What does the Budget’s tax changes mean for client portfolios?

The 2026-27 Federal Budget contains the most significant changes to the taxation of investment assets in more than two decades. While much of the political debate has focused on housing affordability, the measures reach well beyond residential property and have meaningful implications for how Australians hold shares, ETFs and managed funds.

It is worth being clear up front: these are announcements, not yet law. Legislation will need to pass Parliament, and the detail of several measures is still subject to consultation. With that caveat, here is what was announced and what it could mean for your portfolio.

The Federal Budget contains three significant changes that investors need to be across. These changes have been widely reported, but in brief:

1. The 50% CGT discount is being replaced with indexation. From 1 July 2027, the 50% capital gains tax (CGT) discount that has applied since 1999 will be replaced with two new elements: cost-base indexation, which adjusts the purchase price of an asset for inflation, and a minimum 30% tax rate on capital gains. It will apply to assets held for more than 12 months by individuals, trusts and partnerships. This is broadly a return to the pre-1999 regime, with the addition of the 30% tax floor.

2. Negative gearing is being narrowed. For established residential properties bought after 7:30pm on 12 May 2026, rental losses will be immediately quarantined and only deductible against other residential property income, not against salary or wages. From 1 July 2027, negative gearing is limited to new builds only. Properties already owned at 7:30pm on 12 May 2026 are grandfathered and retain existing treatment. This is primarily a property investor story and does not impact investments in shares and ETFs.

3. Discretionary trusts are getting a 30% minimum tax. From 1 July 2028, trustees of discretionary trusts will pay a minimum 30% tax on the trust’s taxable income at the trustee level. Non-corporate beneficiaries receive a non-refundable credit, so beneficiaries on marginal rates above 30% effectively pay at their marginal rate. The bite is on distributions to beneficiaries on rates below 30%, where the credit cannot be refunded and the effective rate is forced up. For families using trusts for income splitting, this is significant. For most direct investors, it isn’t.

There are over 10 million Australian adults who hold an investment outside of super, but only 2.2 million property investors and around 840,000 discretionary trusts. In sheer numbers, the CGT changes touch far more Australians than either the negative gearing or trust measures. In addition, the CGT changes are more likely to impact those trying to build their wealth with the goal of one day owning their own home.

The reversion from the CGT discount method to CGT indexation (as was used prior to 1999) will impact various investments differently. Generally speaking, high growth assets are likely to incur larger CGT obligations going forward, whereas income-producing assets with lower expected capital growth may be better off under CGT indexation.

Scenario analysis is helpful for understanding the key drivers and quantifying the potential impact. The table below summarises the difference in after tax outcomes under:

– Investment 1, a high growth asset; and
– Investment 2, an asset that generates a balanced split of income and capital growth.

In both cases the investor is assumed to be on a 47% marginal tax rate who disposes of their investment after five years.

While the tax burden is increased under CGT indexation for Investment 1, it is actually reduced for this investor under Investment 2.

As a rule of thumb, for an investor on a marginal tax rate above 30%, the two methods produce the same tax outcome when the nominal capital gain is roughly double the cumulative inflation on the original cost base. Above that threshold, the new regime is worse; below it, the new regime is more favourable. For investors on a marginal tax rate below 30%, the 30% minimum tax floor means the new rules will generally produce a materially worse outcome.

As the analysis above shows, where capital growth is relatively low compared to inflation, CGT obligations will generally be lower under indexation. For some investors, adding allocations to income-oriented strategies to take advantage of this tax change may make sense. This could include investing in high dividend or other equity income ETFs. It will also potentially be advantageous for fixed income ETFs. Examples include:

HYLD S&P Australian Shares High Yield ETF – Tracks an index of 50 high-yielding Australian companies, with screens designed to filter out potential dividend traps. HYLD’s index has a trailing 12-month gross yield (including franking credits) is 5.7% p.a².

YMAX Australian Top 20 Equities Yield Maximiser Complex ETF – Holds a portfolio of the 20 largest blue-chip shares on the ASX and overlays a call-writing strategy to generate enhanced monthly income above the dividend yield of the underlying shares. YMAX’s trailing 12-month gross yield (including franking credits) is 9.0% p.a³.

ECRD Australian Enhanced Credit Income Complex ETF – Provides exposure to a geared portfolio of investment grade Australian floating rate bank subordinated bonds and interest rate-hedged corporate bonds. ECRD’s running yield is currently 7.54%p.a⁴.

Given superannuation is untouched by these changes, the tax treatment of capital gains within super will now be even more favourable. By adopting a whole-of-wealth approach, an investor may choose to focus on capital growth within super, by holding high growth assets there, while investing in income and defensive assets in their own name.

While this tax change will generally have a negative impact for accumulators who prioritise growth over income, it is not a reason to dump growth assets. Tax should never be the only consideration when building an investment portfolio, and the long-term return premium from growth assets remains the strongest contributor to outcomes for accumulators.

In our scenario analysis above, the shift to indexation reduces the after-tax outcome for Investment 1 by $1,844 (from 7.39% p.a. to 6.83% p.a.). Yet Investment 1 still finishes $2,595 ahead of the income-oriented Investment 2 on an after-tax basis. The new regime narrows the after-tax advantage of growth assets within our scenarios, but it does not eliminate it. It should be noted that for your clients with a marginal tax rate of 32% and 29%, the tax drag for Investment 1 would be less pronounced.

For wealth accumulators with a long time horizon, growth assets are still likely to be the best asset class. What becomes more important under the new rules is investing in growth assets through tax-efficient structures. When it comes to capital gains tax, index-tracking ETFs are structurally more efficient than actively managed unlisted funds, as we discuss here.

Some examples of efficient higher growth ETFs that have very low ongoing CGT implications:

DHHF Diversified All Growth ETF – A single-trade, all-in-one global equities portfolio holding around 8,000 securities across developed and emerging markets through a passive blend of low-cost underlying ETFs helps optimise capital gains at the ETF level or for investors.

BGBL Global Shares ETF – A broad, low-cost passive exposure to approximately 1,300 developed markets companies (ex-Australia) at 0.08% p.a., where the index-tracking strategy minimises portfolio turnover.

BEMG MSCI Emerging Markets Complex ETF – BEMG is one of Australia’s most cost-effective emerging markets ETFs, providing exposure to 1,000+ stocks across more than 20 emerging countries in fast-growing regions. BEMG invests in a non-distributing UCITS fund, which provides very effective exposure to structural growth in developing countries to minimise tax drag.

Under these changes the structure you invest through will be as important as the underlying investment exposure, if not more so.

There have been no changes to the treatment of CGT within super. The one-third CGT discount remains, and pension-phase assets continue to be taxed at zero. As a result the relative tax efficiency of super for long-term wealth accumulation has improved.

Outside super, the choice of investment vehicle matters more than it did. Index-tracking ETFs remain structurally tax-efficient for investors holding assets in their own name. Investment bonds, which tax earnings internally at the company rate, may warrant a fresh look for investors who don’t need ready access to their capital and can take a longer term view. Family discretionary trusts, by contrast, will need to be reviewed in light of the 2028 changes.

The Budget has changed the tax cost of certain investment decisions, but it has not shifted the fundamentals of building long-term wealth. What it does require is recalibration, not reinvention, and the transition window to 1 July 2027 gives advisers time to translate the headline changes into client-specific outcomes.