Australian Federal Budget 2025-26

Introduction

The Australian Treasurer, the Hon. Jim Chalmers, delivered the 2025/26 Federal Budget (Budget) on Tuesday, 25 March 2025.  Perhaps unsurprisingly, in light of the upcoming Federal election which is expected to take place in May of this year, the Budget was principally focused on cost-of-living relief, rather than significant international and related tax reforms.

The key tax related initiatives from the Budget include:

• Confirming the previous announcement from Treasury that the managed investment trust (MIT) rules will be amended to clarify that foreign widely held investors, such as foreign pension funds, can continue to qualify for the MIT concessions, in light of the ATO’s recent comments in Taxpayer Alert TA2025/1.
• Deferring the start date of the following two measures from previous Federal Budgets:
  • changes to the Foreign resident capital gains tax (CGT), announced in the 2024-25 Budget, which were aimed at ensuring CGT applied to foreign residents on sales of assets with a “close economic connection” to Australian land and to introduce an ATO notification process for the disposal of assets with a value of over AUD20 million; and
  • extending the clean building Managed Investment Trust withholding tax concession (10% tax rate) to eligible data centres and warehouses.
• Further funding for the ATO to undertake tax compliance activities, including a further 1-year extension for the ATO Tax Avoidance Taskforce.
• Personal income tax cuts for all Australian individual taxpayers.

It is noted that the Budget did not provide further details regarding the previously proposed reforms relating to (1) corporate and individual tax residency, (2) penalty regimes relating to the mischaracterisation of royalites, interest or dividends and (3) the expansion of Australia’s general anti-avoidance rules to arrangements designed to access lower withholding tax rates and also arrangements that have a dominant purpose to reduce foreign income tax.

We provide further details on the key business-related tax initiatives in the Budget below.

 

Proposed changes to Managed Investment Trust regime

The Australian Government has confirmed its recent announcement that it will enact laws to “clarify” the uncertainty surrounding the availability of the MIT concessions to certain MIT structures.

In a recent taxpayer alert (TA 2025/1), the ATO raised its concerns relating to restructures and existing structures involving “captive MITs”, ie MITs which are ultimately owned by a single foreign investor. Relevantly, the taxpayer alert identifies concerns with restructurings that result in a MIT having at least two investors to satisfy the “pooled investment” requirements for a managed investment scheme under the Corporations Act 2001 (Cth). The ATO indicated that the general anti-avoidance rules (Part IVA) could potentially apply to such MIT structures that have a single ultimate foreign owner, and that these structures could be subject to ATO scrutiny where there is a material new investment or ownership change.

Shortly after the release of TA 2025/1, the Assistant Treasurer issued a clarifying response stating that the MIT rules will be amended to ensure that “genuine, foreign based widely-held investors, such as pension funds” will still be able to access the MIT concessional withholding tax rate of 15%. The amendments will apply to fund payments from 13 March 2025.

The Government has also announced the deferral of the clean building MIT concessions (10%) to data centres and warehouses from 1 July 2025 to the first 1 January, 1 April, 1 July or 1 October after the relevant Act receives Royal Assent. These concessions were first announced in the 2023-2024 Federal Budget. No draft legislation has yet been issued for these amendments.

Any existing or proposed MIT structures that are ultimately owned by a single foreign investor should monitor the progress of these changes and ATO activity in this area to determine whether the MIT eligibility of their structures could potentially be at risk.

 

Deferred start date for foreign resident CGT measures

The Australian Government has deferred the start date of the proposed foreign resident capital gains tax (CGT) measure, referred to as the “Strengthening the foreign resident capital gains tax regime”, from 1 July 2025 to the first 1 January, 1 April, 1 July or 1 October after the relevant act receives Royal Assent.

The proposed measures were initially announced in the 2024-25 Budget and was subject to a consultation process in July and August 2024 but no draft legislation has since been issued. The proposed measures included:  

• clarifying and broadening the types of assets that foreign residents are subject to CGT for foreign assets to include assets that have a “close economic connection” to Australian land;
• amending the principal asset test to include a 365 day testing period, rather than the existing point-in-time test which applies at the time of disposal; and
• requiring foreign residents disposing of shares and other membership interests exceeding AUD20 million in value to notify the ATO, prior to the transaction being executed.

 

Increase funding for ATO compliance activities

The Australian Government will provide AUD999 million of additional funding over the next four years to the ATO to extend and expand tax compliance activities, with a key focus on multinationals and other large taxpayers. The additional ATO funding is anticipated to generate additional receipts of AUD3,200 million and payments of AUD1,400 million (ie increase in GST payments and disbursements of unpaid superannuation).

The Government’s additional ATO funding includes:

• ~AUD718 million on the Tax Avoidance Taskforce (which was further extended by one-year to 30 June 2029 and expanded for two years) to target multinationals and other large taxpayers;
• ~AUD156 million on the Shadow Economy Compliance Program to target shadow economy behaviour;
• ~AUD76 million on the Personal Income Tax Compliance Program to target individual non-compliance; and
• AUD50 million on the Tax Integrity Program to target the timely payment of tax and superannuation liabilities of medium/large businesses and wealthy groups.

Multinationals and other large taxpayers in particular should be prepared for additional ATO review and audit activity in respect of the areas above.

 

Previously Announced But Unenacted Measures

Whilst this Budget provided an update on certain previously announced but unenacted measures, it did not provide further details regarding the previously announced reforms relating to (1) corporate and individual tax residency, (2) penalty regimes relating to the mischaracterisation of royalites, interest or dividends and (3) the expansion of Australia’s general anti-avoidance rules.

Corporate and individual residency

In previous Budgets, the Australian Government announced changes to the tax residency tests for:

• companies (in the 2020-21 Budget) to ensure that a company will only trigger satisfy the tax residency test where it has a “significant economic connection” to Australia; and
• individuals (in the 2021-22 Budget) to introduce a primary ‘bright line’ test, whereby a person who is physically present in Australia for 183 days or more in any income year will be an Australian tax resident.

It is currently unclear whether these announced changes to the residency rules will proceed.

Royalty payments – penalty measure

In last year’s Federal Budget, the Australian Government announced a new penalty regime targeting taxpayers who are part of a group with more than AUD 1 billion in global turnover annually that mischaracterise or undervalue royalty payments, to which royalty withholding tax would otherwise apply.  Australian Treasury subsequently announced similar penalty regimes for interest and dividends. These measures were set to apply from 1 July 2026, but no draft legislation has been issued to date.

Progress on these measures may be linked to the pending High Court appeal of the Full Federal Court’s decision in the PepsiCo case, which is scheduled to be heard on 1 April 2025.

GAAR – broadened application

The Australian Government, as part of last year’s Federal Budget, also reaffirmed its commitment to broaden the application of Australia’s general anti-avoidance rule (GAAR) to apply to:

• schemes that reduce tax paid in Australia by accessing a lower withholding tax rate on income paid to foreign residents (eg under tax treaties); and
• schemes that achieve an Australian income tax benefit, even where the dominant purpose was to reduce foreign income tax, rather than Australian income tax.

Last year’s Federal Budget noted that the proposed amendments will apply to income years commencing on or after the day the amending legislation receives Royal Assent, regardless of whether the scheme was entered into before that date. No draft legislation has been issued to date and the 2025-26 Federal Budget makes no mention of this proposed measure.

For context, when previously announced in the 2023-24 Federal Budget, the proposed amendments were set to apply to income years commencing on or after 1 July 2024.

If you have any questions in relation to the information provided above, please contact our tax team below.