Federal Budget 2025-26: The Essential Tax Update for Private Businesses and their Owners

Personal Income Tax Cuts

Inflation and cost of living continue to be significant issues in Australia.  

The Government legislated for tax cuts last year with effect from 1 July 2024. In this year's Budget, the Government has announced the following further tax cuts to apply from 1 July 2026. These changes effect the tax rate which applies to the first tax bracket ($18,201 to $45,000):  

• from 1 July 2026, the tax rate of 16% will be reduced to 15%; and

• from 1 July 2027, the 15% will be further reduced to 14%.

Another measure contained in the Budget to provide cost-of-living relief is to increase the Medicare levy low‑income thresholds for singles, families, and seniors and pensioners -  from 1 July 2024.

The new tax cuts are expected to decrease Government receipts by $17.1 billion over the next five years, starting from 2024–25. The Medicare levy measure is estimated to decrease receipts by $648 million over five years from 2024-25.

Extending Various ATO Compliance Programs

In the 2025-26 Federal Budget, the Government continues to focus on extensive tax compliance programs and has allocated substantial additional funding to raise revenue from audit and review activity.

The Government will provide an additional $999 million in funding over four years to the ATO to extend and expand tax compliance activities. The additional funding includes:

• $717.8 million over four years from 1 July 2025 for a two-year expansion and a one-year extension of the Tax Avoidance Taskforce. These funds can be expected to largely be expended on activities relating to the ‘top end of town’ (i.e. multinationals and large taxpayers), which is typically the target of the taskforce’s activities;

• $155.5 million over four years from 1 July 2025 to extend and expand the Shadow Economy Compliance Program to reduce shadow economy behaviour such as worker exploitation, under‑reporting of taxable income, illicit tobacco and other shadow economy activity. As noted by the Government, these behaviours enable non-compliant businesses to undercut competition;

• $75.7 million over four years from 1 July 2025 to extend and expand the Personal Income Tax Compliance Program. This will ‘enable the ATO to continue to deliver a combination of proactive, preventative and corrective activities in key areas of non-compliance' for individuals; and

• $50.0 million over three years from 1 July 2026 to extend the Tax Integrity Program. This will enable the ATO to continue its engagement program ‘to ensure timely payment of tax and superannuation liabilities’ by medium and large businesses and wealthy groups.

As can be seen from the above, the funding spans tax compliance and integrity programs across the full range of taxpayers, from multinationals and large taxpayers through to individuals.

The Government’s continued focus on committing substantial funding to ‘expanding and strengthening’ tax compliance programs will lead to taxpayers and their advisers seeing further increases in audit and review activity. For small businesses and their owners, this highlights the importance of reviewing their affairs carefully to ensure that their tax obligations are complied with (and seek specialist advice where necessary).

Restricting Foreign Ownership of Housing

For a long time, Australia has placed restrictions on foreign persons (including companies and trusts) purchasing residential property in Australia. Generally, a foreign person seeking to purchase Australian residential property is required to obtain approval from the Foreign Investment Review Board (FIRB).

As previously announced by the Government on 16 February 2025, the Government will ban foreign persons from purchasing established residential dwellings for two years commencing from 1 April 2025. Interestingly, the ban will extend to temporary residents (as well as foreign-owned companies). This means such persons will not be permitted to purchase Australian residential property or apply for FIRB approval to do so.

Exceptions from the ban will be available to foreigners who invest to significantly increase housing supply on a commercial scale, allowing foreign developers to continue investing in Australia. Moreover, the existing exceptions for permanent residents, New Zealand citizens and spouses of Australian citizens, permanent residents and New Zealand citizens (when purchased as joint tenants) will continue to apply.

In addition, further funding will be provided to the ATO and Treasury to target foreign investors who land bank, to ensure land is put to use for residential and commercial developments within reasonable timeframes. Presumably, this refers to those foreign investors who acquired land subject to development conditions imposed by the FIRB.

Enhancing Tax Practitioner Regulation and Compliance

The Government is implementing a set of measures to enhance tax practitioner regulation and compliance. The announcement states that the measures involve:

• strengthening the sanctions available to the Tax Practitioners Board (TPB);

• modernising the registration framework for tax practitioners; and

• providing funding to the TPB to undertake additional compliance targeting high-risk tax practitioners over four years from 1 July 2025.  

Following on from the PwC scandal in 2022, the Government has introduced several new measures to strengthen the TPB and increase the obligations imposed on tax agents.

