How will the federal budget impact savers?

Having been handed a large majority by the voting public in last year's federal election, it was a case of now or never for this government to enact substantial reform.   

So it's no surprise that Treasurer Jim Chalmers' fifth budget is his most significant to date.

But change isn't always good, and the jury is out on whether this budget will meet its stated goal of delivering a fairer go, or stand in the way of those that have a go.   

Here are the key changes from this budget that savers need to know about. 

Capital gains tax

This is the big one for any saver that invests their spare cash (which we're often encouraged to do).

Capital gains tax will revert to its pre-1999 inflation-indexation method for capital gains on all assets after 1 July 2027, and the 50% tax discount won't be available. 

However, asset gains that accrued before 1 July 2027 will still receive the 50% tax discount, and investments in newly built properties will have the option of either CGT method.  

Also, the government has introduced a minimum 30% tax on capital gains, preventing people from waiting to sell an asset until a year where their taxable income was in the 16% bracket (which is falling to 14% from 1 July 2027).  

And pre-1985 assets, which have never been subject to capital gains tax, will have gains accrued from 1 July 2027 taxed with the indexation method. 

Indexation accounts for inflation, so it essentially means investors will be taxed on the real gain, as opposed to the nominal gain, which is fair. 

So in situations where inflation represents more than half the asset's gain (e.g. the capital gain was 5%, but inflation was 3%) this could actually result in less capital gains tax than under the previous method.

For example, if you invested $10,000 in a stock which grew 5% and sold it after one year for a capital gain of $500, you might pay $80 in tax under the 50% discount method (assuming you're in the 30% tax bracket and paying the 2% Medicare levy).

But under the indexation method and an inflation rate of 3%, you might only pay $64 in tax. That's because the taxable gain in this situation is only $200, as opposed to $250 under the 50% discount method. 

This could be quite a common situation for many investors in Australia given our current inflation problem (the headline rate is currently 4.6%) and the subdued returns on the local share market (ASX 200 index is only up 5.3% in the past 12 months).      

However in other situations where growth far outpaces inflation - which is ultimately what most investors aim for - there would be a substantially higher tax take.

The ditching of the 50% tax discount will in effect mean Australia has one of the highest top tax rates for capital gains in the world.       

It represents a change that could fundamentally alter how Aussies invest their funds - whether that's in shares, crypto, property or even starting a business.  

Investors may feel less inclined to invest in growth stocks or start-ups, which tend to have higher risk. Some warn this could act as a handbrake on innovation and entrepreneurship.    

Negative gearing 

From 1 July 2027, the tax benefit of negative gearing (as in, the ability to deduct losses from negatively geared properties against other income) will be restricted to newly-built properties. 

Properties that are currently negatively geared will be exempt from this change, so the tax benefit for them continues (i.e. it's grandfathered). 

And those that rush into the market now to negatively-gear property will only have this benefit until July 2027. 

The grandfathering for existing properties and exemption for newly-built properties were obviously done with market rents and housing supply in mind, however there are still concerns from some that this change could have a negative impact on both. 

It's also unclear how this tax break, which older generations have benefitted from for so long and will continue to benefit from, represents 'equity' for younger generations, who will largely miss out on this benefit.

Some see this a case of 'pulling up the ladder'.    

$250 tax offset for workers

From 2027-28, all workers will be eligible for a tax offset of $250 on "earned income".

Called the Working Australians Tax Offset (WATO), it'll be permanent and annual, and benefit 13 million workers.   

This is similar to the old $1,080 Low and Middle Income Tax Offset (LMITO, or 'Lamington'), except it's substantially less and only applies to tax paid on income that was 'earned' - that is through work - as opposed to other income, such as rent, dividends, or capital gains.

Rumours of this tax offset had surfaced earlier this month, sparking concerns from economists that this would worsen inflation. But with it not kicking in until 2027-28, workers will not receive this money until after they submit their tax returns from July 1, 2028.

You'd hope inflation was tamed by then, surely.  

Smaller tax discount for novated leases on expensive EVs

From April 2027, EVs costing more than $75,000 will no longer be exempt from fringe benefits tax (FBT). 

However, they will have a 25% discount off the usual FBT rate.  

EVs costing less than $75,000 will still receive the full fringe benefits tax exemption until 1 April 2029.

Tax cuts for 2026 onwards

As announced in last year's federal budget, the government will cut the lowest income tax bracket.  

The 16% tax rate which applies to taxable income between $18,201 and $45,000 will be reduced to 15% from 1 July 2026 and then 14% from 1 July 2027.

According to the government, this will see the average Aussie worker paying $536 less in tax.

$1,000 instant tax deduction for workers

This is another one that's been known about for quite some time, having been announced in last year's budget. 

It essentially enables workers to make a $1,000 deduction for work-related expenses in their tax returns for 2026-27 and beyond without having to provide any proof (e.g. receipts).

Those claiming more than $1,000 in work-related deductions will still be required to provide proof.   

Minimum tax on trust distributions

Similar to the minimum 30% tax on capital gains, there will be a minimum 30% tax on discretionary trust distributions from 1 July 2028. 

Deceased estates, charitable trusts, super funds and fixed trusts will be exempt from this minimum tax, along with some income related to farms and vulnerable youth.  

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