Federal budget 2026: A turning point for Australia’s tax system

Topics covered

1. A budget with trust issues
2. Treasury continues its war on trusts
3. How the 2026 Budget changes negative gearing
4. Loss carry back makes a comeback
5. New CGT rules explained
6. Supercharging startup capital: Budget expands venture capital tax settings
7. For tax compliance the devil is in the details
8. How the Budget is changing travel
9. How PAYG instalments are changing under the 2026 Budget
10. EV tax incentives scaled back under the 2026 Budget
11. Instant asset write off: $20k and here to stay
12. R&DTI rewired: The $200m cap and a sharper incentive – but the ATO is watching

A budget with trust issues

After many years of underwhelming budgets with no substantive tax changes, the 2026 Federal Budget finally delivers tax reform. The 2026 model of tax reform, however, makes no attempt at broadly balancing changes so as to spread the pain. Instead, the impact will be felt most dramatically by small and medium sized businesses and family groups – that is, the people who have overwhelmingly adopted the use of discretionary trusts over the last 50 years, and have been described as the engine room of the economy.

This is not the reform we wished for.  To place these changes in context, we’ve mapped how Australia’s tax system has evolved over the past century – explore our 100-year tax history timeline here.

Any benefits that hopefully will come from the changes to negative gearing and the CGT discount for first home buyers will be dwarfed by additional complexity, significantly increased taxation and second and third order unintended consequences. 

A blanket removal of the CGT discount across all asset classes – except new residential property – is ill-considered and potentially ruinous, particularly for shareholders of start-up companies which have invested in the growth of their companies.  A minimum CGT tax rate of 30% places Australian individuals and trusts amongst the highest taxed in the world.  A return to the pre-1999 indexation model makes even less sense when companies are not impacted, potentially making companies a significantly more attractive option for investment activities than trusts.

A 30% minimum tax rate for trust distributions is similarly complex and confusing.  How will the changes impact the pass through of franking credits?  What happens with capital gains?  What of distributions of corpus where the trust has no assessable income?  Trust taxation is already horribly complex and the ATO gets its position wrong frequently (see for example the Bendel case currently before the High Court – our article on this is available here).  Rather than simplify and streamline the patchwork changes to trust taxation that have befuddled all parties for years, the Treasurer has instead added yet another layer of complexity.  What is unclear is if there will be any changes to the tax rates if a trustee accumulates income – if this will be decreased to 30%, it could start to look like a meaningful reform.  Although presumably the recipients of income that has been accumulated and then distributed in a future year will not receive the benefit of credits for tax paid by the trustee.

But perhaps the most dramatic measure is the inconsistent application of non-refundable tax credits which will be available to all beneficiaries except companies.  This effectively ends the use of bucket companies which will now face double taxation and an effective tax rate of 51%. When a dividend is distributed, top up tax could mean an effective tax rate of up to 65%, or potentially even up to 77%.  It would seem that the Commissioner has not taken his losses in Bendel well.

We will leave it to economists to consider the economic impact, and leave it to political commentators to consider the electoral impact.

All in all, it seems that the Treasurer has made taxation significantly more complex.  One thing is certain – the increased complexity will add to disputes, unexpected loopholes and unforeseen outcomes.  This will lead to workarounds and restructures for at least the next two years, leading up to the 1 July 2028 implementation date, and likely for years to come.

Who will this impact?  Every taxpayer who has an interest in a discretionary trust, negative geared property and the likelihood of a capital gain.  That is potentially everyone who reads this.  It will be imperative to review structures and consider changes, particularly the use of rollovers to structure out of trusts, a Commonwealth measure which will hopefully also be facilitated by changes to State and Territory duty laws.

Read on for our Tax team’s overview of the Budget and its far-reaching impacts.  Now is the time to review your structures and consider what changes may be needed. 

Treasury continues its war on trusts

From 1 July 2028, trustees of discretionary trusts will pay a flat 30% tax rate on trust net income, with beneficiaries (other than corporate beneficiaries) receiving a non-refundable credit for tax paid by the trustee – effectively imposing a minimum tax of 30% on discretionary trust income. 

