Federal Budget 2026-27: CPA Australia’s expert analysis

Elinor Kasipidis:
Hello and welcome to this special federal budget edition of the With Interest Podcast from our Canberra studios. Joining me today is Gavan Ord, our business international and investment lead and Jenny Wong, our policy lead. It was a big night and we've had a few hours to digest the budget papers and go through the massive announcements that the treasurer disclosed in parliament.

It was launched as an intergenerational budget all about housing, but let's unpack the facts. Gavan, I'll start with you. There were a lot of forecasts about the economy, the future of Australia, the global state of things. What were your initial reactions when you sort of heard the forecasts?

Gavan Ord:
I mean, there's no surprise in the forecast. We all know that the war in the Middle East has impacted the economy, has impacted inflation, has impacted supply. So, there's no surprise in that, that the government expects growth to decline a little bit and also inflation to remain high. So, there's no surprise in that.

But I have to say that the surprise to me was when I started to look through what's called budget paper number two over here. And when I saw some of the tax measures, that was the real surprise to me. And hopefully, we get to discuss some of those tax measures in the podcast.

Elinor Kasipidis:
Let's dive straight into it because we've got this global backdrop of uncertainty. We've got a lot of things that are outside Australia's control. So, we're an open market, a small economy. We rely heavily on foreign investment, but we also have a lot of investment money in superannuation funds as well as individual ordinary Australians, mum and dad investors, young people looking to invest their savings to build up wealth to buy a house, for example.

So, Jenny, I'll turn to you because in our view, this was all about tax. We thought it was maybe going to be confined. They were talking in the lead up a lot of speculation around negative gearing and capital gains and trusts. What's your overall reaction?

Jenny Wong:
Well, they label this particular budget as a tax reform budget, but I think it falls short of it. If you want good tax reform, you need simplicity, equity, revenue adequacy and efficiency. And I think they've labelled it as intergenerational equity, which definitely falls short. And that's proven by increased reliance on the income tax base, which I think it's 77.9% of total taxes, revenue versus 75.6% of the last 10 years.

So, yeah, it's falling short of it being labelled as a tax reform budget, particularly with, as Gavan said, the minimum change, minimum 30% tax on CGT and that applies to all assets. The winding back of negative gearing and the taxation of trust is essentially at 30% like companies, which is very disruptive to business, I think. So, they're the surprise elements, but yeah, fall short of being tax reform, I think.

Elinor Kasipidis:
It really comes from a place where the concept of wealth, building your own capacity to invest and grow your savings outside of superannuation is inherently somehow a bad thing. So, when we look at people over the course of their lifetimes, of course, when we're young, we don't have much, but we have a lot of entrepreneurial people who want to start a business.

There are hundreds of thousands of small businesses that are run through these discretionary trusts. There are essentially my understanding is that the capital gains tax for individuals from the first dollar that you make a capital gain, 30% of that goes no matter what your marginal rate is. So, Gavan, you did the numbers. We hear about where the thresholds kick in for the various tax rates, but how much do you actually have to earn as an individual to have an overall tax rate of 30%?

Gavan Ord:
Yeah, so excluding a Medicare levy, it's around about 230,000. So, that's quite a good salary. So, people earning under 230,000, their effective margin on tax rate is below 30%. So, what this change will do is it actually penalises earning wealth through capital and encourages earning wealth through income. Now, if you're saving up to buy a house, obviously you're going to maybe take on a few extra shifts or get another job, but you'll also try and boost your deposit through investments in shares and things like that.

This actually penalises that investment side of the picture and I think that's really quite unfair. If they just took out the minimum tax and impose their marginal threshold marginal rate, I think that's okay at imposing this minimum 30% tax on capital gains. That's a step too far really in my mind.

Elinor Kasipidis:
So, it's almost like a multi-pronged attack because indexation, I think the conversation had got to a point where we understood what that looked like because that was in place several decades ago. It adjusted for inflation. We understand that the venture capitalists and a lot of the startup community were highly concerned because where you have high growth shares like the US stock market, tech stocks, R and D, which we'll get to as well.

The innovation piece doesn't go on stable yields. The unicorns, things like that are no longer going to be attractive. So, that was indexation. And then now on top of that, they've snuck in this 30% minimum tax. How do you see these interacting, Jenny?

Jenny Wong:
Yeah. So, there's two questions in my mind is firstly, what does this do for investor confidence? What other opportunities are there outside of earning your salary and wages, outside superannuation, can you build wealth? Does that mean we're going to see a rise of the institutional investors owning real estate property?

Are we going to see those sort of complex structuring arrangements, more bucket companies, because they're only taxed at 25%, not 30% even. And the other question in my mind is this really going to be fixing the intergenerational wealth issue as well?

If you're going to raise CGT, you've got to pay back negative gearing, is that really going to move the dial to make housing more affordable? Because we saw in 1985 under the Keating-Hawke government where they tried to wind back negative gearing and that led to housing supply shortages, that led to rent increases and as a result, two years later, they wound the back. Question is whether history will repeat itself.

