2026–27 federal budget: What it means for Australian SMEs

On Tuesday 12 May 2026, Treasurer Jim Chalmers handed down the 2026–27 federal budget. It comes at a time where elevated inflation, rising costs and global uncertainty are front of mind for businesses across the country.

From tax reforms and new small business incentives, to workforce changes and regulatory updates, there’s a lot for employers to be across.

We’ve broken down the key areas for businesses, including what’s changing for your employees’ tax, new incentives for small business and upcoming shifts in how you operate.

Let’s unpack the 2026-27 Australian Federal Budget and what it means for SMEs. 

Business tax: cuts, incentives and new rules

Permanent $20,000 instant asset write-off

The $20,000 instant asset write-off is now permanent from 1 July 2026 for businesses with aggregated annual turnover under $10 million. Previously it was renewed on a year-by-year basis. Eligible businesses can immediately deduct assets costing less than $20,000 instead of depreciating them over time. Treasury estimates this will reduce compliance costs by around $32 million per year across small businesses.

What this means for you

You can now plan equipment purchases with confidence, knowing this concession is not going anywhere. Assets must be first used or installed ready for use before you can claim.

Two-year loss carry-back for companies

From income years starting after 1 July 2026, companies with annual turnover up to $1 billion can carry back tax losses against tax paid in either of the prior two income years and receive a cash refund. This is a permanent measure expected to benefit up to 85,000 companies per year. The estimated cost to government revenue is $2.3 billion over five years.

What this means for you

If your business has a challenging year and records a loss, you may be able to recoup tax you paid in previous profitable years. This is worth discussing with your accountant.

Loss refundability for startups

From 1 July 2028, eligible start-up companies in their first two years of operation can access a refundable tax offset for losses, capped at the amount of FBT and PAYG withholding paid on employee wages. Up to 25,000 new businesses per year are expected to benefit, with the estimated cost being $410 million over five years.

What this means for you

If you’re building a new business and paying staff, losses in those first two years can generate a cash refund instead of just sitting as a carry-forward. The incentive is designed to help early-stage businesses take on sensible risk and invest in growth.

New 30% minimum tax on discretionary trusts

Note: These are early-stage announcements. The Treasurer has indicated both measures will need further refining and consultation is expected before any draft legislation is released.

From 1 July 2028, income distributed through discretionary trusts will attract a minimum 30% tax, paid by the trustee. Beneficiaries (other than corporate beneficiaries) receive non-refundable credits to offset their own tax liability.

Fixed trusts, super funds, deceased estates, charitable trusts and primary production income are excluded. The measure is expected to raise $4.5 billion over the forward estimates.

Rollover relief is available for three years from 1 July 2027 for small businesses that want to restructure out of a discretionary trust into a company or fixed trust. From 1 January 2027, the Australian Small Business and Family Enterprise Ombudsman will be available to help small businesses understand their restructuring options. ASIC will also put specific arrangements in place to support incorporation.

What this means for you

If your business operates through a discretionary trust, the window between now and July 2028 is important. Get advice well before the start date. The rollover relief window opens 1 July 2027 and runs for three years, so planning can start now.

Negative gearing and CGT changes

Note: These are also early-stage announcements. Consultation is expected before draft legislation is released and the detail may change.

From 1 July 2027, negative gearing for residential investment property is limited to new builds. Properties held at 7:30pm AEST on 12 May 2026 are grandfathered, which means that existing investors are unaffected. From the same date, the 50 per cent CGT discount is replaced with cost base indexation and a 30 per cent minimum tax on real capital gains. The new rules only apply to gains arising after 1 July 2027.

What this means for you

If you or your business hold investment properties or realise capital gains as an individual or through a trust, the post-June 2027 treatment will be different. Talk to your accountant about assets you’re planning to sell after that date. There is no impact on your main residence exemption or super.

R&D Tax Incentive restructure from 1 July 2028

The R&D Tax Incentive is being redesigned from 1 July 2028:

• The offset for experimental ‘core’ R&D increases by 25–50%.
• The intensity threshold drops from 2% to 1.5% (higher offsets for businesses doing substantial core R&D).
• Supporting activities such as literature reviews and equipment maintenance are no longer eligible.
• The refundable offset threshold rises to businesses with under $50 million turnover (up from $20 million), limited to firms under 10 years old.
• Maximum claimable expenditure rises to $200 million.
• Minimum expenditure threshold rises to $50,000. Claims below this must be conducted with a Research Service Provider or Cooperative Research Centre.

