dependent child or student: $4,216 → $4,338

Treasury says the change provides Medicare levy relief for more than one million Australians. There is nothing to do. The change applies when you lodge your 2025-26 return.

50% CGT discount replaced by inflation-based indexation

This is the headline change generating most of the public debate. The 50% CGT discount that has applied since 1999 will be replaced from 1 July 2027 with a cost-base indexation system plus a 30% minimum tax rate on capital gains.

How it works under the new rules:

For assets held more than 12 months, the cost base is adjusted upward for inflation between purchase and sale. The capital gain is the sale proceeds minus the indexed cost base. You then pay tax on the indexed gain at your marginal rate, but with a 30% minimum rate floor applied (with limited exceptions for income support recipients).

What gets grandfathered:

The 50% CGT discount continues to apply to gains made before 1 July 2027 on any asset. For assets held across the changeover date, the gain is split: the portion accruing before 1 July 2027 keeps the 50% discount, and the portion accruing after uses indexation plus the 30% minimum.

Who benefits and who pays more:

Investors with lower-growth assets that mostly track inflation may pay less under indexation than under the 50% discount, because the discount effectively assumes 50% of every gain is inflation. Investors with high-growth assets (shares, business equity, founder shares with nominal cost bases) will pay materially more, because indexation gives them little relief on a gain that is mostly real, not inflationary.

Exemptions and exceptions:

• New residential builds: investors can choose between the 50% discount or the new indexation system.
• The main residence exemption is unchanged.
• Small business CGT concessions are unchanged. Eligible business owners can still halve or completely disregard CGT on the sale of qualifying business assets.
• Superannuation CGT treatment is unchanged.
• Pre-CGT assets (held before 20 September 1985) keep their exemption for gains accruing before 1 July 2027. After that date, gains will be subject to the new regime.
• Income support recipients including pensioners are exempt from the 30% minimum rate.

The "47% tax" headline: Critics have noted that a fully indexed gain on a high-growth asset, taxed at a top marginal rate plus Medicare levy, can hit 47%. This is correct in a narrow scenario: top-bracket taxpayers selling assets with high real growth and minimal cost-base indexation. For most Australians selling shares or property, the effective rate will be lower than 47%, sometimes higher than the current 50%-discount rate, sometimes lower depending on inflation over the holding period.

What to do before 1 July 2027:

If you hold an asset with a significant unrealised gain that you were planning to sell within the next few years, the 14 months between Budget night and the changeover are valuable. You may want to model the difference between selling under the 50% discount before 30 June 2027 and selling under indexation afterward. The answer depends on your marginal tax rate, the size of the gain, the holding period, and inflation expectations. This is a decision worth getting personalised tax advice on.

Negative gearing limited to new builds

From 1 July 2027, losses from established residential investment properties can only be offset against rental income or capital gains from residential property. Excess losses will be carried forward against future residential property income, not deducted against your salary and wages.

What stays the same:

• Properties contracted before 7:30pm AEST on 12 May 2026 are grandfathered indefinitely. Negative gearing against salary continues for these properties as long as you own them.
• New builds remain fully negatively gearable, including against salary.
• Build-to-rent developments are exempt.
• Properties supporting affordable housing programs are exempt.
• Positive and neutral gearing are not affected.
• Negative gearing on non-residential assets (shares, commercial property, vacant land in some cases) is not affected.

What changes:

• Established residential properties bought from 7:30pm AEST 12 May 2026 will be subject to the new rules from 1 July 2027.
• If you buy an established home for investment after Budget night, you can still deduct losses against other residential property income, but not against your wage.

Practical effect:

If you already own established residential investment property, you are not affected. Your current arrangement continues. If you were planning to buy an established home for investment, the question becomes whether the new build alternative makes sense for your circumstances. The budget is explicitly designed to channel investment toward new housing supply rather than competition for existing stock.