This measure is specific to discretionary trusts and will not apply to fixed and widely held trusts, charitable trusts, deceased estates and superannuation funds.  Certain income will also be excluded from the taxing provisions, including primary production income and income from assets of testamentary trusts existing as at 12 May 2026.  

Expanded rollover relief will be available for three years from 1 July 2027 to allow businesses and others to restructure out of discretionary trusts into other entities (i.e. fixed trusts or companies).

What does this mean – added complexity for discretionary trusts

The introduction of a flat 30% tax payable by trustees of discretionary trusts may seem simple, but will require complex amendments to the current tax legislation (which will be crucial in ensuring the measures operate as intended).  Furthermore, there is no further guidance on how the measures will impact corporate beneficiaries – who are not noted as being eligible to receive a credit for tax paid by the trustee on income they receive. 

The measures appear to be targeted at dis-incentivising distributions of trust income to corporate beneficiaries, overlooking the fact that there may be valid reasons to do so.  On their fact, the changes are expected to result in net income distributed to corporate beneficiaries being taxed at up to 60%.   Even worse, if the corporate beneficiary then declares and pays a fully franked dividend to individual shareholders, an additional 17% top up tax could be payable (for those on the highest marginal tax rate), bringing the effective tax rate on such income to 65% or potentially up to 77%.

As suggested by the reference to a ‘minimum’ rate of tax, beneficiaries that are eligible are unlikely to be able to carry forward any un-used credits for use in future years.  As a result, if a beneficiary has a lower tax rate in a year, the benefit of any tax paid by the trustee will be lost – targeting the distribution of trust income to individuals on lower tax rates and meaning careful management of trust distributions will be more important than ever.

The other scenario that remains unclear is the tax consequences if a trustee accumulates income rather than distributing it in an income year (currently taxed at 47%).  It would appear that if the trustee was instead taxed at 30%, beneficiaries in receipt of income which has been accumulated in a prior year will not receive the benefit of tax paid by the trustee. Furthermore, while the expanded CGT rollover relief may assist with restructuring, the duty implications of business restructures often prove to be too costly for many taxpayers, with duty relief often not available and/or the duty payable varying significantly across the States and Territories in which a business may operate.

How the 2026 Budget changes negative gearing

Negative gearing is simple. If the rent from an investment property doesn’t cover the costs of holding it, the resulting loss can be used to reduce other taxable income.  For many higher‑income investors, that tax saving has been the point: wear a cashflow loss in the short term, soften it through the tax system, and count on rising property values to make the strategy pay off in future.

The 2026 Budget makes it clear that the familiar version of negative gearing for residential property we are accustomed to is being dismantled.  From 1 July 2027, for purchases of established housing, taxpayers will not be able to use rental losses to shelter salary or business income.  Instead, net rental losses from established residential properties can only be deducted against rent or capital gains from residential property, and any excess will carry forward within that residential property bucket. Transitional rules preserve the old negative gearing treatment for properties purchased or held at 7.30pm (AEST) on 12 May 2026, including those under contract but not yet settled, and new builds remain exempt so can still be fully negatively geared.

In other words, for future established residential investments, negative gearing as you know has been replaced with a quarantined, carry forward loss regime.  The Budget includes a worked example to show how this operates.  Jason buys an existing rental property after Budget night and makes a $10,000 net rental loss in 2027-28.  He cannot use that loss to reduce his other taxable income, so the full $10,000 carries forward.  In 2028-29 he earns $6,000 in net rent.  The carried forward loss wipes out tax on that income and leaves $4,000 still quarantined for use against future residential rental income or residential property capital gains.

A key takeaway is the new limitation applies only to net rental losses from residential property.  Commercial property and other asset classes, including shares, stay under the existing rules, such that losses on those asset classes can still be used to offset salary and other income (for now).