What this means for you

If you currently claim the R&DTI, the changes are material. The good news is the offset rate for qualifying core R&D is increasing. The catch is that supporting activities are being removed from eligibility, so claims will need to be more tightly scoped. Get familiar with the new rules well before the July 2028 start date.

Your employees’ tax: what’s changing

Working Australians Tax Offset (WATO)

From the 2027–28 income year, workers will receive an automatic annual tax offset of up to $250 on income earned from work. The WATO is delivered through tax returns, so it does not change payroll withholding. Over 13 million workers are expected to benefit from this tax cut.

What this means for you

No payroll changes required for the WATO. It’s worth letting your team know they’ll see the benefit when they lodge their 2027–28 tax return.

$1,000 instant tax deduction for workers

This measure was first announced during the 2025 federal election campaign and has been confirmed in the 2026-27 budget. Draft legislation has been released for consultation.

From the 2026–27 income year, employees can claim up to $1,000 in work-related expenses at tax time without keeping receipts. Workers with more than $1,000 in actual expenses can still itemise and claim the full amount as usual. The ATO estimates this will provide 6.2 million workers an average tax benefit of $205.

What this means for you

Workers are likely to ask questions about this. It’s worth giving your team a heads-up that this does not apply until their 2026-27 return, lodged in 2027 and that receipts are still required for the current tax year.

Payroll and tax administration

Monthly PAYG instalment option

From 1 July 2027, businesses can opt in to monthly PAYG instalment reporting and payment. This means tax obligations adjust more quickly to real business conditions instead of lagging behind by a quarter. The ATO is also expanding its dynamic PAYG instalment pilot, which allows businesses to vary their instalments through accounting software without risking interest charges. 

What this means for you

If your business has volatile or seasonal income, monthly instalments can reduce the risk of overpaying tax in advance or accumulating a large end-of-year bill. The opt-in is voluntary.

Updated income tax withholding tables from 1 July 2026

The 16 per cent marginal tax rate (applying to income between $18,201 and $45,000) drops to 15 per cent from 1 July 2026 and to 14 per cent from 1 July 2027. Payroll teams need to apply updated ATO withholding tax tables from 1 July 2026.

What this means for you

Update your payroll software or tax tables before the first pay run of the new financial year. Most payroll platforms will release updated schedules ahead of 1 July.

EV fleet and novated leases

The full FBT exemption for employer-provided electric vehicles is being wound back:

• EVs costing up to $75,000 retain the full FBT exemption, provided the arrangement commences before 1 April 2029.
• EVs costing over $75,000 move to a 25% FBT discount from 1 April 2027.
• From 1 April 2029, the 25% discount applies to all eligible EVs regardless of price.

What this means for you

If you offer novated leasing or a company car fleet that includes EVs over $75,000, review those arrangements before April 2027. Vehicles under $75,000 are unaffected until 2029, giving you time to plan.

Financial support for businesses under pressure

ATO temporary relief (available until 30 June 2026)

The ATO is providing eligible businesses with more generous payment plans, remission of interest and penalties, and flexibility to vary PAYG instalments where taxable income has fallen. If your business is under cash flow pressure right now, contact the ATO before the 30 June 2026 deadline.

Small Business Responsible Lending Obligation exemption extended for 10 years

The exemption that reduces barriers for small businesses accessing credit has been extended for a further 10 years. This prevents delays and unnecessary documentation burdens when applying for business loans.

Small business mental health and debt support extended

An additional $8 million extends both the NewAccess for Small Business Owners program and the Small Business Debt Helpline for 12 months from 1 July 2026. If you or someone in your business is feeling the pressure, both programs are free to access.

Competition law penalties doubled

Maximum penalties for serious breaches of competition and consumer law have doubled to $100 million. The ACCC is also running weekly public fuel price reporting across more than 190 locations. This is relevant context for businesses that rely heavily on transport or logistics in their cost base.

Supply chain and trade

$1 billion in interest-free loans for manufacturing and logistics businesses

Through the National Reconstruction Fund’s Economic Resilience Program, the government is providing interest-free loans to manufacturing and logistics businesses in critical supply chains affected by the Middle East conflict. If your business is in manufacturing, logistics or agriculture and is managing supply disruption, this program is worth investigating.

