Budget 2027 & SMSFs - Eight Comments

While three significant changes were announced in the 2027 Federal Budget (that is the Federal Budget for 2026/27 financial year) to the taxation of capital gains, negative gearing and discretionary trust distributions, these changes will not apply to superannuation funds including self managed superannuation funds.

Briefly, the big four changes are:

• Indexation of the cost base for long term (ie asset held for 12 months or more) capital gains tax -  from 1 July 2027, capital gains will be measured as the growth in the market value of the asset over the indexed cost base of the asset.  Currently, the capital gain is measured as 50% excess of the disposal proceeds over the unindexed cost base. 

Where a CGT asset was acquired before 1 July 2027 and disposal occurs after that date  -  the taxable gain will be determined using the 50% method up to 1 July 2027 and the indexed cost base method will apply from 1 July 2027 up to the date of disposal.  The market value as at 1 July 2027 will, for the 50% method, be treated as the disposal price and treated as the cost base for the indexation method.

“Pre CGT asset exemption” will cease to apply from 1 July 2027, so the gain accrued since that date will be taxable using the indexation method with the market value as at 1 July 2027 being the cost base.

• 30% Minimum Tax on Capital Gains – in respect of taxable capital gains which relate to the period from 1 July 2027, will be subject to a minimum tax rate of 30%

• Quarantining of Negative Gearing on residential properties -  From 1 July 2027 losses arising from negative earning of residential properties acquired on or after Budget Time will only be offset against income arising from positively geared residential properties and from the capital gains arising from the disposal residential properties.  However, quarantining will not apply to “new residential builds”.

• 30% Minimum Tax on Discretionary Trust Income Distributions -  Income distributions from discretionary trusts from 1 July 2028 will be taxed at 30% and the beneficiaries (other than corporate beneficiaries) will be entitled, in their own tax returns, to a non-refundable tax credit for the tax payable by the trustee on their share of the distribution. 

However, until the changes have been reduced to legislative amendment bills (and they will most likely be long in pages and complex in drafting) the following eight comments can only be tentative.

First, the reference to “superannuation funds” in the budget documents should be read as only relating to “complying superannuation funds” and self managed superannuation funds which are complying superannuation funds.  Consequently, long term capital gains (ie derived from holding assets for 12 months or more) for SMSFs will continue to be taxed at the rate of 10% and all gains (short and long term) realised in retirement phase will be tax free. 

Secondly, while the budget documents detailing the changes do not refer to pooled superannuation funds and complying approved deposit funds, these entities will most likely not be affected by the proposed changes.

Thirdly, to the extent that SMSFs invest in collective investments vehicles (for example, life office statutory funds, managed investment trusts or funds) the SMSFs will not be subject to the minimum 30% tax on trust distributions as these investment vehicles are not structured as discretionary trusts.

Fourthly, to the extent SMSFs invest in collective investment vehicles, SMSFs may be indirectly subject to the 30% minimum tax on capital gains of collective investment vehicles which accrue in the period since 1 July 2027.  The information released by the Government on Budget night does not address this issue.

Fifthly, Regulation 13.22C unit trusts will not be subject to the 30% tax on trust distributions (as the entity is a unit trust rather than a discretionary trust) but may be subject to the 30% minimum tax on capital gains which accrue in the period since 1 July 2027.

Sixthly, in relation to existing (currently in force at budget time) and new (which arise after budget time) limited recourse borrowing arrangements:

• the holding trust will not be subject to the 30% trust distribution tax, as the holding trust is a fixed trust; and

• if the arrangement is negatively geared (possible but probably not desirable where the tax rate of the superannuation fund is either 15% or zero) – the negative gearing changes will not apply;

• any capital gain in the asset of the holding trust will be attributed to the SMSF and taxed as if the asset were an asset of the SMSF.

Seventhly, the proposed arrangements will not apply to death benefits paid to the deceased estate of the member, if the death benefit is passed directly to the beneficiary or held on a fully vested trust for the beneficiary rather than the benefits forming the capital of a discretionary trust.

Lastly, while the proposed changes may not affect the current tax treatment of SMSFs, the changes may materially adversely affect the general investment environment.  If so, SMSFs will be affected by reduced investment earnings.