Last night, Treasurer Jim Chalmers handed down the 2026-27 Federal Budget. His own description — "the most significant tax reform package in more than a quarter of a century" — is, for once, not hyperbole.
Three changes will reshape how Australian investors hold and grow wealth: the 50% CGT discount is being replaced, negative gearing is limited to new builds, and discretionary family trusts face a new 30% minimum tax. Every one of these changes has been discussed, debated, and feared for years. Now they're here.
Our job is to tell you what it means for the strategies most Merit clients run, where the real risks and opportunities are, and where decisions need to be made in the next 14 months. The short version: if you already own your investments, you have more protection than you think. If you have decisions to make in the next few years, the timing has just become more consequential than at any point in the last 25 years.
The Three Changes That Matter
| Reform | What changes | From when | Grandfathering / protection |
|---|---|---|---|
| CGT — indexation replaces 50% discount | 50% CGT discount replaced with CPI cost-base adjustment + 30% minimum tax floor. All assets outside super & family home. | 1 Jul 2027 | Gains to 30 Jun 2027 — old rules locked in |
| Negative gearing — ring-fenced | Losses on new established property purchases offset future rental income only — not wages. Shares, commercial property & debt recycling unaffected. | 1 Jul 2027 | Pre 7:30pm 12 May 2026 — grandfathered permanently |
| Trust distributions — 30% minimum tax | Non-refundable 30% minimum tax on discretionary trust distributions. Farming, super, charitable & fixed trusts exempt. | 1 Jul 2028 | 3-year rollover window (2027–2030) |
1. Capital Gains Tax — broader than most people realise
The most important misread doing the rounds this morning: these are not just a property story. The CGT reforms apply broadly — property, shares, managed funds, business interests. Almost every asset outside superannuation and your family home is in scope.
From 1 July 2027, the 50% CGT discount is replaced with cost-base indexation — a return to the pre-1999 Keating-era approach. You only pay tax on the real gain after adjusting for inflation. But a critical addition: a 30% minimum tax rate on that real gain, regardless of marginal rate.
That last point is the one most commentators have missed. The 30% floor eliminates the low-MTR retirement sale strategy — the plan to sell in a lower-income year and pay significantly less CGT. From 1 July 2027, 30% is the floor. Always.
Critically: Gains accrued to 30 June 2027 are locked under the old 50% discount rules. You are not losing the gains you've already made — you're choosing how and when to realise them. That decision window is now a strategic priority for almost every Merit client.
2. Negative Gearing — the line was drawn at 7:30pm last night
12 May 2026 at 7:30pm is the most important timestamp in Australian investment property for 25 years. If you owned investment property before that moment, nothing changes — your negative gearing is grandfathered permanently. Shares, commercial property, and debt recycling are completely unaffected.
The grandfathering is worth a real dollar figure. If you own investment property today, it carries a permanent structural tax advantage that newly purchased established properties won't have. Selling and rebuying the same property means losing that grandfather status forever. Any "should I sell?" conversation must explicitly value that loss first.
3. Family Trusts — the 3-year restructure window opens
From 1 July 2028, discretionary trust distributions face a 30% minimum tax. The trust pays first; beneficiaries receive a non-refundable credit. Unlike franking credits, this is non-refundable — if your marginal rate is below 30%, you receive no refund of the excess. Farming trusts, super funds, charitable trusts, and fixed trusts are fully exempt.
Strategy Impact — Quick Reference
| Strategy | What changes from 1 July 2027 | Existing holdings | Verdict | Action |
|---|---|---|---|---|
| Debt recycling (shares) |
Interest deductibility unchanged. CGT exit cost rises — 30% minimum floor from Jul 2027 | Protected | Largely intact | Re-model exit timing |
| SMSF property (LRBA) |
No change — super explicitly excluded from all reforms | Fully protected | Protected | No action needed |
| Shares inside super | No change — super untouched. Outside-super gap has materially widened | Fully protected | Budget winner | Max contributions |
| Investment property (own name) |
Neg gearing grandfathered permanently. CGT — 30% minimum floor applies from Jul 2027 | NG grandfathered; CGT window closes Jun 2027 |
14-mth window | Model exit by Dec 2026 |
| Property through trusts | CGT 30% floor from Jul 2027 plus 30% distribution minimum from Jul 2028 — double impact | Partial protection to Jun 2027 | Restructure window | Trust review by Jun 2027 |
| Investments via company | No change — 25% rate now at/below individual & trust minimums. Most competitive since 1999 | Improved position | More competitive than ever | Compare for new long-term portfolios |
Key Dates — The Decision Timeline
Debt Recycling (into Shares)
This strategy remains one of the strongest available to Australian investors. Negative gearing on shares is completely unaffected — only residential property is subject to the new ring-fencing rules. Interest on borrowed funds invested in income-producing shares continues to be fully deductible.
