Labor will raise taxes on investment properties and some trust funds, giving the revenue back to workers with a new $250 tax break under reforms it says will 'rebalance' the Australian tax system.
Labor will raise taxes on investment properties and some trust funds, giving the revenue back to workers with a new $250 tax break under reforms it says will "rebalance" the Australian tax system.
Treasurer Jim Chalmers on Tuesday night unveiled sweeping changes to negative gearing, capital gains tax discount and trusts, and announced a new income tax offset to be paid to more than 13.3 million workers every year from July, 2028. Mr Chalmers described Labor's fifth budget as the "most important and ambitious" in decades, saying it made the tax system "fairer and stronger for workers, businesses, first home buyers and future generations".
"In an era where people feel like the system no longer works for them, this budget doesn't just acknowledge that, it acts on it," he said. A plan to rein in the ballooning NDIS is the biggest single source of saving in the budget, which is expected to remain in the red over the next four years.
War in the Middle East is forecast to have significant impact on Australia's economy in the short term, with inflation peaking at 5 per cent in a scenario with oil prices starting to ease from July. Labor is betting on public support from younger Australians to offset expected political blowback for the decision to break multiple promises made at the 2025 federal election.
It expects the property tax changes will support an additional 75,000 Australians to buy their first home over the next decade. Workers to receive extra income tax break The budget includes a new $250 Working Australians Tax Offset that will be paid annually to taxpaying workers from mid-2028. The WATO, which Mr Chalmers says is the "biggest cost-of-living measure in this budget" will cost $6.4 billion in the first two years.
Initially, the income offset and separate tax relief for businesses effectively neutralises the extra budget revenue generated by the CGT, negative gearing and trust changes, which are forecast to raise $8.1 billion over four years. But over time the government will earn more from those reforms than it spends on tax cuts, with the total tax package improving the budget deficit by an estimated $77.2 billion over a decade.
Mr Chalmers said the government was explicitly "creating space to return bracket creep" to workers with potential further tax cuts in future years. The global oil crisis sparked by war in the Middle East is forecast to significantly impact the Australian economy in the short term, with growth downgraded by half a per cent to just 1.75 per cent in 2026–27.
Treasury's central forecast has assumed oil stays at about $US100 a barrel until the end of June and then "glides" to $US80 over the following 12 months. Under this scenario, inflation is expected to peak at 5 per cent in the middle of the year before returning to 2.5 per cent in the following financial years.
But Mr Chalmers warned those figures were "heavily dependent" on events overseas beyond Australia's control, including the length of the Iran conflict and closure of the Strait of Hormuz. In a more "severe" scenario where the oil price peaks at $200 a barrel and takes three years to fall back down, Mr Chalmers said Treasury has forecast Australia would still "avoid" a recession.
But in this case unemployment would rise to 5 per cent in 2027–28, while inflation would soar to 7.25 per cent. The budget deficit is now forecast to reach $31.5 billion in 2026–27, which is about $2.8 billion better than was forecast six months ago. That improvement is despite a $19 billion increase in government spending over the upcoming financial year, with total expenditure now expected to reach $830 billion.
The additional costs include continuing NDIS blowouts, new policy costs in areas like defence and pharmaceuticals, and higher government payments due to inflation. The spend is offset by a forecast $45 billion improvement to the budget bottom line over the next five years, of which more than 90 per cent comes from revenue upgrades. Australia's gross debt will climb above $1 trillion this financial year, and grow to $1.25 trillion by the end of the decade.
Unemployment is forecast to tick up from 4.25 per cent this financial year to 4.5 per cent for the next two, assuming the economic shock caused by the global oil crisis peaks at the end of June. Forecasts over the medium term show total government spending staying at the same level for the first half of the 2030s, eventually declining as NDIS cuts take greater effect.
At the same time, expected revenue increases at a steady rate, surpassing spending in about the mid-2030s. It's boosted by growing gains from the changes to CGT and taxing trusts, as well as by the usual assumption of no further income tax cuts beyond what is currently in the budget. The budget has also forecast net overseas migration for the current financial year will be 295,000, dropping to 245,000 in 2026–27 and 225,000 the following year.
