Background
The 2026-27 Federal Budget was delivered on 12 May 2026. It introduced three reforms affecting trust properties. These apply to both testamentary and discretionary trusts. The reforms cover abolition of the 50% CGT discount, restrictions on negative gearing, and a 30% minimum tax on discretionary trust income. Each reform has a different commencement date. Consequences also vary depending on when the trust was established relative to budget night.
When does the change take effect?
The CGT discount abolition applies to gains accruing from 1 July 2027. The 50% discount under Division 115 of the Income Tax Assessment Act 1997 will be replaced with cost base indexation and a 30% minimum tax on capital gains.
Negative gearing for established residential properties is also ring-fenced from 1 July 2027. This confines rental losses to residential property income rather than allowing offset against salary or business income – although properties held before 7:30 pm AEST on 12 May 2026 are grandfathered (meaning that existing arrangements are protected from the new rules that would otherwise apply to them).
The 30% minimum tax on discretionary trust income commences later, on 1 July 2028. This gives trustees approximately two years from this year’s budget night to assess whether their structures remain appropriate. If it is decided that the structure is no longer appropriate, a “rollover relief window” will be available from 1 July 2027 for three years to restructure into a company or fixed trust without immediate CGT consequences.
How will my existing trusts be affected?
Discretionary trusts
Discretionary trusts are the primary target of the 1 July 2028 minimum tax. After this date, a trustee pays 30% minimum tax on the trust’s taxable income.
The grandfathering principle does not apply to the minimum tax for discretionary trusts. For example, a family trust holding an investment property today will be subject to the minimum tax from 1 July 2028, regardless of when the property was acquired.
Testamentary trusts
Assets held in testamentary trusts established before budget night are exempt from the 30% minimum tax. The trust must also have been holding assets before 12 May 2026. This protection does not apply to trusts created after budget night. It also does not cover new assets added to an existing trust after that date. For example, a superannuation payout made to an existing testamentary trust after 12 May 2026 would not be covered.
Property purchased before 20 September 1985
Pre-CGT assets will also be affected by these rules. These assets have been historically exempt from capital gains tax. From 1 July 2027, any further growth becomes taxable under the new regime. The gain accumulated up to that date stays exempt.
Exempted from the rules
Any of the following trust types are explicitly excluded from these changes:
- fixed and widely held trusts;
- complying superannuation funds;
- special disability trusts;
- deceased estates;
- charitable trusts; and
- fixed testamentary trusts.
Establishing property value at 1 July 2027
Every trust holding property that crosses that date will need to establish what the property was worth on 1 July 2027. That value becomes the dividing line between old-rules gains and new-rules gains.
- Obtaining a formal independent valuation report
The first option to do this is to obtain an independent valuation report prepared as at 1 July 2027, meeting ATO requirements for tax-purpose valuations (it will need to cover the property’s details, the valuation date, market evidence, and the valuer’s conclusion).
- ATO Apportionment formula
The second option will engage the ATO in publishing an apportionment formula that estimates the 1 July 2027 value by applying the property’s average growth rate proportionally over its holding period.
Limitations
For properties that have grown significantly in value, the two methods can produce different results. The formula applies growth evenly across the holding period, which may push more of the gain into the pre-2027 (lower-taxed) period than a market-based valuation would. A formal valuation is generally the more defensible option for high-value properties.
The valuation does not need to be lodged in 2027 – it is used when the property is eventually sold. However, obtaining a valuation close to 1 July 2027 is advisable while property market data from that period is still accessible.
Jake McKinley notes that this article is written for the purpose of providing generalised information and not to provide specialised legal advice. If you require qualified legal advice on anything mentioned in this article, our experienced team of solicitors at Jake McKinley are here to help. Please get in touch with us on 02 9232 8033 today to make an enquiry.
Article Written by Fernanda Araujo, Law Graduate