Elinor Kasipidis:
One thing that the government can't control is how people respond, how the markets respond and what the choices are. And we talk as an accounting organisation a lot about fiscal responsibility, financial literacy and there are all sorts of budgeting tools that actually say, don't spend. You should save and you should invest. And that's a good way to set yourself up for life.

For those that are looking to structure, for example, you just mentioned around there are opportunities for those who actually have wealth, who have access to good advice to set themselves up in a certain way.

So, is this really fundamentally increasing the tax burden on individuals on people starting off in their life and taxing them rather than actually achieving what the government ostensibly was trying to say, which is those with lots of wealth will pay a higher rate of tax?

Jenny Wong:
I think so because what's also changed... Well, not change, I should say, is the CGT main resident exemption. So, the wealthy can actually dispose all their investment assets and invest in their own home and that's capital gains tax-exempt and yet someone that's starting out is hit with a 30% minimum. There's a question of why would you invest in Australia? Why would you stay in Australia?

Gavan Ord:
Yeah, I agree with that. If you're wanting to grow a business, you have like a tech business, your labour is mobile, your capital is mobile, you would go to a more business friendly, tax friendly environment like a Singapore and the US.

So, we have a few unicorns in Australia. Does this kill the mythical unicorn? I'd say definitely would be a consideration that people, you're starting out look to Singapore, look to the US, look to other markets that really want to bring you in and there's a much more business friendly environment in those markets anyway.

So, I'm just concerned what signal this sends to investors, to people who are starting out. And I don't think those angles have been fully thought through. Maybe you'll see more evidence in the coming weeks when they start to release more information, but at the moment, I'm concerned.

Elinor Kasipidis:
And the one thing that wasn't fully explored or made that transparent or discussed until several weeks ahead of the budget was the trust piece. So, we've got discretionary trusts are the ones that have been identified. I believe that testamentary trusts from today are also going to be captured.

Why do you think, Gavan, you've been in this space for a long time, you've seen sort of how businesses structure themselves in Australia, particularly small and medium businesses. So, these are ones with revenue under $10 million. A lot of them, they're net income from that. They're operating on margins of 3% to 4%.

They're not necessarily that they get revenue, but actually a lot of the value is in the capital, in the asset and the balance sheet to sell off that company and that's where their retirement savings lie. So, why do you think that trusts in particular have been singled out? Is that the right decision given how many small businesses operate through these structures?

Gavan Ord:
Trusts are used for many reasons. Often asset protection is the main driving reason, but they can also be used to split incomes to give money to people on lower effect marginal tax rates. I can see where the government's thinking is on that.

They could always tackle that through part 4A. They don't necessarily need to do this change here, but I can see where the government's at. But trusts have been a legitimate structure in which to run businesses for decades. But I will say that there's a 3-year transition period where people can restructure, so there will be some rollover relief during that period, so restructure.

Effectively, the government's saying they don't want businesses to run through trust. They want to kill off trusts as a business vehicle. That's okay, three years, but also what about state stamp duty and other issues, which is not... Obviously, the Commonwealth can't control that. So, there's other issues and people are going to need to speak to their accountant to get advice on how to respond to this. There's a period to get ready, but you need to speak to an accountant. It'll be complex and the advice will depend on your individual circumstances.

Jenny Wong:
If I can add to that, if you look at the ATO statistics, there are about 400,000 trusts that carry on business, of which over half of that, about 240,000 small micro businesses that are carrying on business, that's the amount of trusts that will be affected by these measures.

And as you said, Gavan, a lot of them set up their family businesses for asset protection, succession planning, managing business risks to keep their assets separate from other personal liability. It's very disruptive to be able to ask a small business to restructure out of a trust structure into a company structure. It's very disruptive.

And if income splitting is the issue, is this a sledgehammer approach? Is the 30% sledgehammer approach rather than using a targeted measure?

Gavan Ord:
That's a good question. Sounds like a sledgehammer to me.

Elinor Kasipidis:
And in terms of sledgehammers, it's also around the revenue. So, when we look at the forward estimates and given that there's only a couple of years in the forward estimates where this has been budgeted for, and we know treasury can be quite conservative, my read, Gavan, was that they're actually not handing back as much as they expect these revenue measures to bring in. Is that right?

Gavan Ord:
I think we calculated last night that in the first year, full year of operation, which is 2029, 2030, from the CGT discount, the negative gearing and the trust measure, they'll collect around $7 billion in additional revenue and the working Australian tax offset, the WATO, they'll hand back around three and a half billion dollars. So, for every $2 they collect from these tax measures, they'll hand back one.

So, this is not, to me, this is not what we've asked for. We do need to reduce personal income taxes and yes, we'll obviously support tax cuts, but if they're going to do this, it should hand back all of it.