A massive overhaul of the National Disability Insurance Scheme announced last month is the biggest single source of savings in the budget, worth $37.8 billion over the next four financial years. A reduction in the private health insurance rebate for older Australians is forecast to save $11 billion over the next decade.
Labor has also clawed back unspent funding from what were once flagship initiatives to tackle climate change, pulling a total of $1.3 billion over 10 years from the Hydrogen Headstart, Solar Sunshot and Battery Breakthrough Initiative programs. The government will also save about $760 million in uncommitted funding from Australia's Economic Accelerator program. A reduction in public service spending on external labour and other non-wage expenses, like travel, property and hospitality is expected to save $2.7 billion over four years.
The "better targeting" of services for veterans and their families is expected to decrease government payments to providers by $606.6 million over five years to 2029–30. Australians will no longer be able to negatively gear an investment property purchased after tonight, unless it is a newly built home. People who currently negatively gear their investment property, which is where any rental losses are deducted from their tax, will be able to continue to do so.
The 50 per cent CGT discount will end, returning to the previous setting of a tax on the profit from the sale of the property or asset, minus inflation. Australians who invest in new homes would retain the option of receiving either the 50 per cent discount or the inflation model, depending on which was lower.
Though the changes will impact all investment properties purchased from budget night onwards, a transition period of one year under the old system will continue until June 30, 2027. The new CGT and negative gearing settings are expected to generate $1.35 billion in extra revenue for the government in 2028–29 and then $2.28 billion the next financial year.
Treasury expects the tax changes will result in 35,000 fewer dwellings being built over a decade, which would be offset by an estimated 65,000 new builds under a $2 billion local infrastructure fund. Labor is also introducing a minimum 30 per cent tax on discretionary trusts from July 2028, which is expected to generate $4.47 billion in revenue by the end of the decade.
The tax will not apply to fixed or testamentary trusts, complying superannuation funds, special disability, deceased estates or charitable trusts. Labor to defend broken election promise At the last federal election, Prime Minister Anthony Albanese repeatedly insisted Labor was not looking to touch investment property taxes. In one exchange when asked to guarantee there would be no changes to CGT or negative gearing, Mr Albanese said "yes, how hard is it? For the 50th time".
Mr Chalmers said such comments reflected the government's "singular focus" on housing supply at that time.
"It … has become increasingly clear to us that even though the challenges in the housing market begin with housing supply, they don't end with them," he said. "The main change in our thinking is the view that you can't let the intersection of the housing market and the tax system continue to lock out so many people from getting a toehold in the housing market".
Mr Chalmers has acknowledged the tax changes will be "controversial", but insisted they were the right call.
"It would have been easy, but wrong, for a government like ours to see the way that the housing market is developing, see the way the pressures on young people are intensifying and to leave some of these structures unattended-to," he said. Government revenue from tobacco has continued to plummet, with the budget forecasting the tax take from cigarette products will be $1.2 billion less for the 2026–27 financial year than it expected just six months ago.
By 2029–30 it is now expected the tobacco excise will only generate a paltry $2.1 billion, which is about 75 per cent less than the $7.8 billion in tax collected in 2024–25. Other measures previously announced ahead of the budget include a productivity package that is expected to save $10.2 billion in regulator costs every year.
Labor is also introducing a two-year loss carry back for Australian companies with up to $1 billion in annual turnover, and a loss refundability for startups in their first two years. The budget includes $53 billion in extra spending on defence over the next decade, including $6.8 billion over the forward estimates. The government is also changing a tax break for electric vehicles purchased on novated leases to make the popular scheme more sustainable long term.
Independent economist Chris Richardson said the budget ticked off some "long-overdue changes" on Treasury's reform "to-do list".
"They will have good impacts, especially over the longer term, but they start small and they start slow," he said. Mr Richardson said the improvements in the budget bottom line in the short term were mostly due to a windfall tax take due to war and inflation. Mr Richardson also warned he was not certain the Reserve Bank of Australia would be able to "ignore" the federal spending, particularly when combined with recent state budgets, in its interest rate deliberations.
"The key for the RBA is the near term, and the coming financial year is set to see rather more government spending than had been estimated a handful of months ago," he said.
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