Impacts to owners of residential investment properties

If you already own residential investment property, the key takeaway is that the Budget protects your current negative gearing position on those assets.  Properties you hold at 7.30pm (AEST) on 12 May 2026, including properties where you have exchanged contracts but not yet settled, remain under the existing rules until you dispose of them.  You can continue to use net rental losses from those properties to offset salary, business income and other assessable income, subject to the normal deductibility rules.

You should still review your portfolio.  For properties that remain strongly negatively geared, you should review your cash flow and exit planning, but you do not face an immediate change to how you claim rental losses going forward.

Buying an established dwelling

If you buy an established residential property after Budget night, you will live under a very different regime to current investors.  The new rules create two sub‑periods:

1. Purchases between 7.30pm (AEST) on 12 May 2026 and 30 June 2027
   During this transitional window, you may still be able to negatively gear in the 2026‑27 income year in the way you are used to, by claiming net rental losses from the property against salary or business income. From 1 July 2027, however, any net rental losses from that property will be quarantined.  You will only be able to offset those losses against residential rental income or capital gains from residential property, and any excess will carry forward for use in future years within that same residential property bucket.
2. Purchases from 1 July 2027 onwards
   For established dwellings you acquire on or after 1 July 2027, quarantining effectively applies from day one. Net rental losses on those properties will never shelter your salary or business income.  They will operate as carried forward property losses that you can only apply against residential rent and residential property capital gains.

The bottom line is that for future purchases of established residential property, negative gearing as you know it disappears and is replaced with a quarantined, carry forward loss regime.

Buying a new dwelling

The Budget deliberately treats eligible new residential builds differently.  To keep tax support focused on additional housing supply, the Government will exempt new builds from the negative gearing limitation.  If you buy qualifying new residential property, you can continue to deduct net rental losses against salary and other income under the current rules, rather than having those losses quarantined to the residential property bucket.

On the CGT side, investors in new builds will have a choice when they sell.  They can elect either to retain the 50% CGT discount or to move into the new regime with cost base indexation and a 30% minimum tax on real capital gains.  That choice, combined with preserved negative gearing, means the tax system remains comparatively more generous towards new housing that adds to supply than highly leveraged purchases of existing homes.

Practically, if you plan to invest after Budget night, you should run separate models for new and established stock. New builds may still carry quality, strata and resale risks, but they retain the familiar tax uplift from full negative gearing and will often have a more favourable post‑tax profile than an otherwise similar established dwelling under the new rules.

What does this mean for first home buyers?

For first home buyers, the changes aim to ease investor pressure on the segments of the market where you compete most directly.  However, beyond the CGT consideration outlined above, the effect of these changes is aimed at helping first home buyers indirectly by affecting their competition.  The Budget acknowledges that negative gearing and the CGT discount have added to demand for property and contributed to higher house prices at the expense of younger owner‑occupiers. By restricting negative gearing for established dwellings and reducing CGT concessions, the Government expects highly leveraged investor demand for existing homes to fall.

In practice, you may see less investor competition at auctions for entry‑level established houses and units, and more investor interest in new product. The changes will not solve all affordability issues on their own, but the changes tilt the tax system away from heavily geared investment in existing stock and towards a market where first home buyers have more space to compete.

Loss carry back makes a comeback

From 1 July 2026, a scaled back version of the temporary COVID-era loss carry back will be reintroduced as a permanent two-year loss carry back available to companies with less than $1 billion in aggregated annual global turnover in the loss year.  Eligible companies will be entitled to offset their revenue losses (not capital losses) against tax paid in the previous two income years, generating a refundable tax offset in the loss year.  The offset will be limited to the amount of the prior year tax liability and the company’s franking account balance at the end of the claim year.  Fewer taxpayers will be eligible for the permanent carry back than under the temporary measure, with the annual turnover threshold reduced from $5 billion to $1 billion.  It is not confirmed whether corporate tax entities such as public trading trusts and corporate limited partnerships will remain eligible for the permanent measure.

