Executive summary

On 25 March 2025, Federal Treasurer Jim Chalmers handed down his fourth budget, being the 2025-26 Federal Budget.

This Tax Alert focuses on the key announced tax measures that affect business tax planning and compliance processes and business incentives. The broader economic and policy issues in the 2025-26 Federal Budget are available on the EY Australia website (link here).

Last year's budget surplus of AU$15.8b (FY 2023-24) has now become a forecast deficit of AU$27.6b for this current year (FY 2024-25), increasing to an AU$42b deficit next financial year (FY 2026-27). The Budget forecasts real spending growth of 6% this year, far exceeding economic growth, which has been downgraded from 1.75% to 1.5% of gross domestic product (GDP). It also assumes spending growth will drop to 3% next year and 0.5% the year after, a forecast that seems optimistic. Gross government debt is now forecast to peak at 37% (AU$1.2t) of GDP, up from 35% in last year's budget.

Given that Australia is only a few weeks away from an election, there are typical pre-election budget sweeteners to be found, this year predominantly in the form of AU$17b worth of personal tax cuts — of up to AU$268 in 2026-27 and up to AU$536 in 2027-28 on an individual basis, relative to 2024-25.

When the Treasurer delivered last year's Budget in May 2024, the budget aimed to do three things: (1) prioritize fiscal discipline to ensure inflation remains under control; (2) bring the structural budget closer to balance; and (3) accelerate the pace of policy reform, including tax reform, to help boost our failing productivity. (See EY Global Tax Alert, Australia delivers 2024-25 Federal Budget, dated 16 May 2024.) These three goals have not been completely achieved.

On the tax front, the new Budget leaves in place a uncompetitive corporate tax rate of 30% and a personal income tax system with a high top marginal tax rate (with Medicare levy) of 47% that cuts in at a low-dollar threshold by Organisation of Economic Co-operation and Development (OECD) standards.

This results in a very high proportion of Australia's tax revenues coming from income taxes, as opposed to consumption taxes, which therefore results in disincentives to productivity enhancing work and investments. The largest revenue raising measure in the new Budget, raising some AU$3b over the forecast period, is additional funding of approximately AU$1b to the ATO to pursue revenue-raising compliance activities, and thus maximize the collection of corporate and personal income tax. Despite Australia's need for structural fiscal reform, political obstacles seem to have prevented it thus far.

Perhaps it may remain to a hung Parliament and a deal with the Independents to eventually see it.

Investment incentives — building on the existing Future Made in Australia plan

The new Budget continues the government's AU$22.7b agenda to help Australians benefit from the global shift to cleaner, cheaper energy and to secure Australia's position in a changing global economic and strategic environment. This includes AU$3.2b of additional funding to invest in the future of Australia's metals industry:

• AU$2b over 19 years for Green Aluminum Production Credits to provide production-based grants to support Australian aluminum smelters to transition to renewable electricity, announced in January 2025
• AU$1b over seven years for the Green Iron Investment Fund

The budget also reaffirms the government's commitment to the previously funded initiatives, including:

• AU$2b to recapitalize the Clean Energy Finance Corporation to invest in renewable energy, energy efficiency and low-emissions technologies
• AU$13.7b in green hydrogen and critical minerals production tax incentives that are now legislated
• AU$1.5b for priority areas through the Future Made in Australia Innovation Fund

Tax administration

Enhancing tax practitioner regulation and compliance

The government will strengthen the sanctions available to the Tax Practitioners Board (TPB), modernize the registration framework for tax practitioners and provide funding to the TPB to undertake additional compliance targeting high-risk tax practitioners over four years from 1 July 2025. This measure forms part of the government's response to a recent leak of confidential government tax information and implements recommendations from the 2019 Independent Review of the TPB; the government will consult on the implementation details of the measure. The measure is estimated to increase receipts by AU$47m and increase payments by AU$27.4m over five years from 2024-25.

Government extending ATO tax compliance programs

The government is providing funding to the ATO to extend and expand tax compliance activities. Cumulatively, this will cost AU$999m over four years from 2025-26, but will raise an additional AU$3.2b over five years from 2024-25. The programs covered are:

• Tax Avoidance Taskforce. The government is providing an additional AU$717.8m to the Tax Avoidance Taskforce over four years, from 1 July 2025, for a two-year expansion and a one-year extension of the Taskforce, to support the ATO's scrutiny of multinationals and other large companies.
• Shadow Economy Compliance Program. The government will provide AU$155.5m over four years, from 1 July 2025, to extend and expand the Shadow Economy Compliance Program to reduce shadow-economy behavior, such as worker exploitation, underreporting of taxable income, illicit tobacco and other shadow-economy activity that enables noncompliant businesses to undercut competition.
• Personal Income Tax Compliance Program. The government is providing AU$75.7m over four years, from 1 July 2025, to extend and expand the Personal Income Tax Compliance Program. This will enable the ATO to continue delivering a combination of proactive, preventative and corrective activities in key areas of noncompliance.
• Tax Integrity Program. The government is providing AU$50m over three years, from 1 July 2026, to extend the Tax Integrity Program, to 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.

Personal taxation

New tax cuts for Australian taxpayers

The government has announced that they will deliver new tax cuts to taxpayers from 1 July 2026. This measure is estimated to decrease receipts by AU$17.1b over three years from 2026-27.

The tax cuts are:

• From 1 July 2026 — reduce the 16% rate to 15%
• From 1 July 2027 — reduce the 15% rate to 14%

These adjustments follow the government's previously legislated tax cuts, which took effect from 1 July 2024.