This additional funding seeks to protect taxpayers from tax agent misconduct, including tax practitioners providing poor and unlawful tax advice. The additional compliance activities are intended to specifically target high-risk tax practitioners.

The Government intends to consult with the TPB on the implementation details of this measure.

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Restricting Non-Compete Clauses

The Government has announced that it will ban non-compete clauses for non-high income workers, from an unspecified date. This will apply to workers earning less than the high-income threshold in the Fair Work Act (currently $175,000).

It is estimated that around 3 million Australian workers are currently subject to these clauses, and such clauses are increasingly common even in lower-wage areas such as child care. Restraint of trade clauses are generally presumed unenforceable at law unless they are reasonably necessary to protect an employer’s legitimate business interest. However, their mere existence in employment contracts can act as a strong deterrent.  

The Government forecasts that banning the unreasonable use of non-compete clauses could encourage greater movement in the workforce (e.g. freeing Australian workers to move into a higher paying job or to start their own business) and increase annual GDP by $5 billion once the reforms take full effect.  

The Government will consult on policy details concerning the non-compete ban, including exemptions, penalties, and transitional arrangements. The measure solely concerns non-compete clauses, as opposed to other types of restraints (e.g. non-solicitation of customers or non-solicitation of employees).  The announcement notes that the Government will consult further in relation to non-solicit clauses and high-income earners.

The Government will also make changes to competition law that will prevent businesses from:

• fixing wages by making anti-competitive arrangements that cap workers’ pay and conditions, without the knowledge and agreement of affected workers; and

• using ‘no-poach’ agreements to block staff from being hired by competitors.

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Small Business and Franchisee Support

The Government has announced that it will provide $12.0 million over four years from 2025-26 to support and protect small businesses (with a particular focus on the franchising sector). This includes:

• $7.1 million over two years to strengthen the ACCC’s enforcement of the Franchising Code in order to ‘deliver a better deal’ for small businesses in the franchising sector;

• $3.0 million over four years from 2025–26 for ASIC to improve its data analytics capability to better target enforcement activities to deter illegal phoenixing activities, particularly in the construction sector;

• $1.2 million in 2025–26 to partner with White Box Enterprises to establish a Social Enterprise Loan Fund to offer small loans to social enterprises, including work integration social enterprises, to support employment for disadvantaged Australians; and

• $0.8 million in 2025–26 for Treasury to develop and consult on options to extend protections against unfair trading practices to small businesses and protect businesses regulated by the Franchising Code of Conduct from unfair contract terms and unfair trading practices. This is designed to level the playing field for small businesses given the power imbalance they face when dealing with large businesses.

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Clarifications concerning Managed Investment Trusts

A Managed Investment Trust (MIT) is a trust in which members of the public collectively invest. The tax law provides concessional withholding tax rates for MITs to encourage investment in Australia.

The ATO has identified non-commercial restructures which have been designed to access the MIT withholding regime, culminating in the release of Taxpayer Alert TA 2025/1.

To provide certainty in the market, the MIT rules will be clarified to ensure legitimate investors can continue to access the concessional withholding tax rates in Australia.  

While the Budget Papers do not elaborate, this measure was previously announced by The Hon Stephen Jones MP on 13 March 2025. In that announcement, the Minister stated that:

This targeted policy change reaffirms that genuine, foreign based widely‑held investors, such as pension funds, can still access concessional withholding tax rates on eligible distributions to members through managed investment trusts (MITs).

The amendments will maintain current industry practice and understanding of the operation of the managed investment trust pooling requirements under Division 275 of the Income Tax Assessment Act 1997 and remove ambiguity around the use of MITs.

The amendments will make clear that trusts ultimately owned by a single widely‑held investor (e.g. a foreign pension fund) are able to access the MIT concessions.

This measure will apply to fund payments from 13 March 2025, being the date of the Minister’s announcement.  

The Government will also defer the start date of the 2023–24 Budget measure extending the clean building managed investment trust withholding tax concession from 1 July 2025 to the first 1 January, 1 April, 1 July or 1 October after the Act receives Royal Assent.  That concession provides for a 10% final withholding tax rate for MITs invested in energy-efficient commercial buildings.

Deferral of Foreign Resident CGT Measures

An unexpected measure in last year’s Federal Budget was a suite of changes to the foreign resident capital gains tax (CGT) regime, set to take effect from 1 July 2025. The key proposals include:

• Expanding CGT scope – ‘Clarifying’ and ‘broadening’ the types of assets subject to CGT for foreign residents. The exact changes remain unclear (is it clarifying or is it broadening?), but currently, non-residents are taxed only on ‘taxable Australian property,’ which includes real property, indirect interests, and business assets linked to a permanent establishment in Australia.