How loss carry back affects your franking account balance

While the loss carry back will provide tax relief to companies experiencing a temporary downturn in business, the impact on the company’s franking account balance should be considered before opting for a loss carry back (rather than carrying forward losses to deduct in future years).  A debit to the company’s franking account arising from the loss carry back refund may produce a liability for franking deficit tax if the refund causes a franking account deficit that is not made up by the end of the year in which the refund is received.

Wins from losses for small start-ups

From 1 July 2028, start-up companies with less than $10 million in aggregated annual turnover will be entitled to a refundable tax offset for tax losses generated in their first two years of operation.  The refund will be capped at the amount of FBT and withholding tax on wages paid to Australian employees in the loss year.  Any excess loss can be carried forward and deducted in future income years under the ordinary carry forward loss rules.

What do these tax measures mean for start-ups

This measure will improve cashflow for start-ups by giving them immediate access to tax losses in the form of a refund that would otherwise only be accessible in a future year once they become profitable.  It will also give start-ups greater flexibility to raise capital, reward employees with equity, and innovate without being held back by the restrictions that apply to carry forward losses (i.e. if they would otherwise be disqualified from carrying forward losses due to failing the continuity of ownership test or changing their business to such a degree that they no longer satisfy the same/similar business test).

Read more about how the Budget impacts start-ups here.

New CGT rules explained

The Government has announced that, from 1 July 2027, for individuals, trusts and partnerships:

1. the taxing of capital gains will revert to an indexation based model; and
2. a minimum 30% tax will also be introduced.

Currently, where a capital gain is derived and the asset is held for 12 months or more, a 50% discount to the capital gain is first applied, with the remainder taxed at marginal tax rates.  Under the indexation approach, the cost base of the property will be determined in line with an inflation based index.  This means that, when the property is sold, the capital gain will be determined by determining the difference between the capital proceeds and the cost base (increased in line with the inflation index).  The full amount will be taxed at marginal tax rates, instead of a discount percentage first being applied.

The new indexation method will apply from 1 July 2027.  The current 50% CGT discount is grandfathered and will continue to apply to capital gains accrued until 1 July 2027.  At this point, a taxpayer can determine their new cost base (to which the indexation model will be applied in the case of any future CGT event) either by:

1. obtaining a valuation, or
2. using an apportionment formula (to be provided by the ATO) that estimates the asset’s value based on its average return over the holding period.

There will be a carve out for investors who purchase a newly built residential property, who can choose to still apply the 50% discount, or the indexation method when that property is sold, however we are awaiting further details regarding this.

The 30% minimum tax will also apply to capital gains accrued from 1 July 2027.  The Government states that this will reduce incentives to defer the sale of assets to a period when a taxpayer’s marginal tax rate is low.  Exemptions for pensioners and other income support recipients are expected.

What do these CGT changes mean?

These new measures significantly change (and complicate) the calculation of tax payable on capital gains made going forward. 

1. For assets held prior to 1 July 2027:
   • gains accrued to 30 June 2027 will have access to the 50% CGT discount; but
   • a valuation or an apportionment formula will need to be used to determine the cost base as at 1 July 2027 for the purpose of calculating any future capital gains.
2. Capital gains accrued from 1 July 2027 will be determined by reference to the indexation model only – and will also be subject to the minimum 30% tax rate. 

In perhaps the most significant change to the CGT regime, these changes will apply to all CGT assets, including those which are currently exempt from tax because they are pre-1985 assets (i.e. pre-CGT assets).

The Government does note that there will be further consultation with stakeholders on key details of the capital gains tax reforms, particularly in relation to start up businesses.  It will be interesting to see what (if any) alterations are ultimately made in respect of such businesses. 

Start up companies often have a low or minimal cost base at the outset and may subsequently enter a significant growth phase.  However, it is expected that any indexation of the cost base under the new method will be nominal – particularly over a relatively short period of time.  This will result in significant capital gains in the future that will no longer qualify for the CGT discount (and instead, will attract a minimum tax rate of 30%). 

Similarly, one of the key attractions of the start up concession for employee share option plans (for employees receiving shares in respect of their employment) is access to the 50% discount.  Without carving out such interests, any capital gain made on the sale of these shares will now be subject to the indexation method from 1 July 2027, with no CGT discount available. 

