In brief
The Australian Federal Budget was handed down on 12 May 2026. This year saw some significant changes to the tax system in Australia and comes on the heels of substantial changes proposed to the definition of real property, impacting international investors. We have also seen legislation introduced into parliament to legislate previously announced measures.
In more detail
Three of the key changes are set out below.
Capital Gains Tax (CGT) and the removal of the CGT discount
One of the most high profile changes announced as part of the budget was the removal of the CGT discount, to be replaced with indexation and a 30% minimum tax for all assets. These changes have now been legislated and take effect from 1 July 2027.
From 1 July 2027:
- The 50% CGT discount will be replaced with cost base indexation for assets held more than 12 months, and a 30% minimum tax on net capital gains.
- The CGT discount is not completely abolished. For example, investors in new residential property may choose between the existing CGT discount or the new regime upon disposal.
Taxation of discretionary trusts
The Government also announced a 30% minimum tax on trust taxable income, effective from 1 July 2028. This measure has not yet been enacted and is currently undergoing consultation.
This proposal represents a significant change to the general approach to trust taxation. Under the proposed measures, non-corporate beneficiaries are expected to be provided with non-refundable tax credits for the tax paid at the trustee level. However, the exclusion of corporate beneficiaries means that significant consideration needs to be given to structures that involve bucket companies. A three year rollover relief is proposed to apply from 1 July 2027 to allow for transition from a discretionary trust structure, however no relief has been announced at a state level. This is important as any restructure could, in the absence of such relief, result in substantial transfer duty.
Importantly, the minimum tax is not proposed to apply to certain types of trusts such as fixed trusts, widely held trusts, complying superannuation funds, special disability trusts, deceased estates and charitable trusts.
Definition of real property and changes to the foreign resident capital gains withholding tax regime
While not part of this year’s Federal Budget, the government has this year proposed legislation to enact changes proposed as part of the 2024 and 2025 Federal Budgets relating to the definition of real property and the foreign resident CGT withholding tax regime.
Following a period of consultation, in July this year the Government introduced a bill into parliament to give effect to the proposal. Under the bill, the definition of “real property” is expanded to include “a thing (or combination of things) that is fixed or installed on land and is, or is reasonably expected to be, situated on the land for the majority of its useful life (whether or not it is a fixture, or treated in any other way, for the purposes of any State law or Territory law or at general law)”. This expansion, together with other amendments, is intended to ensure that items with a close economic connection to the land (such as wind turbines) are caught within the Australian tax net.
This change to the definition of real property is particularly important for foreign investors who are taxed on taxable Australian real property and indirect Australian real property interests. An indirect Australian real property interest is, broadly, an interest of more than 10% (together with associates) in an entity where more than 50% of the market value of the entity’s total assets relates to Australian real property.
In determining whether an interest is an indirect Australian real property interest, a 356-day test has been introduced in determining whether the 50% threshold of assets has been met. This replaces the point in time test currently used.
Where a non-resident entity considers that tax is not payable in Australia on the basis that the relevant interest is not an indirect Australian real property interest, advance notification will need to be given to the Australian Taxation Office (ATO) prior to a transaction completing where the value exceeds AUD 50 million.