Gild Legal – 2026-27 Federal Budget Overview

| Good stuff

• For early start-up – In the initial 2 years from incorporation, a refund is available up to the amount of employee taxes – available from 1 July 2028.
• Loss carry back – taxes paid in last 2 years can be refunded in a loss year – available from 1 July 2026

| Bad stuff

• CGT changes
• Trust changes

| Trust tax changes

• 30% minimum tax on distributions from discretionary trusts.
• Beneficiaries will receive non-refundable (to reflect the minimum nature of the tax) tax offsets for this 30% tax.
• Corporate beneficiaries (i.e. Bucket Companies) will not receive this tax offset.
• Will not apply to certain types of discretionary trust structures, including SMSF’s and deceased estates.
• Will not apply to certain types of income, including primary production income and from foreign sources already subject to WHT.
• Transitional period of additional rollover relief to allow restructure out of a trust.

What is still to come:

• If the distribution is included in a bucket company’s assessable income, there is a risk we have an ETR of 55% – 60%. This would be 30% WHT under the minimum tax changes and 25% – 30% company income tax.
• It is also unclear what level of franking credits would apply for the bucket company.
• It is not clear how this would apply to franked dividends (or other income which has already been subject to tax) received by the trustee of a discretionary trust.

What this means for you right now:

• Still needs to be passed through Parliament.
• However, this is a huge change to the existing ‘default’ position of distributing any trust income which individual beneficiaries do not require into a bucket company.
• It is a huge change for our performing artist structures, which generally rely on discretionary trusts to mitigate double taxation from WHT on foreign sourced income and to effectively repatriate profits both domestically and offshore.
  • While the foreign sourced WHT income will not be subject to the tax, we will need to review the current structure of all income being derived through discretionary trusts.

| CGT changes

• From 1 July 2027, 50% general CGT discount removed and replaced with annual indexation (which was a pre-1999 approach).
  • From date of acquisition to 1 July 2027, any gain will retain the 50% discount;
  • From 1 July 2027 to date of disposal, annual indexation will apply to any gain;
  • This indexation and tax from 1 July 2027 also extends to pre-CGT assets; and
  • Any gain subject to indexation will have a minimum 30% tax rate.
• Investors acquiring new residential property can choose to retain the 50% general discount.

What is still to come:

• There will be a formula for determining cost base / market value as at 1 July 2027, but no detail on this.
• Under the pre-1999 rules, companies could apply indexation to capital gains – no indication of whether this approach will also be retained.

What this means for you right now:

• Still needs to be passed through Parliament.
• Even with a formula for determining cost base / market value as at 1 July 2027, it may be more beneficial to obtain a valuation of CGT assets.
• Main residence exemption and Small Business CGT concessions will be retained.
• This is a major change, combined with the trust minimum tax changes would seem to make companies a more attractive holding and operating structure, but this needs to be considered on a client by client basis.

| Negative gearing changes

• For any existing residential property acquired after 12 May 2026, from 1 July 2027 losses on the property will not be available to offset other items of income (e.g salary);
• Unused losses will be carried forward and applied against rental income.
• New residential property will not be impacted.

What is still to come:

• It is unclear how carried forward losses will be treated, if the property is sold before the losses are utilised will they be available to reduce any capital gain on sale?

What this means for you right now:

• Still needs to be passed through Parliament.
• This applies to residential property, commercial property will still be available for negative gearing (as will other assets class, e.g. shares).
• Carefully review timing of contracts around 12 May 2026. Contracts entered into prior to 7.30pm on 12 May will be grandfathered, even if settlement occurs later.
  • May need documentation on the timing of execution.

| Loss carry back rules

• From 1 July 2026, companies with a turnover less than $1b will be able to carry back tax losses and claim them against income tax paid in the last two years.
• From 1 July 2028, start-up companies in the first 2 years of operation with tax losses will be able to access a refundable tax offset, capped at the amount of FBT and employee PAYG taxes paid in the loss year.

What this means for you right now:

• These measures are limited:
  • For loss carry back, it is limited to the company’s franking account, so if some profits have been paid as dividends this reduces the amount available to claim. We identified this as an issue for clients to understand the last time these rules were introduced post-COVID.
  • For start-up companies, it is limited to taxes paid on employee salary and benefits, and may have limited use if there are no employees.

| What is missing

• No indication of whether ESS/ESOP interests will be carved out from the CGT changes;
• No updates on the previously announced changes to corporate tax residency (badly needed) or individual tax residency (would be useful).
• No updates on other previously announced budget measures, including:
  • Part IVA and international WHT benefits;
  • Relaxed tax residency rules for SMSFs;
  • Changes to car parking FBT rules;
  • Changes to MIT rules.