• Changing the principal asset test – Shifting from a point-in-time test to a 365-day assessment to determine if an entity’s value is principally derived from Australian real property. It is presumed this test must be met for the full period before disposal.

• New ATO notification requirement – Foreign residents disposing of shares or units worth over $20 million must notify the ATO before the transaction occurs. This aims to assess withholding tax obligations upfront, though consequences for non-compliance remain unclear.

In the 2025-26 Federal Budget, the Government deferred the start date to the later of:

• 1 October 2025, or

• The first 1 January, 1 April, 1 July, or 1 October after Royal Assent.

This delay is expected to reduce receipts by $50 million and payments by $0.3 million over five years from 2024–25.

Cutting Student Debt

The 2025–26 Budget includes the Government's previous announcement on 3 November 2024 about reducing student debt and reforming the repayment system fairer. These changes include:

• 20% reduction in student debt: The government will make a once-off reduction of all outstanding Higher Education Loan Program (HELP) and other student debts by 20%. This will remove $16 billion from student loan accounts for around 3 million Australians.

• Increase in minimum repayment threshold: From 1 July 2025, the income threshold for compulsory student loan repayments will increase from $54,435 to $67,000 (an increase of more than 20%), reducing the burden on lower-income earners.

• New marginal repayment system: Current repayment rates are set as a proportion of total income. Under the new marginal repayment system, repayments will only be required based on the portion of a person’s income above the new $67,000 threshold, summarised as follows:

• Indexation reforms: The government has also retrospectively adjusted indexation for 2023 and 2024, reducing student loan balances by an additional $3 billion.

These welcomed changes are all subject to the passage of legislation. The Government stated that every person with a HELP debt earning under $180,000 will be better off and people earning over $180,000 will see no change to their repayments. These new arrangements are also aimed at fixing the situation where someone earns additional income, for example by taking a second job, but then see a decrease in their take-home pay as a result of HELP repayment arrangements

(Not) Extending the Instant Asset Write Off

In the last two Federal Budgets, the instant asset write-off was ‘increased’ to $20,000 (from 1 July 2023 to 30 June 2024 in the 2023-24 Budget, and from 1 July 2024 to 30 June 2025 in the 2024-25 Budget).

The instant asset write off has been a feature of the income tax landscape for almost 15 years. This write-off is currently available to small businesses, with an aggregated annual turnover of less than $10 million. It allows those small businesses to immediately deduct the full cost of eligible assets costing less than $20,000.

In last year’s Budget update, we predicted that given the instant asset write-off's track record, further extensions were probable. Surprisingly, the Budget contains no announcement extending the instant asset write-off.  

Without further announcements, this appears to be the death knell in the instant asset write off’s long and storied history. Thus, it appears that from 1 July 2025, all businesses will return to depreciating assets in line with usual effective life depreciation rules.

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What’s Not in the Budget?

This year’s Budget is relatively light on tax announcements. Given that a Federal Election must occur by mid-May and that significant tax reform items may become a political issue, this is perhaps unsurprising.  

Several significant items which remain on the ‘tax agenda’ are not mentioned in the 2025-26 Budget. These include:

• Division 7A reform (including a legislative response to the decision in Commissioner of Taxation v Bendel [2025] FCAFC 15);

• reforming the tax residency rules (for individuals and companies);

• a review of the CGT rollovers and demerger rollover relief;

• CGT concessions for small business (the small business CGT concessions and Small Business Restructure Rollover);

• trust reimbursement integrity rules (section 100A);

• taxation of trusts;

• amending the trust loss rules (including fixing deficiencies in respect of the family trust distributions tax);

• the Government’s plan for the Division 296 ‘super tax’ that would increase the tax on earnings on the component of super funds above $3 million from 15 per cent to 30 per cent. The amending bill failed to pass the Senate in the final sitting;

• the Government’s plan (announced in the 2023-24 Federal Budget) to apply penalties to taxpayers that have mischaracterised or undervalued royalty payments from 1 July 2026; and

• previously shelved policies (e.g. restricting negative gearing or halving the general 50% CGT discount).

This article in no way constitutes legal advice. It is general in nature and is the opinion of the author only. You should seek legal advice tailored to your individual circumstances before acting on anything related to this article.