What the proposed Federal Budget tax changes may mean for investors

The proposed Federal Budget tax changes have triggered plenty of debate, particularly around discretionary trusts, capital gains tax and property investing. While some measures may begin earlier, many of the changes are still more than a year away and could evolve before becoming law. Even so, they could eventually influence how Australians invest, structure their assets and build long-term wealth. 

We've focused on the proposed changes most likely to affect investors, including many typical InvestSMART clients. For now, understanding what may change is probably more important than rushing to do anything. 

Discretionary trusts  

One of the biggest proposed changes for investors relates to discretionary trusts, which are commonly used to distribute income between family members. 

Under the proposal, the Government will introduce a 30% minimum tax on the taxable income of discretionary trusts from 1 July 2028. Individual beneficiaries would receive a tax credit for tax already paid by the trustee. However, unlike franking credits, unused credits would not be able to be turned into cash back. Beneficiaries on tax rates above 30% may still pay additional tax, while those below 30% will not receive the full benefit of unused credits. 

The changes would not apply to several other trust structures and categories of income including fixed and widely held trusts (such as fixed testamentary trusts), complying superannuation funds, special disability trusts, deceased estates, charitable trusts and primary production income. 

There will be expanded rollover relief for three years starting 1 July 2027, allowing some investors to move assets into structures such as companies or fixed trusts without immediately triggering capital gains tax. However, state stamp duty and other taxes may still apply. 

What does this mean? 

Currently, discretionary trusts can distribute income to beneficiaries who then pay tax at their own marginal tax rates, which can help reduce the overall family tax bill. 

A simple example is a discretionary trust distributing $18,000 of income to a spouse with little or no other income. Under the current rules, there may be little or no tax payable by either the spouse or the trust. 

Under the proposed changes, the trustee would instead pay 30% tax, or $5,400, with beneficiaries receiving tax credits that would not result in cash back.  

These changes could make discretionary trusts less attractive for some investors and may encourage greater use of companies or SMSFs over time. Managed funds and ETFs may be less affected because they generally realise fewer capital gains over time.  

Capital gains tax

The area many investors are most likely to focus on is the proposed changes to capital gains tax. 

Here's a simplified summary: 

• From 1 July 2027, the current 50% capital gains tax (CGT) discount for assets held longer than 12 months would be replaced with cost base indexation and a minimum 30% tax on future capital gains. 
• The changes would apply broadly to investments held by individuals, trusts and partnerships, including shares, ETFs, investment properties and cryptocurrencies such as Bitcoin. 
• Most gains built up before 1 July 2027, including gains on pre-1985 assets, would stay under the current rules.  
• Investors in new residential property may be able to choose between the current CGT discount and the new system when they eventually sell.  
• The family home would still be exempt from CGT and, at this stage, the CGT discount for super funds is also expected to continue. 

What does this mean? 

Many investors may end up paying more tax on future capital gains than they do under the current system, including on some pre-1985 assets.  

The changes may also make super and SMSFs more attractive places to hold investments, particularly if the current CGT concessions remain in place.  

We think some investors will sell long-term assets with large unrealised gains before 1 July 2027 to take advantage of the current CGT rules. 

Lower-turnover investments, such as many LICs, ETFs and index funds, may be less affected because they generally realise fewer capital gains over time. 

Negative gearing  

The proposed changes to negative gearing are another area attracting plenty of attention. 

Currently, investors can use losses from an investment property to reduce the tax they pay on other income, such as their salary. Under the proposed changes, investors who buy an established residential investment property after 7.30pm (AEST) on 12 May 2026 could still negatively gear the property until 30 June 2027. 

From 1 July 2027, however, rental losses could only be used against rental income or capital gains from property. Any excess losses could still be carried forward and used against residential property income or capital gains in future years. 

The exception is newly built homes, which could still be negatively geared under the current rules. SMSFs and widely held trusts are also excluded from these proposed new measures. The changes would also not apply to negatively geared shares or other investments. 

What does this mean? 

The changes could make investment property less attractive for some investors, and we think more buyers may look at buying property through their SMSF. That said, they may be caught by the new $3 million super tax. 

We don't expect a rush of investors selling existing properties, as current negative gearing arrangements would be grandfathered under the existing rules. However, those investors may still be affected by the proposed CGT changes from 1 July 2027. 

We also think some higher-income investors may look more closely at using margin loans on shares as an alternative way to reduce taxable income in the future. 

What is the broader impact for investing?  

Compounding wealth is one of the most important parts of investing, and these changes could affect how investors build wealth in the future and the investments they choose to hold. 

Managed funds and active ETFs with high turnover would still need to distribute realised capital gains. From 1 July 2027, those gains could attract higher tax than they do today, potentially making after-tax returns less attractive for some investors. 

Index funds and ETFs with lower turnover and fewer realised capital gains may perform even better on an after-tax basis over time. 

Comparing high-dividend investments with higher-growth investments may also become more complicated, as the better option will depend on inflation and your personal tax rate. We'll provide some simple examples and analysis from our analysts in the coming months. 

The changes may also make putting more money into super or an SMSF more attractive, as the tax drag on long-term returns would likely be lower than outside super. One caveat may be the new tax on super balances above $3 million per person, which starts on 1 July 2026. Earnings on balances above that threshold will be taxed at 30%, rising to 40% for balances above $10 million. 

The stalwart of Australian assets, the family home, remains one of the most tax-advantaged assets you can hold, so it is debatable whether the heat will come out of house prices quickly. 

Why portfolio structure may become more important 

For investors thinking about the potential tax implications of these changes, portfolio structure and turnover may become increasingly important over time. 

Lower-turnover investments, careful rebalancing and tax-aware portfolio management could all play a bigger role in after-tax returns. 

InvestSMART's PMA structure is designed to help manage some of these issues by allowing investors to build diversified ETF portfolios while also managing rebalancing and capital gains outcomes more efficiently.  

There's still plenty of time to think through the potential implications before any final legislation is introduced.