The May federal budget for the 2026-2027 financial year is out, covering major tax reform and support for workers and businesses amid the oil crisis in the Middle East. While reactions to the budget are mixed, there is certainly a lot to talk about, especially what it provides for small businesses โ or doesnโt.
Letโs look at what’s important in the budget for Aussie small businesses.
Budget wins for small businesses
The budget is full of items to chew on, but for small businesses, the main wins come from instant asset write-offs, PAYG flexibility, tax refunds, and tax offsets.
$20,000 instant asset write-off made permanent
The instant asset write-off is a scheme many small businesses should be familiar with. What makes this a major win, however, is that the tax incentive is now permanent. Previously, the write-off practice was tentatively extended each year on budget night. Now? Businesses can plan with confidence that the scheme is in place for the long term.
Loss carryback scheme reintroduced
Loss carryback was a scheme in place during COVID to assist businesses struggling with revenue losses. The measure is now permanent, starting on 1 July 2026, for companies that generate up to $1 billion in income. Be aware that this applies only to revenue losses and is limited by a company’s franking account balance from the previous 2 financial years.
This means that if your business made a loss in its current financial year, the tax you paid on those previous profitable years can be partially refunded, based on your company tax rate.
For example, say you paid $30,000 in taxes in 2025-2026, but in 2026-2027, you had a $30,000 loss (tax loss). If franked dividends were not distributed, you are entitled to claim based on your loss multiplied by your company tax rate (25%) from your franking credit pool:
- Tax loss in 2026-2027: $30,000
- Tax rate: 25%
- Tax liability in prior year (2025-2026): $30,000
- Franking account balance: $30,000 (capped refund amount)
- Refund: $7,500 ($30,000 x 25%)
Important note: The loss carryback scheme does not apply to sole traders, partnerships, trusts, or individuals, and applies only to revenue losses.
PAYG Instalment Flexibility
From 1 July 2027, businesses can โopt-inโ to monthly PAYG instalment reporting and payments. This means that a businessโs tax obligations adjust to current business conditions rather than being tied to what happened last quarter. This is part of the ATOโs new dynamic system, where businesses can vary their instalments through their accounting software.
What this means, on a practical level, is that current rules set PAYG instalment amounts that usually fall each quarter, and the ATO calculates a business’s instalment based on the most recent tax return. The issue flagged here is that your quarterly instalment is based on your earnings last year.
For example, if a business has a bad quarter now but a good previous financial year, it is still paying tax based on its prior performance, not on its current circumstances. If income drops dramatically, you have to manually adjust your instalment, which requires paperwork and carries the risk of interest charges if applied incorrectly. This ties up cash unnecessarily, which this change attempts to address.
Loss refundability for start-ups (2028)
Starting on 1 July 2028, start-up companies in the first two years of operations with a turnover of less than $10 million can receive a refundable tax offset. The offset is limited to fringe benefits tax and withholding tax on wages paid in the loss year.
Important note: This scheme benefits start-ups with higher employee headcounts (and only Australian employees), as the refund is tied to your payroll tax obligations. Solo entrepreneurs/founders will benefit very little, if any, from the measure.
Budget items to prepare for
Where there are budget wins, there are also items that require immediate attention for cash flow reasons, operational restructuring, or a discussion with your accountant about what to do next.
ATO payment relief windback
After 30th June 2026, the ATO Fuel Crisis Response will be rolled back. This isnโt a payment refund scheme but rather a โhandshakeโ between the tax department and businesses affected by the Middle East fuel crisis.
The measure in place provides temporary debt relief โ favourable treatment of interest repayments, penalties, and payment arrangements โ to businesses that meet four criteria.
- Experiencing rising business costs due directly (higher fuel costs) or indirectly (such as transport, logistics, and supply chain disruption) to the fuel crisis.
- Carrying tax debt that cannot be paid/maintained on an existing payment plan.
- Can demonstrate the inability to make payments due to the fuel crisis.
- Can prove to the ATO that the issues are only related to the fuel crisis, not pre-existing cash flow issues.
If you fit this criteria, act now and apply, as you will have access to:
- No upfront payments
- A 3-year payment plan period of 36 equal monthly instalments
- General interest charge (GIC) remission.
The deadline to apply is the 30th of June. For more information, please see the ATOโs page here.
Important note: All lodgements must be up to date within 3 months of the plan being set, otherwise the ATO will cancel the application.