Supercharging startup capital: Budget expands venture capital tax settings

The Government will expand key tax settings for venture capital from 1 July 2027, with the changes designed to better reflect current company valuations and unlock additional “patient” capital for startups and high‑growth businesses.

Venture capital investors can operate through venture capital limited partnerships (VCLPs) and early-stage venture capital limited partnerships (ESVCLPs), which provide access to flow-through treatment and targeted tax incentives.  However many of the asset and fund size caps for these regimes have not been updated since VCLPs were introduced in 2002 and ESVCLPs in 2007, reducing their effectiveness over time.

From 1 July 2027:

• VCLP eligibility will extend to investments in businesses with assets up to $480 million (up from $250 million).
• ESVCLP eligibility will extend to investments in businesses with assets up to $80 million (up from $50 million).
• ESVCLP investors will retain full access to incentives as businesses grow their assets up to $420 million (up from $250 million).
• The maximum committed capital for ESVCLPs will increase to $270 million (up from $200 million).

The increased thresholds will apply to both new and existing funds and to any new investments made, including follow‑on investments in existing portfolio companies.  However, funds will be required to remain compliant with their existing investment plans or obtain approval for a replacement plan.

In a related change, the eligible venture capital investor program (which was designed to encourage foreign investment in Australian start ups and growing businesses) will be closed to new applications from 7.30 pm (AEST) on 12 May 2026.

What this means

While the updates to the VCLP and ESVCLP thresholds is a welcome move for investors and venture capital funds who invest in startups and early stage businesses, fund managers will no doubt be weighing the likely impact (and benefit of flow through treatment) in a world where investors will no longer receive CGT 50% discount and be subject to a minimum 30% CGT rate (unless changes are made following further consultation).

For tax compliance the devil is in the details

The Government’s headline on tax compliance is that it is ‘protecting the tax system against fraud’.  It announced a further $86.3 million from 1 July 2026 and $9.7 million per year for phase 2 of the program, which is presumably in addition to the $187 million funding over four years announced in the 2024-2025 budget. In addition to this funding, the Government announced:

• the funds are intended to enhance the ATO’s monitoring and real time response to fraudulent account access to tax agents, business and for high‑risk superannuation changes;
• the ATO will have powers to provide relief to victims of fraud by tax intermediaries;
• the ATO’s garnishee powers will be expanded to include joint asset which are used to frustrate ATO recovery;
• the ATO will ‘progress further targeted exceptions to tax secrecy and engagements to tax regulators’ information-gathering powers to support integrity, compliance and effective administration of the tax system’; and
• the ATO will target fraud, including research and development tax incentive.

What this means for tax compliance

Behind the Government’s appropriate recognition of the cost to taxpayers as a result of fraud and who should receive relief, this innocuously drafted section of the Budget holds big compliance implications for taxpayers, and marks the expansion of its already immense information gathering and debt recovery powers.

These Budget measures mean:

1. Debt recovery:  a frequent snag in the ATO’s debt recovery action is that it cannot access jointly held assets except through approaching the Australian Courts around trust arguments in favour of the taxpayer.  The extension of the garnishee powers removes the potential inconvenience of judicial oversight for the ATO and significantly expands the orbit of their debt recovery which from a taxpayer’s perspective is extremely difficult to challenge.  The Budget suggests that the power may only apply if the joint arrangement is to ‘frustrate ATO recovery’ but what this might look like, if it holds any sway at all, is unlikely to slow down the ATO’s recovery.
2. Information gathering:  in addition to the ATO’s ability to require taxpayers to hand over information, they can request information from third parties, including offshore and government parties under a host of international agreements which do not all allow that information to be shared with the taxpayers themselves.  The focus on tax secrecy presumably refers to these offshore agreements, and come while the new AML provisions are introduced for lawyers and accountants and exposes private individuals to invasive scrutiny.