The debt recycling mechanics — pay down home loan, redraw, invest in shares, deduct interest — are untouched. What changes is the CGT exit cost. Gains in your share portfolio accrued before 1 July 2027 remain under the old 50% discount. Post-2027 gains will be taxed on the indexed real gain with a 30% minimum floor.
For clients who have been building a debt-recycled portfolio for many years with significant unrealised gains, a pre-2027 sale decision deserves modelling — but only in the context of your full plan, holding period, and inflation assumptions. This is not a blanket "sell now" call.
Our position: We are not changing our view on debt recycling as a core wealth-building strategy for clients with a home loan. The interest deductibility remains intact. The exit point needs re-modelling — and we will do that with you.
Property Through Your SMSF (LRBA)
Super has its own tax regime and is specifically excluded from the trust reform. Based on the budget papers, CGT and negative gearing changes apply outside superannuation. SMSF property sits in a protected and structurally advantaged position.
| Tax item | SMSF — accumulation | SMSF — pension phase | Personal name (post 2027) |
|---|---|---|---|
| Income tax on rent | 15% | 0% | MTR (up to 47%) |
| CGT on sale | 10% effective | 0% | 30% minimum floor |
| Trust reform impact | Exempt | Exempt | Applies (if trust structure) |
| Negative gearing ring-fence | Not applicable | Not applicable | Applies to new purchases |
The gap between investing inside super and outside super has widened materially with this budget. If you have capacity to contribute more to super — and many Merit clients do — the case for doing so has strengthened. Our position: SMSF-held property, including via LRBA, remains one of the most tax-efficient investment structures available. No change recommended.
If you hold shares inside superannuation — 10% effective CGT in accumulation, 0% in pension — absolutely nothing changes. Super's tax treatment is untouched by this budget. No new CGT rules. No trust reform. No contribution cap changes.
Effective tax cost on a $200,000 gain — inside super vs outside super (post-2027)
Our position: Super first, always. This budget reinforces that view more strongly than any budget in the past two decades. Every Merit client who can maximise contributions, extend their accumulation phase, or consider pension-phase conversion should be having that conversation with fresh urgency.
Investment Property in Your Own Name
If you owned investment property at 7:30pm on 12 May 2026, your negative gearing is grandfathered permanently. Pre-2027 gains remain under the old CGT rules. The question is what comes next — specifically, when you plan to exit.
Here is the issue we are already discussing with clients: many Merit investors hold 2-3 investment properties through their working life, then sell one or two as they approach retirement. The proceeds pay down the home loan, top up super, or create a cash buffer. It has worked beautifully because selling in a lower-income year in your late 50s meant paying relatively little CGT. The 30% minimum floor changes that equation entirely.
CGT outcome — old rules vs new rules across different inflation scenarios (37% MTR, $300K nominal gain)
Breakeven at approx. 23% cumulative inflation. Above this line, new rules can be better. Below it, old rules are superior — and the window has value.
Our position: Every Merit client who holds investment property and has a sale on the horizon in the next 3–7 years needs individual modelling before 31 December 2026. We are prioritising these reviews. If you have a transaction in flight right now, call us today.
Property and Shares Through Family Trusts
Trusts face two simultaneous changes: the CGT discount reduction from 1 July 2027, and the 30% minimum tax on distributions from 1 July 2028. Neither alone is catastrophic — together they significantly compress the after-tax advantage of holding growth assets in a discretionary trust.
| Scenario | Pre-reform outcome | Post-reform outcome | Impact |
|---|---|---|---|
| Distribute to spouse (low income) | Taxed at spouse's MTR (approx. 22%) | 30% minimum tax — non-refundable | +8 percentage points minimum |
| Distribute to adult children | Taxed at child's MTR | 30% minimum — regardless of child's income | Variable — can be material |
| Bucket company strategy | 25% corporate rate; fully franked credits | 30% minimum; credits don't flow through to company | Strategy largely eliminated |
| Capital gain distributed | 50% discount; beneficiary's MTR | 30% minimum on indexed real gain | Double layer — 30% at trust + distribution tax |
| Farming / primary production trust | Existing concessions | No change — explicitly exempt | Protected |
The three-year rollover window (1 July 2027 to 30 June 2030) exists precisely to allow deliberate restructuring. Options include: retaining the trust for non-tax purposes and accepting lower distribution efficiency; restructuring into a company; or selectively winding up if the trust was purely tax-driven. We will not rush anyone into a decision — the window is three years and that is enough time to do this properly.
Our position: Every Merit family with a discretionary trust holding material investment assets should have a trust review on the calendar before 30 June 2027. This doesn't mean winding up. It means making a deliberate, informed choice with all the numbers on the table.