Fuel excise cut reversal
The fuel excise cut will be reversed come 1 July 2026. This is more of a cash-flow public address announcement; act accordingly. With the cut, the excise rate is 20.6 cents per litre. This will revert back to 52.6 cents per litre.
Part of the reversal is the reinstatement of the suspended road user charge (RUC), but the 6% increase slated for this year will be deferred for a further 6 months.
Tax reform: Discretionary trusts, negative gearing, and capital gains tax
The tax reform outline in the budget is a three-pronged approach that represents the most significant tax reform in a quarter-century. The tax reform looks to change three areas: discretionary trusts, negative gearing, and the capital gains tax discount.
Discretionary trusts
From 1 July 2028, the taxable income of discretionary trusts will be subject to a minimum 30% tax collected at the trustee level. Non-corporate beneficiaries still declare distributions and receive non-refundable tax credits. Corporate beneficiaries do not get the credit. This is a measure to stop bucket companies deferring tax to underlying shareholders via franking credits.
The measure will also target income splitting across family beneficiaries using lower marginal rates. However, this only applies to discretionary trusts. The following are excluded:
- Fixed and widely-held trusts
- Complying super funds
- Special disability trusts
- Deceased estates
- Charitable trusts
Certain income is excluded, which includes primary production income and assets held in testamentary trusts existing at the announcement.
There will be a 3-year rollover relief window for small businesses and others. Small businesses will get extra support during the transition.
Negative gearing
Negative gearing is a tax arrangement that allows rental losses from residential property investments to be offset against other income. If the rental property’s costs exceed its rental income, the investor can claim the loss against their overall taxable income.
This tax mechanic will change under the reforms in three ways:
- Properties held before budget night (12 May 7:30 pm), including where a contract was entered into but not yet settled, can continue under these negative gearing arrangements until sale.
- Established residential properties bought after budget night can be negatively geared under the old arrangements until 30 June 2027. On 1 July 2027, losses can only be applied against income from other residential properties (including capital gains). Losses cannot offset wages or business income; instead, they can be carried forward.
- New builds can still use negative gearing, where losses can offset wages and business income. New builds will also benefit from the option to choose between the 50% CGT discount and the new indexation plus 30% minimum tax rule upon sale.
Capital gains tax discount
From 1 July 2027, the 50% capital gains tax (CGT) discount will be replaced by cost base indexation, with a 30% minimum tax on net capital gains. What that means is that:
- Any assets sold before 1 July 2027 retain the 50% discount rule on capital gains.
- Assets sold after 1 July 2027 but purchased before this date will have the gain split: gains accrued before the date receive 50% discount treatment, and any gain accrued after receives cost base indexation plus 30% minimum tax treatment.
- Any asset purchased after 1 July 2027 will only be treated with indexation + 30% minimum tax unless it is a new build property (owners of new builds can choose between either the CGT 50% discount or indexation plus 30% minimum tax treatments).
The mechanics are somewhat more complicated than the previous 50% discount. The CGT rules apply cost-based indexation, meaning that any capital gain realised must take into account inflation’s erosion factor.
New CGT rules calculation:
For example, if you purchase a CGT applicable asset for $100,000 on 1 July 2027 and sell it for $200,000 on 1 July 2032, your nominal gain is $100,000, but it doesnโt account for the 5 years of inflation, so we need to calculate the inflation rate on the cost base ($100,000). For simplicity’s sake, letโs say there was a flat 3% inflation rate for those 5 years.
- Cost base = $100,000
- Inflation rate over 5 years = 3%
- Indexation = 1.035 (1.03 x 1.03 x 1.03 x 1.03 x 1.03) = 1.1592 (15.92%)
- Indexed cost base = $100,000 x 1.1592= $115,920
- Sale price = $200,000
- Real capital gain = $200,000 – 115,920 = 84,080
- Tax payable at 30% minimum = $25,224
- Net profit = $74,776
- Total cash after tax = $174,776
Super funds retain their one-third discount and are not subject to the new rules, including those for self-managed super funds (SMSFs).
The budget in a nutshell
There is a lot to take away from this budget; it features some pretty big changes that every Aussie is trying to process. Whether you think itโs right or wrong, it needs to be said that none of these announcements is law yet and will be discussed and debated in parliament before being legislated (meaning there is potential for amendment).
For small businesses, look at what you can do now and make sure to take advantage of the ATO relief payment plan before the 30th June if you are eligible, and speak with your accountant or tax advisor regarding tax planning and how to implement government schemes into your business.