Trade Resilience Service

A new government service gives exporters access to freight logistics information and market intelligence to help them maintain international supply lines and find alternative shipping routes. This sits alongside the $50 million Accessing New Markets Initiative, which is being expanded to help businesses diversify exports.

497 tariffs abolished from 1 July 2026

497 tariffs are being removed from 1 July 2026.. If your business imports goods, check whether any of your inputs are affected.

Hiring and workforce supply

$85.2 million to cut skilled trades assessment wait times

The government is investing $85.2 million to reduce skills assessment wait times for migrant trades workers by up to six months. The goal is to add up to 4,000 additional skilled trades workers per year to the workforce. Trades Recognition Australia will run a dedicated program for onshore visa holders, fast-tracking recognition of existing qualifications and trade experience.

What this means for you

If you’re a business in construction, electrical, plumbing or other trades facing a skills shortage, this should help ease the pipeline over the coming year.

National occupational licensing being progressed

This measure was first announced in the 2025-26 budget and is continuing to be progressed. The government is working with states and territories to establish nationally harmonised licensing for workers in electrical and engineering occupations, creating one licence that works across states instead of requiring separate registration in each jurisdiction. A national worker screening approach for the care and support economy is also being developed.

What this means for you

For employers in the trades or care sectors who hire workers across state lines, this will reduce admin over time. The framework is being developed now with timing for rollout subject to agreement with states and territories.

Regulatory burden and compliance

Financial sector red tape: $780 million per year reduction

Fourteen legislative reforms are being progressed that reduce regulatory burden in the financial sector by an estimated $780 million per year. These include:

• Increasing monetary thresholds for large proprietary companies. Some businesses will move out of audit and reporting obligations.
• Making electronic recordkeeping and communication with ASIC easier.
• Streamlining climate-related financial disclosure requirements.

Mandatory Australian standards made free

All mandatory Australian standards are being made available for free, including standards covering construction, occupational health and safety, and product safety. This saves small electrical, plumbing and construction businesses up to $1,600 in annual access fees.

Payroll tax administrative harmonisation

The government is working with states and territories on targeted harmonisation of payroll tax administrative arrangements as part of the National Competition Policy. 

Payroll tax is currently a state-based tax, meaning businesses that operate across multiple jurisdictions manage different legislation, rates and thresholds. The harmonisation reforms are part of a broader single national market package expected to boost long-run GDP by around $13 billion per year once fully implemented.

Unlocking the data and AI opportunity

The government is backing AI as a productivity lever. The Productivity Commission estimates AI could add at least 4.3% to productivity levels, equivalent to $116 billion in economic growth, over the next decade. 

As part of the National AI Plan, the budget is making up to $70 million available through the CRC and CRC-P program for an AI Accelerator to help researchers and businesses develop and commercialise AI solutions. 

AI.gov.au will also launch as a practical guide to help organisations understand, plan for and use AI responsibly. 

We’re keeping you across all the details of the 2026-27 Federal Budget

The 2026–27 federal budget brings a mix of opportunities and obligations for Australian businesses. Whether it’s updating your payroll, reviewing your business structure or planning for new compliance requirements, there’s a lot to work through.

Employment Hero is built to help employers do exactly that. With HR, payroll and recruitment in one platform, plus a team of over 1,800 employment experts and HR advisory support on hand, we can help you manage your compliance obligations.

Need tailored help for your business?

Our HR advisory service gives you access to HR experts who understand the specifics of your business, so you can get clear answers on what these new changes mean for you.

All figures and information sourced from Budget Paper No. 1, Budget Strategy and Outlook 2026–27, released 12 May 2026.or compliance become a source of stress.

Disclaimer: The information in this article is current as at 12 May 2026, and has been prepared by Employment Hero Pty Ltd (ABN 11 160 047 709) and its related bodies corporate (Employment Hero). The views expressed in this article are general information only, are provided in good faith to assist employers and their employees, and should not be relied on as professional advice. The Information is based on data supplied by third parties. While such data is believed to be accurate, it has not been independently verified and no warranties are given that it is complete, accurate, up to date or fit for the purpose for which it is required. Employment Hero does not accept responsibility for any inaccuracy in such data and is not liable for any loss or damages arising either directly or indirectly as a result of reliance on, use of or inability to use any information provided in this article. You should undertake your own research and to seek professional advice before making any decisions or relying on the information in this article.