Disclaimer: The following is for informational purposes only. It is not intended to constitute legal advice, or to recommend a course of action, and does not create an attorney-client relationship between the reader and Renuka Somers, or Somers Tax Law, PLLC.

Australia’s 2026 Federal Budget, released on May 12, 2026, proposes significant tax reforms in areas previously regarded as politically untouchable. Relevant key measures include changes to the Capital Gains Tax (CGT) discount, limits on negative gearing, and a new minimum tax rate on distributions from discretionary trusts.

1. Capital Gains Tax (CGT) Discount

• For assets held longer than 12 months, the Government proposes replacing the 50% CGT discount with cost base indexation, together with a 30% minimum tax on capital gains, effective from 1 July 2027.
• Capital gains on pre-CGT assets arising before 1 July 2027 would remain exempt from these changes.
• For new residential properties, investors may choose either the existing 50% discount or cost base indexation with the 30% minimum tax.

Nonresidents of Australia were already unable to claim the 50% CGT discount on capital gains accrued after 8 May 2012, with the full gain instead taxed at Australian non-resident rates. However, for U.S. citizens living in Australia, and for U.S. residents subject to lower U.S. federal tax rates, the proposed reforms may be more significant. The IRS does not recognize inflation indexation, and U.S. federal long-term capital gains tax rates remain 0%, 15%, or 20%, depending on taxable income and filing status. As a result, the proposed Australian changes could create or exacerbate mismatches in taxable gains between the two countries, generate excess foreign tax credits for U.S. purposes, and increase overall effective tax rates.

2. Negative Gearing

• From 1 July 2027, negative gearing would be limited to new buildings only.
• For contracts entered into after 12 May 2026, buyers of established rental properties would be permitted to deduct rental losses only against rental income and realized capital gains. Any unused losses could be carried forward and applied against future rental income and gains.

These proposed changes could significantly affect Australians who have traditionally relied on negative gearing and residential investment properties as part of their tax planning and wealth building strategy.

However, the proposed limitations with respect to established rental properties are broadly consistent with the U.S. treatment of passive activity losses, which generally may offset only passive income rather than active income such as wages, unless a taxpayer qualifies as a real estate professional or meets a specific active participation exception.

3. Discretionary Trusts

• From 1 July 2028, trustees would be required to pay a minimum 30% tax on trust income. Beneficiaries other than companies would receive a non-refundable tax credit for the tax paid by the trustee.
• Beneficiaries whose marginal tax rates exceed 30% would pay additional tax, while those on lower marginal rates would not receive the full benefit of the credit.
• No tax credit would be available for distributions to corporate beneficiaries.

As a practical matter, discretionary trusts may become less attractive as income-splitting vehicles, and distributions to “bucket companies” may result in double taxation.

Many Australians living overseas retain interests in Australian discretionary trusts or continue to use them to hold investment properties, distribute income among family members, and manage intergenerational wealth transfers. For these families, the structures are already subject to complex U.S. tax and information-reporting rules. The proposed 30% minimum tax on trust distributions could therefore produce excess foreign tax credits for U.S. federal income tax purposes, increase effective tax rates, and further reduce the appeal of discretionary trusts in a cross-border setting.

4. Planning Considerations

At this stage, these measures remain proposals only and will require legislation before they can change existing tax law.

In the meantime, there may be a limited planning window before the proposed commencement dates to consider the following:

• Review investment holdings and potentially realize gains,
• Evaluate whether trust structures should be restructured, and
• Assess tax residency planning opportunities.

Renuka Somers