Federal Budget 2026: Predictions And What To Expect

Spotlight on the CGT Discount, Negative Gearing, and Electric Vehicle Incentives

Analysis and Investor Strategies

The Albanese Labor government is preparing what Treasurer Jim Chalmers has described as an “ambitious” Federal Budget, expected to be handed down around 12 May 2026.

With a strong parliamentary majority and several years until the next election, the government has both the political capital and the time horizon to pursue meaningful tax reform. Housing affordability, intergenerational equity, revenue repair, and the transition to cleaner energy are all firmly in focus.

However, while some reform directions are increasingly clear, significant uncertainty remains.

What We Don’t Know

Despite clear signals around reform intent, a number of major economic variables remain outside the government’s direct control and could materially influence the shape of the budget.

Key uncertainties include:

• Energy supply shocks arising from ongoing conflict in the Middle East, particularly reduced availability of oil, petrol, and diesel.
• Flow‑on economic impacts from fossil fuel shortages, affecting transport costs, construction materials (such as plastics), fertilisers, and food production.
• Inflationary pressures and monetary policy responses, including how higher input costs may affect household budgets, government spending priorities, and interest rates.
• Potential fiscal responses, such as increased defence spending, transport or agricultural subsidies, expanded energy bill relief, or targeted industry support.

These external pressures will influence how the overall “budget pie” is sized—and how it is ultimately divided.

What We Do Know

What is increasingly clear is that tax reform is firmly on the agenda. Recent Senate inquiries, Treasury modelling leaks, and carefully calibrated ministerial commentary all point to changes in three key areas:

• Capital Gains Tax (CGT) discount
• Negative gearing
• Electric vehicle (EV) tax incentives

Together, these measures sit at the intersection of housing affordability, investment behaviour, revenue sustainability, and climate policy.

Capital Gains Tax (CGT) Discount

Under existing rules, individuals pay tax on only 50% of capital gains on assets held for more than 12 months, including residential property, shares, and other investments. Treasury is reportedly modelling a reduction in the CGT discount to 25% or 33%, with reforms possibly limited to residential investment property only, and where the 50% discount for shares and other financial assets might still be retained.

Key features under consideration include:

• No full abolition of the discount
• Prospective application (new acquisitions post‑budget)
• Grandfathering for existing assets
• Revenue recycled into broader personal income tax relief

Policy Signals

A Senate committee report—endorsed by Labor senators—concluded that the CGT discount, when combined with negative gearing, has skewed housing ownership away from owner‑occupiers and toward investors. Treasurer Chalmers has repeatedly stated he is “working up options” for cabinet and has not ruled out reform.

There has been debate as to whether the proposed changes will:

• Put downward pressure on investor demand and prices
• Have a potential reduction in new rental supply if investor activity slows
• Have possible upward pressure on rents if construction falls short

Investor Strategies

• Consider timing of disposals: If you are planning to sell an investment property with a large unrealised gain, selling pre‑budget may lock in the current 50% discount—although grandfathering reduces the need for rushed decisions.
• Review asset allocation: If property loses part of its CGT advantage, shares and ETFs may become relatively more attractive for new capital.
• Stress‑test portfolios: Model post‑tax returns under 25–33% discount scenarios, particularly for highly leveraged investments.

Negative Gearing

Current Settings

Losses on investment properties—interest, maintenance, depreciation—can be offset against other income. This disproportionately benefits higher‑income earners and is considered costly to government coffers.

Potential Changes

Rather than full abolition, Treasury is modelling a cap limiting negative gearing to two investment properties per investor. This would primarily affect the top 10% of investors who own three or more properties.

More radical options—such as restricting negative gearing to new builds only (as proposed in 2019)—appear less likely.

Policy Signals

Negative gearing reform is less advanced than CGT reform but is clearly “on the table”. Ministers have consistently declined to rule it out, citing the need for intergenerational fairness.

Likely Impacts

• Reduced investor demand for established dwellings
• Improved competitive position for first‑home buyers
• Risk of rental shortages if supply does not keep pace

Investor Strategies

• Review portfolio size: Investors holding more than two properties should consider debt reduction or selective divestment.
• Prioritise new builds: These have historically been protected in Labor proposals and may remain favoured.
• Plan for cash flow: Reduced deductibility may require a shift toward neutral or positively geared assets.
• Structure review: Companies and trusts may offer alternative tax outcomes—specialist advice is essential.

Electric Vehicle (EV) Tax Incentives (FBT Exemption)

Current Settings

Eligible battery electric and fuel‑cell vehicles below the luxury car tax threshold (approximately $91,387 GST‑inclusive) are exempt from fringe benefits tax when provided via novated leases or salary packaging. Plug‑in hybrids lost eligibility from April 2025.

Potential Changes

The exemption is currently under statutory review, with the final report due mid‑2027. However, the May 2026 budget may introduce early tightening, driven by an estimated $1.35 billion revenue cost in 2025–26.

Possible options include:

• Lowering the vehicle value cap
• Restricting eligibility to new vehicles only
• Narrowing emissions or usage criteria

Policy Signals

Ministers have confirmed the review and acknowledged rising costs, describing changes as under “active consideration”, though no final decisions have been announced.

Likely Impacts

• Reduced attractiveness of novated leasing for EVs
• Slower uptake at a time of rising petrol prices
• Greater cost burden on employees and fleets

Investor and Employee Strategies

• Act early: Those considering a novated EV lease should move before budget night. Existing qualifying arrangements are likely to be grandfathered.
• Time vehicle upgrades: The next 12–18 months may represent a closing window.
• Confirm eligibility: Only zero‑emissions vehicles qualify; PHEVs are already excluded.
• Coordinate with employers: Binding commitments may help preserve current concessions.

Key Takeaways and Caveats

The May 2026 Federal Budget is shaping up as one of the most significant tax reform moments in years, particularly for housing investors and EV users.

• CGT reform appears highly likely
• Negative gearing changes are a strong possibility
• EV tax incentives face material risk of early tightening

While these measures could improve fairness and raise revenue, they also carry risks for rental supply and EV momentum.

Important: This analysis is based on current signals, modelling leaks, and commentary as at March 2026. Budget outcomes may differ materially, and changes are typically prospective with grandfathering.

Disclaimer: This information is general in nature and should not be relied on as advice. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs and seek professional advice before making any decisions based on this information.