But Jenny, you've made the point around GST and this is actually, we're still too reliant on income taxes and all this does is shift within the income taxes, but we're not shifting the overall tax mix.

Jenny Wong:
Hence, it's not tax reform.

Gavan Ord:
Yeah.

Elinor Kasipidis:
So, we have really thought about this a long time. We really want this holistic review. The OECD and others have pointed at how reliant the Australian government is on the income tax base. They are not even returning the additional revenue back to working Australians. So, in theory, that WATO should be $500. The other piece, of course, is that inflation is the government's best friend because we have bracket creep. So, every time that the inflation goes up, real wages are going down, but there's no adjustment to the income tax thresholds.

Increasingly, we're seeing that the government is looking at Australian individuals to really drive a lot of their revenue base, which is exactly what they're saying they don't want to be doing. So, how from a productivity, just from an economic and an equity perspective, does this budget actually achieve what the government's saying it achieves?

Gavan Ord:
I mean, there are elements that are focusing on productivity. I know Jenny will speak to some of those, but there is a productivity package and there are elements there that I think is pretty good and it's sort of changing. For example, productivity will build into the performance of regulators. I think that's the statement of ministerial expectations. I think there's positives.

In terms of equity, I don't think it achieves the intergenerational equity that the government's saying it's going to achieve and I think we've all spoken about that. The other thing is we're also running deficits and over the forward estimates, over the next four years, the combined deficit will be $150 billion.

That'll be paid for by future generations. So, it's not just about tax delivering intergenerational equity, it's about reducing the tax burden on future generations. So, you can't claim to be achieving intergenerational equity over here, but then imposing extra future costs on future generations over here.

So, I think you've got to do both and I'm just concerned the messaging that the government is not considering the whole picture and I think people will over time start to appreciate that this is not going to achieve intergenerational equity in the way that the government claims it is.

Elinor Kasipidis:
Great point. And you did mention the productivity package. Jenny, what are some of the incentives that have been built into this budget in that space?

Jenny Wong:
Yeah, I think some of the productivity benefits and proposals that came out of the budget has been overshadowed by all the changes on CGT negative gearing, but there is some light on the productivity side of things. So, small businesses will benefit from lost carryback for two years and it's just reinvigorating the COVID style lost carryback.

There's also the $20,000 instant asset write-off and CPA Australia's been quite vocal on advocating that position on making it permanent rather than temporary because problem with temporary concessions is they get stuck in parliament and get deferred and never come into effect.

There's also the R and D tax incentive and that's a complete overhaul of the R and D tax incentive to encourage investments and it's consistent with what was called the Ambitious Australia Report and it does impact large and small firms who want to invest in R and D. So, things like increasing the R and D tax offset from 20% to 50% and increasing the annual cap from $150 to $200 million.

There's also for startups a loss refundability and startups, you've got turnover less than $10 million where you convert losses into refundable tax offsets in the first two years.

Some changes for venture capital tax entities as well, accelerated foreign investment approvals. They're just some of the few productivity changes. But like I said, I think the B1s on CGT negative gearing and trust have overshadowed some of these changes.

Elinor Kasipidis:
Time will tell how this budget lands. There's a lot of detail that needs to be worked through and presumably we will see exposure drafts and there will be consultation. One of the things has been a real challenge. We haven't seen the modelling. We haven't seen the details. There hasn't been public consultations like previous governments have done. So, before we close off the podcast, any final thoughts from you, Gavan?

Gavan Ord:
I think you mentioned about how governments have done tax reform in the past and they've done green papers, white papers, discussion papers. They don't just dump an announcement on budget night. I think it would have been better if the government had gone through a process of developing the idea publicly, not privately.

And then by the time we come to budget or the actual announcement, we understand what the issues are, we understand the government's approach, but we don't understand the government's approach here. It's been done in the confines of treasury with maybe a few academic external consultants.

I don't think that's a good public policy setting, particularly in an area where the unintended consequences can be so big, you need to do these things in the public domain and tax reform is about not just picking a few issues. That's just change, not reform. You need to have a whole package of reforms. So, government, consult early, consult often before you start making decisions like it was in today, that last night's budget.

Elinor Kasipidis:
Thanks, Gavan. And Jenny, any final thoughts from you?

Jenny Wong:
Oh, look, I agree with Gavan. We do need holistic reform. We're relying too much on income taxes, but the budget does raise serious questions about whether we're actually rewarding aspiration and innovation, or we're just taxing more raising revenue.

Elinor Kasipidis:
Thank you so much, Gavan and Jenny, for your insights today after a very long night. For our listeners, you can check out the show notes for a link to our CPA Australia budget website for more expert commentary and also check out our webinar on our YouTube live channel.

With Interest is a regular podcast, so keep an eye out for episodes and don't forget to subscribe through your favourite podcast app. From all of us here at CPA Australia, thank you for listening.