The 2026-27 Budget delivers the biggest overhaul of Australia's tax settings in 26 years, but for SME owners the headline is clear: this is a massive increase in the tax burden on small business and investment with no meaningful reduction in tax rates to offset it.
Here's what was announced:
- The 50% CGT discount is being scrapped and replaced with CPI cost base indexation plus a new minimum 30% tax on real capital gains (from 1 July 2027)
- Negative gearing on established residential property is restricted to new builds only (from 1 July 2027). Existing holdings are grandfathered.
- A 30% minimum tax on discretionary trust distributions (from 1 July 2028). Around 350,000 active small businesses currently operate through discretionary trusts.
- A $250 annual Working Australians Tax Offset (from 2027-28) and a $1,000 instant tax deduction for work expenses (from 2026-27, average benefit of $205)
- $20,000 instant asset write-off for small business made permanent
- $10 billion fuel security package to increase minimum stockholding to 50 days and establish a government-owned reserve of one billion litres of diesel and aviation fuel
- Defence spending to rise to 3% of GDP by 2033 with a $53 billion boost over 10 years
- Government payments as a percentage of GDP to rise to 26.8% in 2026-27, the highest ratio since 1987 outside of the pandemic
- Deficit projected at $28.3 billion in 2025-26 and remaining in the red until 2034-35. Gross debt to exceed $1 trillion in 2026-27.
The government is framing this as "levelling the playing field" and making the system "fairer". That framing doesn't survive contact with reality. What we actually have is three simultaneous tax increases on the same group of people. The CGT changes increase tax on business exits. The trust minimum tax increases tax on how SME owners distribute their operating income. And the negative gearing changes increase tax on investment property, which is one of the primary wealth-building tools available to business owners outside of their operating businesses.
Capital Gains Tax
The move to CPI indexation for CGT is not the problem. Taxing only real gains is the most intellectually honest way to calculate CGT and it was how the system worked before 1999. The problem is how this interacts with Australia's extremely high marginal tax rates. A business owner who sells after 20 years of building a company will realise the entire real gain in a single year and get taxed at the top marginal rate on income that was generated over decades. The 50% discount was a crude fix for this problem, but replacing it with indexation alone doesn't address the underlying issue. A more appropriate approach would have been to pair the indexation change with either a reduction in the top marginal rate or the reintroduction of capital gains averaging over three or five years. Either of those would ensure that real gains are taxed fairly without punishing people for the fact that capital gains are lumpy by nature. Instead, we got a 30% minimum tax on top of marginal rates, which is a revenue grab, not a reform.
The CGT changes are also deeply problematic for Australia's innovation pipeline. While the government is expanding venture capital incentives, the new minimum 30% tax on real capital gains significantly increases the tax hit on founders and early investors who back high-growth companies. These are the exact people taking the most risk in the economy, and increasing the tax take on their upside while doing nothing to share the downside is terrible policy for a country that already has declining business expenditure on R&D.
Trust Taxation
Around one million discretionary trusts operate in Australia, with 350,000 of them active small businesses. These businesses didn't choose the trust structure to dodge tax. They chose it because it provides asset protection, succession planning flexibility, and the ability to manage cash flow across a family unit. Imposing a flat 30% minimum tax on trust distributions effectively eliminates one of the key reasons to use a trust in the first place and will force a wave of restructuring activity at a time when small businesses are already dealing with the worst operating environment in years. The government says 40% of affected small businesses won't pay additional tax, but that means 60% will. The rollover relief to restructure out of trusts runs from 2027 to 2030, which creates a ticking clock for business owners to make major structural decisions during what could still be a crisis period.
The tax credit mechanism makes this even worse. Beneficiaries will receive non-refundable tax credits for the 30% paid by the trustee. Compare that to a company structure where franking credits are refundable for individuals. If a trust distributes to a beneficiary whose marginal rate is below 30%, the excess tax is simply lost. There is no refund. That makes the trust structure strictly worse than running a company for any beneficiary earning below the 30% marginal rate threshold. The government is offering rollover relief to restructure into companies, which is essentially an admission that they've made the trust structure unviable.
The predictable outcome is that businesses will restructure into companies with multiple share classes, declare dividends selectively, and continue to split income through a different vehicle. Income splitting is not illegal. It never has been. The only guaranteed winners from the trust changes are the accountants and lawyers who will be paid to restructure hundreds of thousands of businesses into arrangements that achieve the same outcome through a different vehicle.
This exposes the fundamental contradiction at the heart of this budget. The government's entire objection to income splitting only exists because of progressive marginal tax rates. If everyone paid the same rate on every dollar of income, there would be no benefit to splitting income and no policy problem to solve. The government has created a tax system with extremely high marginal rates (up to 47% including the Medicare levy), which creates a massive incentive to split income, and then it spends enormous policy energy trying to stop people from doing exactly what the system incentivises them to do. The honest version of this policy would be one of two things. Either flatten the tax rates, which removes the incentive to split income and makes the entire debate irrelevant. Or accept that progressive rates create an incentive to split income and design the system to accommodate that reality, which is what trusts have done for decades. Instead, the government has chosen the worst option: keep the high marginal rates, keep the incentive to split income, and clamp down on the structures that allow it. This is not reform. This is a war on entrepreneurialism and small business, designed to extract ever more revenue from the productive economy so the government can continue to grow the size of the public sector and spend that revenue unproductively.
Personal Income Tax
The "tax cuts" being offered in return are worth examining closely, because they are far less generous than the government wants you to believe. The $1,000 instant tax deduction is not a new deduction. You could always claim $1,000 in work-related expenses, and you still can. The only thing that has changed is that you no longer need to keep receipts for the first $1,000. That is a compliance simplification, not a tax cut. The average benefit of $205 simply reflects the fact that many workers weren't bothering to claim small deductions they were already entitled to. The $250 Working Australians Tax Offset is real, but it is a rounding error against the scale of the tax increases elsewhere in this budget.
Small Business
The $20,000 instant asset write-off being made permanent is also less than it appears. This is not free money. Every dollar written off under the instant asset write-off is a dollar that would have been deducted over the life of the asset through depreciation anyway. It is a timing difference, not a tax saving. It brings forward the deduction, which helps cash flow in the year of purchase, but it does not reduce the total tax paid over the life of the asset. Calling it a centrepiece of small business support is marketing, not policy.
Government Spending
Government payments are forecast to hit 26.8% of GDP in 2026-27, a level we haven't seen outside of the pandemic since the late 1980s. Defence is up. The NDIS, even with the announced cuts, is still above $55 billion. The fuel security package is $10 billion. The budget remains in deficit until 2034-35. This government's strategy remains the same as it has always been: grow the size of government, fund it by increasing taxes on the productive economy, and offer token relief to wage earners to keep the politics manageable. The real economy, the SMEs that employ the majority of Australians, continues to get squeezed from every direction.
What To Do About It
For business owners, the immediate action items are straightforward. Get tax advice on your trust structure now, not in 2028. Review the CGT implications for any planned asset sales, especially if you were thinking about selling a business in the next few years. And stress test your numbers against the assumption that the operating environment is going to get harder, not easier, because this budget just made sure of it.