All of this comes in the context of the ATO’s previously announced focus on non-arm’s length income and expenditure in superannuation funds, division 7A, back-to-back rollovers, succession planning and structuring, and family trust distribution tax, with the Budget adding R&D tax incentives to this list.

The tax landscape was already a perilous place for taxpayers, and it only grows more perilous as the power and the reach of the ATO grows, while a taxpayers’ ability to stand their ground remains unchanged and fraught with increasing difficulty. 

How the Budget is changing travel

For each person that departs from Australia to travel to another country, the travel provider (e.g. the airline or cruise line) must pay a charge to the Government, referred to as the ‘Passenger Movement Charge’ (PMC).  Under this Budget, the PMC has been increased to $80 per person, a $10 increase from the previous rate.

What impact will the Passenger Movement Charge have

Though PMC is charged to travel providers, it is generally incorporated into the price of the passenger’s ticket.  As such, the increased PMC will be an unwelcome (albeit apparently nominal) change for business travelers and holidaymakers alike – who are already facing high fares in response to spikes in global oil and fuel prices.

The Federal Government currently collects approximately $1.4 billion per annum from the PMC.  Under the increased PMC, collections are expected to grow to approximately $1.63 billion per annum by the 2029-30 financial year.

Freeze on foreign purchase of established dwellings extended

On 1 April 2025, the Government introduced a two-year ban on purchases of established dwellings by foreign persons.  This ban is subject to limited exemptions – including for example, acquisitions made for the purposes of developments that will increase the housing supply.  Under the Budget, this ban has been extended to 30 June 2029.

How will this extended freeze impact foreign purchasers of property?

Foreign purchasers of property, who already face a fairly hostile investment environment, are sure to be disappointed by the extension of their ban on acquiring established dwellings.

This ban was introduced to assist Australian home buyers.  The ban is also intended to encourage investments which promote the expansion of housing supply (as is apparent from the fact that this ban does not apply to new dwellings, coupled with the exemption for acquisitions by residential developers).  To the extent that these goals have been achieved by the ban to date, its extension will presumably further this impact.

It is estimated that by extending this ban, the Government will forgo approximately $185 million in foreign investment application fees.

How PAYG instalments are changing under the 2026 Budget

The Government is changing how PAYG instalments work so they better reflect how businesses are actually performing, rather than relying on outdated figures from prior tax returns.  Under the current approach, instalments are often set too high or too low, which can tie up cash unnecessarily or leave businesses with large tax bills at year end (or penalised for ‘over-varying’ instalments downwards).

To improve this, the ATO will expand the use of real-time, or ‘dynamic’, monthly instalments.  These will use current accounting data, fed into accounting software used by businesses, to automatically adjust instalments as business conditions change based on a particular ATO-approved calculation.  Taxpayers can opt in to the program from 1 July 2027, however taxpayers with a demonstrated history of non-compliance will be required to report and pay PAYG instalments monthly.

A safe harbour will also be introduced for those using the approved method, with interest charges not being imposed if instalments are later found to be too low.

What the PAYG changes mean

Overall, the changes are intended to make PAYG instalments more frequent, accurate and easier to manage, helping businesses retain cash when needed and reducing the risk of unexpected tax liabilities. 

This measure will allow real time updates to instalment calculations while ensuring taxpayers not facing interest changes if incorrect (which importantly, are no longer deductible).

EV tax incentives scaled back under the 2026 Budget

In July 2022, the Government introduced the Electronic Car Discount Bill, which allowed eligible drivers to access an FBT exemption on electric vehicles (EVs) through salary packaging and novated leases.  The Government anticipated that this would cost approximately $205 million in the four years following implementation.  Problematically, the initiative accelerated past expectations, exceeding costs of $2 billion in the first three years.

Along with unforeseen demand in EVs, it appears the Government did not fully quantify the impact of compliance costs, revenue impacts from the import tariff exemption, or GST and fuel excise. As a result, the Government has recalibrated the Electronic Car Discount with the aim of delivering a ‘fairer and more fiscally responsible’ tax treatment for EVs.