Resident personal tax rates:

*Rates do not include Medicare levy of 2% as applicable

The government has also announced that:

• From 1 July 2024, the Medicare levy low-income thresholds for singles, families, and seniors and pensioners will increase.
• As previously announced, the government will increase the compulsory student loan repayment threshold from AU$54,435 to AU$67,000 from 1 July 2025, and reduce outstanding student debts by 20% before indexation is applied on 1 June 2025.

There are no changes to the low-income tax offset (LITO).

Managed investment trusts

Deferral of clean building concessional MIT withholding tax rate extension

The government announced a deferral of the proposed extension of the 10% Clean Building managed investment trusts (MIT) withholding tax concession to cover data centers and warehouses where construction commences after 9 May 2023, originally announced in the 2023-24 Budget, from 1 July 2025 to the first 1 January, 1 April, 1 July or 1 October after the Act receives Royal Assent. There is no quantifiable cost to the revenue from the deferral.

Amendment to MIT rules to confirm foreign-owned funds eligibility

The government previously announced that it will amend the income tax laws to confirm that MITs ultimately wholly owned by widely held foreign funds (e.g., foreign pension funds) can continue to access concessional withholding tax rates in Australia. The announcement followed the issuance of taxpayer alert TA 2025/1, which highlighted the ATO's concerns with restructures of an existing inward investment structure to access the MIT withholding regime. However, TA 2025/1 also included a statement that the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 might potentially apply to MITs originally established as MITs indirectly wholly owned by a single foreign entity. The amendments will not affect the ATO's power to apply Part IVA where noncommercial restructures are undertaken to inappropriately access the MIT regime. The measure will apply to fund payments from 13 March 2025, and there is no quantifiable cost to the revenue.

Real estate/infrastructure

Deferral of strengthening the foreign resident capital gains tax regime measures

The government announced a deferral of the proposed amendments to the foreign-resident capital gains tax (CGT) regime announced in the 2024-25 Budget. It is proposed to clarify and broaden the types of assets on which CGT will apply for foreign residents, to amend the point-in-time principal-asset test to a 365-day testing period and to require additional ATO notifications where foreign residents dispose of shares and other membership interests exceeding AU$20m in value.

The application date will be changed from CGT events that occur on or after 1 July 2025 to events that occur from the later of 1 October 2025 or the first 1 January, 1 April, 1 July or 1 October after the Act receives Royal Assent. The deferral is estimated to decrease receipts by AU$50m in 2025-26, while the original measure was estimated to increase receipts by AU$600m over the five years from 2023-24.

Restricting foreign ownership of housing

As previously announced, the government will ban foreign persons (including temporary residents and foreign-owned companies) from purchasing established dwellings for two years from 1 April 2025, unless an exception applies. Exceptions include investments that significantly increase housing supply or support the availability of housing on a commercial scale, and purchases by foreign-owned companies to provide housing for workers in certain circumstances.

Additional funding will be provided to the ATO, and Treasury to enforce the ban and implement an audit program to enhance the compliance approach to target land banking by foreign investors, to ensure they comply with requirements to put vacant land to use for residential and commercial developments within reasonable timeframes.

Indirect tax

Two-year freeze on beer excise

The government previously announced that it would freeze the excise tax on draught beer, for two years, starting from the next indexation date of August 2025 (indexation is currently applied twice a year). The brewers and distillers cap for full remission of any excise paid will also be increased from AU$350,000 to AU$400,000 per year for all eligible manufacturers and the Wine Equalisation Tax producer rebate cap will be increased to AU$400,000, from 1 July 2026. The government will consult with this sector regarding the implementation of this measure. The government has not frozen the excise on spirits. This measure is estimated to cost AU$165m over the 4 years from 2025-26.

Announced but unlegislated previous key budget tax measures

Note that a number of tax-related government announcements, made over the past three years in Budgets and Mid-Year Economic and Fiscal Outlook statements (MYEFOs), have yet to be enacted. Some measures are in Bills before Parliament, which if not passed before the Federal Election is called will lapse, while many others are yet to be developed. Key measures include the following.

2023-24 Budget

• Adding a 15% tax on earnings from an individuals' superannuation balance that is greater than AU$3m (from 1 July 2025, in a Bill)
• Expanding the general anti-avoidance rule to withholding tax schemes and schemes with a dominant purpose to reduce foreign income tax (start date subsequently deferred to years on/after Royal Assent)
• Adding a clean building concessional MIT withholding tax rate extension (from 1 July 2025 — now deferred, see above)

2023-24 MYEFO

• Denying deductions for ATO interest charges (years from 1 July 2025, in a Bill)
• Modernizing luxury car tax for fuel-efficient vehicles (from 1 July 2025, in a Bill)

2024-25 Budget

• Retaining the Business Activity Statement (BAS) refunds time limit increase (after Royal Assent, in a Bill)
• Extending the AU$20,000 instant asset write-off for small business (to 30 June 2025, proposed addition to a Bill)
• Strengthening the foreign-resident CGT regime (CGT events from 1 July 2025 — now deferred, see above)
• Adding a penalty for significant global entities (SGEs) that have mischaracterized or undervalued royalty payments, to which royalty withholding tax would otherwise apply (from 1 July 2026)

2024-25 MYEFO

• Modifying the research-and-development tax incentive to exclude eligibility of activities relating to gambling and tobacco (from years on/after 1 July 2025)
• Ensuring that tax scheme penalties apply to taxpayers who are in a loss position (from 1 July 2026)
• Expanding 2024-25 Budget measure to penalize SGEs that mischaracterize or undervalue interest or dividend payments to which withholding tax would otherwise apply (from 1 July 2026)