Preparing for tax time: Change is in the wind

Abi Chellapen and Ned Galloway

The article is relevant to members in Australia and was current at the time of publication.

Significant changes to Australia’s tax regime in decades passed as legislation through Federal Parliament. The changes will have major implications for practitioners and clients going forward. 

CGT changes

From 1 July 2027, the 50 per cent CGT discount will be replaced with cost base indexation, together with a 30 per cent minimum tax on net capital gains. Taxpayers holding assets at 1 July 2027 will need to determine the value of those assets at that date, either by obtaining a valuation or using a prescribed apportionment methodology supported by Australian Taxation Office (ATO) tools. While valuations may be obtained retrospectively, contemporaneous evidence and early planning will be important.

While gains accruing before 1 July 2027 should remain outside the new CGT net, gains accruing after that date will be taxable when realised. For pre-CGT shares and units, a review of the interaction with Division 149 and CGT event K6 will be important, particularly where underlying assets have changed in value or ownership has shifted over time.

Negative gearing changes

Negative gearing will be significantly narrowed. Existing residential investment properties held before 7:30pm AEST on 12 May 2026 are grandfathered. However, for established residential investment properties acquired after that time, losses will be quarantined from 1 July 2027 and only available to offset residential rental income or capital gains from residential property. New residential housing that contributes to housing supply can be negatively geared at any time.

Discretionary trusts

From 1 July 2028, discretionary trusts will be subject to a minimum 30 per cent tax on taxable income. Individuals and some other beneficiaries are expected to receive non-refundable credits for tax paid by the trustee, but corporate beneficiaries are not expected to receive a credit.

The Government has announced a three-year rollover relief window from 1 July 2027 to assist small businesses and others wishing to restructure out of discretionary trusts into companies or fixed trusts. However, the detail remains outstanding, and any restructure will need to consider income tax, CGT and stamp duty.

Other Budget changes

• From 1 July 2027, every working Australian will automatically qualify for the $250 Working Australian Tax Offset.
• Small business CGT concessions will remain available, and the turnover threshold for the small business 50 per cent active asset reduction will increase to $10 million from 1 July 2027.
• From 1 July 2026, the instant asset write-off allowing small business taxpayers to immediately deduct depreciating assets up to $20,000 will become permanent.
• Also from 1 July 2026, entities with turnover of less than $1 billion can apply the loss carry back rules to offset against tax paid in the prior two income years.
• From 1 July 2028, start-up companies with turnover of less than $10 million that make tax losses in their first two years of business can get a refundable tax offset by using the loss.

Foreign resident CGT regime 

Proposed changes to CGT for non-resident investors seek to broaden the scope of assets that are taxable Australian property. If passed, this would have a significant impact on foreign investors investing in renewable energy, mining and farming (water rights) assets. There will be a concessionary period up to 30 June 2030 for investors in the renewable energy sector.

Intra-group arrangements

The importance of formalising intra-group arrangements in writing, as highlighted by the SNA case, underscores the need to ensure fixed duration agreements are renewed. The case highlights that documentation is key to substantiate intra-group transactions and advisers should perform a client health check to ensure appropriate documentation that reflects the underlying transactions is in place.

Division 7A unpaid trust distributions

On 10 June 2026, in the case of Commissioner of Taxation v Bendel, the High Court of Australia dismissed the Commissioner’s appeal against a previous ruling that an unpaid present entitlement (UPE) owed by a trust to a corporate beneficiary does not, of itself, constitute a loan for the purposes of Division 7A of the Income Tax Assessment Act 1936.

The Commissioner’s Decision Impact Statement providing guidance was released on 26 June 2026. The ATO warns that while a standard unpaid present entitlement is safe from being deemed a loan, they will still scrutinise arrangements using other integrity measures, such as Subdivision EA (if the retained funds are subsequently loaned to individuals) and section 100A (reimbursement agreements) and Part IVA (general anti-avoidance) could still apply where there are UPEs from a trust to a company.

PCG 2025/5 on personal service businesses

The ATO released PCG 2025/5 in November 2025 outlining its approach to personal service income rules that ensure income generated through personal exertion of an individual is taxed to the individual. The PCG sets out a framework for when the Commissioner would consider the application Part IVA to personal services businesses.

While Part IVA can apply to any higher-risk arrangement, as noted by the PCG, taxpayers should not be concerned that the ATO will apply compliance resources to pursue Part IVA where they have made a genuine attempt to move into a low-risk arrangement by 30 June 2027.

Property development arrangements

The ATO’s TA 2026/1 and PCG 2026/D2 guidance, released in April, outlines its concerns around the separation of land-owning entities and development entities. The ATO is concerned that taxpayers can receive a timing benefit by claiming deductions in the development entity when incurred. However, if deductions were incurred by the land-owning entity, deductions are only offset against the gain when the asset is sold.

Practitioners advising property developers should be aware of the ATO’s concerns and, if needed, undertake corrective action.

XLZH — pre-CGT assets and Division 149

The XLZH v Commissioner of Taxation [2025] ARTA 2154 case is one to watch in 2027. Division 149 has been problematic in terms of discretionary trusts as the provisions do not cater for discretionary interests. If the Commissioner’s approach is found to be correct, there may be few assets in discretionary trusts that retain pre-CGT status.

Family Trust Distributions Tax

Family Trust Distributions Tax (FTDT) has increasingly become a focus area of the ATO. Advisers should undertake a review of Family Trust Elections to ensure they have been made appropriately and evidence is in place.

The Australian Taxation Office (ATO) is offering an administrative relief window until 31 December 2026 for family trusts that have inadvertently distributed funds outside of their designated family group. By taking advantage of this amnesty, trustees can avoid up to 80% of the General Interest Charge (GIC) applied to their Family Trust Distribution Tax (FTDT) liabilities.

Abi Chellapen is Tax Partner and Director and Ned Galloway is Associate Tax Director SW Accountants & Advisors.