Discretionary trust minimum tax (from 1 July 2028)

The newest, and arguably most consequential, change for small business owners using trust structures. From 1 July 2028, distributions from discretionary trusts will be subject to a 30% minimum tax rate at the trust level (trustee-paid), with non-refundable credits available to beneficiaries.

Exclusions:

• Fixed and 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 announcement

The strategy this targets:

The longstanding practice of distributing trust income to lower-marginal-rate family members (such as adult children at university, a non-working spouse, or a parent on a pension) to reduce the family's overall tax bill will be effectively neutralised. Distributions will be taxed at a minimum of 30% at the trust level regardless of the beneficiary's personal marginal rate.

Rollover relief:

Three years of rollover relief is being provided from 1 July 2027 to 30 June 2030 to help small businesses and others restructure out of discretionary trust arrangements where appropriate.

What to do:

If you run a family business through a discretionary trust, the next two years are the window to review the structure with a qualified accountant or tax adviser. Restructuring is complex and individual. Rollover relief reduces the cost but does not eliminate it.

Small business measures

The budget also confirmed several measures specifically for small business and sole traders:

$20,000 instant asset write-off made permanent. From 1 July 2026, small businesses with turnover under $10 million can immediately deduct eligible assets costing less than $20,000 in the year of purchase. This was previously a year-by-year temporary measure. Making it permanent simplifies planning.

Loss carry-back reintroduced. From 2026-27, eligible companies that make a loss in the current income year can use that loss to claim a refund against tax paid in the previous two income years. Treasury estimates 85,000 mostly small companies will benefit.

Small business CGT concessions retained. The existing concessions that allow eligible small business owners to halve or completely disregard CGT on the sale of qualifying business assets are unchanged.

PAYG instalment flexibility. From 1 July 2027, businesses will be able to opt into monthly PAYG instalments. The ATO is expanding access to its dynamic instalments pilot.

Other changes worth knowing

Electric vehicle FBT. The 100% FBT exemption for electric cars transitions to a permanent 25% FBT discount from 1 April 2029 for cars valued up to the fuel-efficient luxury car tax threshold. Cars provided before 1 April 2029 keep the 100% exemption. Cars provided between 1 April 2027 and 1 April 2029 valued above $75,000 receive a 25% discount in the transition.

Fuel excise relief. Fuel excise more than halved from 1 April 2026 for three months, from 52.6 to 20.6 cents per litre.

Venture capital incentives expanded. From 1 July 2027, changes to ESVCLP and VCLP programs to align with modern company valuations.

R&D tax incentive. From 1 July 2028, the offset for experimental "core" R&D increases, and the higher-offset turnover threshold lifts to $50 million for firms operating less than 10 years.

What to do before 30 June 2026

The 2025-26 return you lodge from July 2026 still operates under the old rules. The new rules apply to subsequent years. That said, there are some sensible moves to consider in the next six weeks.

If you have an asset with a large unrealised gain: Model whether to sell before 30 June 2027 (to lock in the 50% CGT discount) or hold and use indexation. This is individual to your tax position. For very high-growth assets like founder equity or appreciated shares, the 50% discount window is meaningful. For inflation-tracking assets, indexation may not be worse.

If you were planning to buy an investment property: Be aware that established properties purchased from 7:30pm AEST 12 May 2026 will be subject to the new negative gearing rules from 1 July 2027. Properties already contracted before that time are grandfathered. New builds remain fully negatively gearable.

If you operate through a discretionary trust: The next two years are the window to review the structure. Rollover relief is available from 1 July 2027 to 30 June 2030.

If you are a PAYG employee: Nothing urgent. Keep your records for the 2025-26 return as usual. From July 2026, you will see the lower marginal rate in your pay, and at lodgement time from July 2027 you can use the $1,000 instant deduction if it suits your situation.

If you are a sole trader: Make sure your business records are clean for 2025-26. The $20,000 instant asset write-off is permanent from 1 July 2026, so equipment purchases made in 2026-27 onward can be planned around the limit.

