In a bid to rebalance an “out of whack system” Jim Chalmers will curtail perks on investment properties while handing out moderate tax breaks to the average Australian worker, despite soaring inflation.
The Treasurer and Prime Minister Anthony Albanese are gambling on the hope that broken promises on negative gearing and capital gains tax will be overlooked by those who will be $991 better off than they are now — come tax time in 2028.
“We’re delivering a fairer tax system for workers, first-homebuyers and future generations,” Dr Chalmers said.
“This will help rebalance a system which is more generous to assets than it is to labour and help rebalance a system where house prices have decoupled from incomes.
“And in an era where people feel like the system no longer works for them, this Budget doesn’t just acknowledge that, it acts on it.”
The Budget handed down on Tuesday forecasts a $31.5 billion deficit for 2026-27 — a near $3b improvement from December — and a cumulative deficit of $122.2b over the next four years.
It also shows a return to surplus in 2034, where previously the books were awash with red ink for a decade or more.
This improvement comes off the back of $63.8b in savings, more than half of which is cuts to the NDIS.
The NDIS, previously tagged as having runaway growth, will have $1b cut in real dollar terms over the next year, and growth significantly constrained for the next four.
When spending is taken into account, including the $25b set aside for hospitals in the deal with the States, the Government ultimately saves a net $8.2b between now and 2029-30.
Spending falls from 26.8 per cent of GDP now to 26.2 per cent over the four years, although this is still higher than any time since the late 1980s, outside of the pandemic. The tax ratio also falls, but is at a post-Howard era peak.
A new Working Australian Tax Offset will return $250 a year to anyone who earns a salary or is a sole trader, starting when they submit their 2027-28 tax return.
The $6.4b measure is expected to benefit 13 million Australians.
Added to this, the $1000 instant expenses deduction promised in last year’s election campaign will kick in from tax returns lodged for 2026-27. That’s expected to give an average benefit of $205 per person, at a cost of $2.6b to the Budget.
When these are combined with the “top-up” tax cuts announced in last year’s Budget and the revamped Stage 3 tax cuts, by 2027-28 the average earner will be up to $2816 better off since 2023-24.
The changes mean workers will see their taxes cut in five different ways, Dr Chalmers said.
He foreshadowed more tax cuts to come when the Budget can afford it.
“But the tax system got out of whack and we’re trying to realign it,” he said.
“We’re creating the architecture to use that as a way to dial up tax relief for people who work.”
The counterpart to this shift is the heavily foreshadowed curbing of capital gains tax discounts and negative gearing on investment properties.
People who own investment properties as of Budget night won’t face any changes, which Dr Chalmers said was an important respect for the financial decision they had already taken.
But starting from July 2027, negative gearing will only be allowed for newly built properties. Those who buy existing properties will only be allowed to deduct expenses such as for maintenance from rental income, not from any other income they earn.
The capital gains system will revert to the pre-1999 method of being indexed in line with inflation, with a minimum of 30 per cent tax to be paid.
People who buy and then sell newly built properties will be able to choose to use the 50 per cent discount or the new system, while transitional arrangements will apply to people who sell investment homes they own now.
Dr Chalmers said the move to maintain the bigger tax breaks on new properties meant that “if younger people have the means and the inclination” to invest in property, they could use the same concessions as previous generations, “they’ve just got to make a contribution to building more supply in our economy”.
The two measures combined will net the Budget $3.6b over the next four years.
They’re expected to help 75,000 first homebuyers over the next decade, and propel the construction of an extra 30,000 homes.
A minimum tax rate of 30 per cent on discretionary trusts will come into effect from July 2028 — after the next election — and will add $4.5b to government coffers in its first year.
And the phasing down of fringe benefits tax concessions for electric vehicles will return $1.9b to the bottom line. However, the tax package is broadly revenue neutral, raising just $95 million over the next four years.
“What this package does is it returns the revenue from some of these controversial changes, returns it to workers and businesses. That’s deliberate,” Dr Chalmers said.
He acknowledged the “controversial change” broke election promises and would attract “the usual strong views” and “scare campaigns and lies”. But it would have been “easy but wrong” to watch the pressures on younger Australians get worse without doing anything.
“The main change in our thinking is the view that we can’t let the intersection of the housing market and the tax system continue to lock out so many people from getting a toehold in the housing market, particularly younger people,” he said.
But Treasury has issued dire warnings about the cost of living over the next few years if the war in the Middle East is prolonged.
The Budget is written on the assumption the war will end relatively quickly and oil prices peak at $US100 a barrel then drop from mid-2026.
This would push inflation up to 5 per cent by the end of June — just above the 4.6 per cent it hit in March — but it would drop back to the middle of the Reserve Bank’s 2-3 per cent target band within a year.
But under a scenario where where oil prices reach $US200 a barrel and don’t get back to pre-war normal until June 2029, inflation would rise to nearly 7.3 per cent in December and take six months longer to return to the target band.