The Government will introduce the changes in three (progressively reducing) phases, with the intention of saving $1.7 billion across the next four years.  Fortunately for employers and employees, existing leases will not be affected by the changes, avoiding any immediate detours for current arrangements.

1. Phase 1: the existing EV discount will continue in full until the end of March 2027, with the full FBT exemption on eligible electric vehicles under the luxury car tax threshold remaining available.
2. Phase 2: between 1 April 2027 and 1 April 2029, a full FBT exemption on eligible electric vehicles acquired and costing $75,000 or less is available.  However, it will limit the discount to 25% on FBT payable for electric vehicles exceeding $75,000.
3. Phase 3: all eligible EVs below the luxury car tax threshold will move to a flat 25% FBT discount, rather than the full exemption.

What the Budget means for EVs

Australia’s appetite for EVs has increased exponentially in recent years.  Immediate demand is only likely to increase through the implementation of the three phases, where taxpayers will seek to enter leases and capitalise on the FBT exemption before the incentives run out of road.

Through the reducing threshold, taxpayers are likely to prioritise cheaper vehicles which are eligible for the FBT exemption.  As such, manufacturers may be incentivised to reduce prices to satisfy the growing demand for cheaper vehicles.

However, one obvious risk of the rapidly increased demand is the capacity for manufacturers to provide adequate supply.  Consequently, this initiative may become increasingly inaccessible to many Australians seeking to maximise the benefit of a transition to an EV.  

Instant asset write off: $20k and here to stay

The Government has announced the $20,000 instant asset write‑off (IAWO) will be a permanent feature from 1 July 2026 for all small businesses with aggregated annual turnover up to $10 million.  This means that eligible businesses can:

1. immediately deduct the full cost of eligible depreciating assets costing less than $20,000; and
2. depreciate assets with a cost of more than $20,000 as part of the small business simplified depreciation pool. 

The Government has also elected to continue the suspension of the 5‑year “lock‑out” rule (which otherwise prevents re‑entering the simplified depreciation regime after opting out) until 30 June 2027.

What this means for small businesses

With the IAWO now locked in, small businesses will be able to invest in their businesses and better plan for cashflow management without the uncertainty of having to wait until tax time to find out whether the IAWO (previously a temporary measure) is still on the table.

R&DTI rewired: The $200m cap and a sharper incentive – but the ATO is watching

Key changes will be made to the Research and Development Tax Incentive (R&DTI) from 1 July 2028, intended to simplify and better target support for business R&D from 1 July 2028. 

The centrepiece of the changes is a shift in generosity and increased focus toward experimental R&D, including a 4.5 percentage point increase in core R&D offset rates (described as lifting support by around 25–50%) and a reduction in the R&D intensity threshold from 2% to 1.5%, which is designed to allow more firms undertaking substantial core R&D to qualify for higher rates.  At the same time, the Budget removes eligibility for supporting R&D expenditure, narrowing claims to core R&D activities and tightening the boundary around eligible expenditure. 

For SMEs the turnover threshold for the highest offset rate increases from $20 million to $50 million.  Refundability will be limited to firms under ten years of age, with older firms directed to non‑refundable support. 

For larger claimants, the Government has increased the long‑standing annual eligible expenditure cap by lifting the maximum R&DTI expenditure threshold from $150 million to $200 million (an additional $50 million per annum of eligible spend potentially attracting the offset). 

The Government’s changes to the R&DTI tightens entry and integrity settings for smaller claims, including by increasing the minimum expenditure threshold from $20,000 to $50,000 and requiring that R&D activities valued below $50,000 be performed with a registered Research Service Provider or Cooperative Research Centre to remain eligible.

What the changes to the R&DTI means

The redesigned settings are aimed at lifting business R&D where it is most responsive, particularly among younger, fast‑growing firms – with an expected $400 million per year increase in R&D investment by young firms.  The ATO will receive $2.8 million in funding over three years from 2027–28 to support implementation of this measure and we anticipate will be closely monitoring R&D claims in light of the increased thresholds.