Investments Through a Company
Companies are this budget's quiet winner. No changes to company tax rates. No negative gearing restrictions. Not subject to the trust reform. The 25% rate sits at or below the new individual/trust minimums.
| Structure | Tax rate on income | Effective CGT (post-2027) | Relative position |
|---|---|---|---|
| Company (base rate entity) | 25% | 25% (no CGT discount) | Improved |
| Individual (high MTR) | 47% | 30% minimum floor | Narrowed gap |
| Individual (low MTR — retired) | 22% | 30% minimum floor | Low-MTR exit strategy eliminated |
| Family trust distribution | Beneficiary MTR | 30% minimum (double) | Compressed |
| Super (accumulation) | 15% | 10% effective | Best position |
Our position: The structure conversation has changed. We will be raising company comparisons with clients who are building significant outside-super assets over a 10–20 year horizon and for whom long-term access timing is less critical.
What It Means for Your Investment Portfolio
The following reflects analysis from Morgans, shared with Merit clients as part of our ongoing partnership.
The macro backdrop
Treasury is forecasting headline inflation to peak at 5% through the year to June 2026, with real GDP slowing to 1.75% in 2026-27. Gross debt is projected to reach $1.05 trillion by June 2027, with the structural deficit not forecast to close until 2034-35. Higher-for-longer interest rates are the base case, not a tail risk.
The structural portfolio shift: from growth to income
The single most important portfolio implication: a tilt in the relative attractiveness of income-producing assets versus growth assets. Under the old 50% CGT discount, capital growth investing was heavily rewarded. Under cost-base indexation with a 30% minimum floor, the scenarios where investors are relatively worse off are exactly the profile many have experienced — moderate-hold, high-growth assets bought over the past decade when inflation was low.
Fully franked dividend income becomes relatively more attractive. The dividend imputation system is untouched. Franking credits remain refundable. For accumulation-phase investors, holding large-cap dividend payers and reinvesting franked distributions becomes structurally more efficient than chasing capital growth and paying tax on exit.
| Sector / asset | Budget impact | Direction | Reason |
|---|---|---|---|
| Large-cap income stocks (banks, miners, telcos) | Positive | ↑ More attractive | Franked dividends more competitive vs growth; imputation unchanged |
| Residential construction & materials | Positive | ↑ Structural pipeline | New-build exemptions steer investor capital toward new supply |
| Defence & energy security | Positive | ↑ Structural tailwind | $53B defence spend over decade; $14.8B fuel resilience package |
| Insurance bonds & annuities | Positive | ↑ Increased demand | Outside-super landscape more expensive; structured products more competitive |
| Low-yielding growth stocks (tech, fintech, healthcare) | Negative | ↓ CGT exit cost rises | Returns mostly via capital appreciation; 30% floor raises after-tax cost |
| Major banks — lending volumes | Mixed | — Income yield ↑, loan book ↓ | Yield appeal improves; investor property lending demand falls |
| Long-duration fixed income | Negative | ↓ Structural pressure | Higher-for-longer rates; persistent structural deficit |
Legislative Status — What Is Law and What Isn't
Budget announcements require legislation to pass Parliament before they take effect. These are proposed government policy, not current law. Merit's advice will be refined as final technical detail is confirmed via Budget Paper No. 2 and subsequent legislation.
| Political factor | Assessment |
|---|---|
| Labor — House majority | Strong — legislation passes lower house with comfort |
| Greens position | Supportive — publicly criticised as "not going far enough" |
| Coalition position | Opposed — insufficient Senate numbers without crossbench |
| Key risk | Crossbench seeking to reduce/remove grandfathering provisions |
| Our working assumption | Measures pass substantially as announced, effective dates intact |
Don't make investment decisions assuming the legislation will fail. The probability is high that it passes. Plan for the announced rules. Adjust if detail changes when legislation is introduced — expected before end of 2026.
What Is Not Changing
✓ Protected and Unchanged
Merit's Position: Don't React. Decide.
The immediate market reaction to budgets like this is almost always wrong. People panic-sell, panic-restructure, or do nothing at all. None of those are strategies. What this budget demands is a calm, per-asset, per-structure analysis for every client whose position is materially affected. That is exactly what we are doing today, this week, and across the next 14 months.
If you have a transaction in flight — a property sale, a trust distribution, a share portfolio rebalance — please make this call today, not at the end of the financial year.
Book a Budget 2026 Strategy Review
30 minutes with Sarah or Jim. We look at your specific position — your properties, your structure, your timeline — and tell you exactly what decisions need to be made and when.
Book Your Review →Important information. The budget measures discussed in this article are proposed policy and are not yet legislated. Final technical detail will be confirmed in Budget Paper No. 2 and through legislation in the months ahead. Merit's position may be refined as further detail is released and as technical guidance from Paragem AFSL is received. This article contains general information only and does not take your personal circumstances into account. Before acting on any information in this article, please seek personal financial advice from a licensed adviser. Merit Financial Services is an authorised representative of Paragem Pty Ltd | ABN 16 108 571 875 | AFSL 297276. Sarah Mills AR 378390 · Jim Mills AR 416822.