How Finwell AI helps you navigate the changes

The 2026 Budget makes Australian tax simpler in one way and more complex in another. Simpler for the worker with small work expenses, because the $1,000 instant deduction removes the receipt burden. More complex for almost everyone else, because two parallel CGT systems will run side-by-side from 1 July 2027, negative gearing rules will differ between new builds and established homes, and trust structures will need rethinking.

Finwell AI is built for that complexity. It captures itemised transaction data the moment you pay, categorises each line against ATO rules, and maintains a live tax ledger you can see all year. For the new $1,000 instant deduction, the app shows you whether your itemised work expenses are above or below the threshold in real time, so you know at any point in the year which method will give you the better outcome.

For CGT events, Finwell AI tracks the acquisition date of every asset and applies the right discount or indexation calculation depending on whether the gain accrued before or after 1 July 2027. For negatively-geared property, the app separates rental income and expenses from your salary income, and flags the deductibility limits that apply to your specific property. For sole traders with trust arrangements, the app surfaces the new minimum tax thresholds and helps you plan the timing of distributions.

At tax time, Finwell AI prepares lodgement-ready forms covering all of your income types, runs a peer desktop review, and surfaces suggestions on what you may want to amend. You press a button to lodge. Your accountant or bookkeeper can sign in to check before you do. Where you authorise it, Finwell AI can represent you to the ATO.

Finwell AI is a flat monthly subscription, not a percentage of your income. It works with whatever bank, card, invoicing tool, and POS you already use.

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Frequently asked questions

Q: When does the 50% CGT discount actually end?

The 50% discount applies to gains accruing before 1 July 2027 on any asset. For assets sold after that date, the gain is split: pre-1 July 2027 portion gets the 50% discount, post-1 July 2027 portion uses indexation with a 30% minimum tax rate. There is no cliff edge on 1 July 2027. Existing assets do not lose accrued benefits.

Q: I already own an investment property. Do the negative gearing changes affect me?

Properties contracted before 7:30pm AEST on 12 May 2026 are grandfathered indefinitely. You can continue to negatively gear against your salary as long as you own the property. The new rules apply only to established properties acquired after that time.

Q: Will the $1,000 instant deduction help me?

It depends on whether your actual work-related expenses are above or below $1,000. Workers with smaller, hard-to-substantiate expenses (occasional protective items, modest phone bills, a few work courses) benefit from the simpler claim. Workers with larger expenses (mobile trades, hybrid professionals, multi-vehicle workers, anyone with significant home office costs) will keep itemising because the actual claim is bigger.

Q: Do I need to do anything for the income tax cuts?

No. The 16% rate dropping to 15% from 1 July 2026 happens automatically through your PAYG withholding. The 14% rate from 1 July 2027 happens the same way. You may see a small increase in your fortnightly take-home pay from the first pay run in July 2026.

Q: I run a family business through a discretionary trust. What should I do?

The new minimum tax starts on 1 July 2028, giving you over two years. Rollover relief from 1 July 2027 to 30 June 2030 reduces the cost of restructuring. Talk to a qualified accountant about whether your structure still suits the new rules. The answer will depend on your specific arrangement, your beneficiaries, and the income types flowing through.

Q: Is any of this actually law yet?

The 1 July 2026 tax rate cut and the retrospective 2025-26 Medicare levy threshold increase have been legislated. The other major changes (CGT reform, negative gearing changes, $1,000 instant deduction, $250 WATO, trust minimum tax) are announced budget measures that still need to pass Parliament. Final form may change in parliamentary passage. We will update this article as the bills progress.

Q: Where can I read the official documents?

The full budget papers are at budget.gov.au. Treasury has released tax explainer factsheets covering CGT and negative gearing reform, the trust minimum tax, the worker tax cuts, and the small business measures.

This article is general information only and not personal tax advice. For your situation, consult a registered tax agent. The measures described above are based on the 2026-27 Federal Budget announced on 12 May 2026 and may change during parliamentary passage. We will update this article when legislation passes or material changes are announced.