Further tax cuts to every worker, as Chalmers flags generational tax change

The Albanian government has been accused of an “unnecessary” step back on housing supply after approving a major tax change.

The Real Estate Institute of Australia said negative gearing and changes to capital gains tax relief would undermine housing supply.

REIA resident Jacob Caine said modeling by Qaive and Tulipwood showed the reforms could result in around 25,500 fewer homes being built over the next five years.

“Australia is well behind the National Housing Deal target of 1.2 million new homes, so we need policies that support investment and the supply of new homes, not policies that make delivery difficult,” Mr Caine said.

“Private investment plays a critical role in Australia’s housing system.

“In a time of acute rent stress and chronic undersupply, policy environments should encourage greater investment in housing without creating uncertainty or diminishing confidence.”

Finance Minister Jim Chalmers defended his policy despite breaking his election promise.

“We recognize, of course, that those who want to defend the current tax arrangements or who think the current housing market is working quite well will want to focus on that element, the political element of it,” he says.

Negative gearing and capital gains tax exemptions

Chief among the tax reforms were changes to negative gearing and capital gains tax (CGT) cuts.

Under changes to CGT, the 50 per cent discount has been canceled and returned to indexation; Negative gearing will now be limited to new builds.

Existing investors will be given a one-year grace period before the changes take effect for assets purchased after July 1, 2027.

Investors will be expected to have their assets valued independently or by the tax office by this date for tax purposes.

“Since 1999, house prices have risen by over 400 per cent, more than twice as fast as the average income,” Mr Chalmers said.

“Our tax changes will help nearly 75,000 Australians realize the dream of home ownership.”

In total, it is expected to raise $3.6 billion in the 2027-2028 fiscal year.

National Shelter, the peak body that aims to improve housing outcomes for low-income Australians, called the budget a “watershed moment for housing” but called on the government to go a step further to help increase homeownership.

“It respects existing investment decisions, avoids unnecessary market disruptions, and begins to unwind tax settings that have long skewed housing outcomes and disproportionately affected lower-to-middle-income households,” said National Shelter CEO Jackson Hill.

“This budget begins to rebalance the system towards delivering the new homes that first home buyers, renters and the country urgently need.”

But Mr Hill warns more needs to be done.

Australia faces a structural housing deficit that tax reform alone cannot solve, with the country projected to have a deficit of around 640,000 social and affordable homes by 2041, according to Mr Hill.

Tax cuts for Australian workers

As part of a further restructuring of the tax system, Mr Chalmers announced modest tax cuts for 13.3 million Australian workers.

Starting from 1 July 2027, a new $250 “Working Australians Tax Cut” (WATO) will be introduced, costing the government $6.4 billion in lost revenue over the next four years.

Budget documents show WATO will increase the effective tax-free threshold by $1785 to $19,985 for workers (or $24,985 for workers who benefit from the Low Income Tax Offset).

Mr Chalmers said this would be “paid annually, on an ongoing basis, and automatically on your tax return”.

The government will also implement the previously announced $1,000 instant deduction for work-related expenses.

From the 2026-27 income year, Australian workers will be able to claim immediate deductions for work-related expenses rather than itemizing and claiming them.

Mr Chalmers said Tuesday’s announcement builds on previous tax cuts announced in the last two federal budgets, which will total $2816 a year by 2028.

“On average over the year, our three tax breaks, our immediate deduction and our new offset are equivalent to putting up to $54 back into the average earner’s pocket every week,” Mr Chalmers said.

business and trade

As part of a support for employers, the government will also permanently extend the $20,000 instant asset write-off for small businesses with a turnover of less than $10 million.

The immediate wealth tax relief was increased from $1,000 to $20,000, but had to be reversed at the end of the financial year.

“We are building a better tax system for businesses with over $3.5 billion in new measures that reduce taxes to encourage investment and innovation,” Mr Chalmers said.

“We will introduce permanent two-year loss carryback for all companies up to $1 billion in turnover, which will strengthen flexibility and risk-taking.

“And we will introduce loss refunds to startups to help new businesses invest and grow in the first two years.”

Figures released ahead of the budget revealed that income tax revenues remain the highest proportion of total revenue, rising from 47.7 per cent in 2025-26 to a forecast 53 per cent in 2035-36. The share of all other income sources in total income is expected to decrease.

How does it work?

In an example provided by the Treasury Department, real estate investor Jane buys a home for $800,000 in 2022, and by 2032, that figure doubles to $1.6 million.

Under the transitional system, the tax system will be split into two five-year blocks, one before the changes kick in from 1 July 2027 and the second after.

Jane will need to value her home for tax purposes as of July 1, 2027; In the example, the value of the house is assumed to be $1,131,371.

Starting from the second five-year period, capital gains taxes would be paid minus indexation. In this example $468,629 less indexing would be $319,958.

Assuming a 47 percent tax rate, the tax on his earnings is $228,252 (compared to $188,000 with a 50 percent discount).

The government says $3.6 billion raised over the next four years will be used to help fund tax cuts for every Australian worker.

Electric vehicles are becoming more expensive

The Australian government is also making it less lucrative to buy an electric vehicle as part of a change to Fringe Benefit Taxes.

First introduced in 2022, the government will abolish Fringe Benefit Taxes on vehicles purchased through a salary sacrifice arrangement.

Because of this policy, EVs have become around $150 per week cheaper compared to traditional internal combustion engines, helping to sell more than 100,000 EVs in Australia.

The new taxes will be phased in over two periods.

First, the government will try to claw back $1.9 billion over the next five years and turn it into a permanent 25 percent benefit on electric cars that cost $75,000 or more.

But by 2029 this will cover all electric vehicles sold in Australia.

These new regulations continue targeted support for the transition to electric cars, while ensuring the long-term sustainability of the system and reflect recommendations for a legislative review of the electric car discount policy.