SMSFs, Trusts and the 2027 Negative Gearing Changes: What's Exempt and What Isn't

Introduction

The 2026-27 Budget reforms apply to residential investment property held by individuals (and partnerships of individuals). Three significant categories of property holders are outside the scope of the main reform: superannuation funds (including SMSFs), widely held trusts, and certain other entities. A separate budget measure does target one specific structure discretionary trusts holding investment income with a 30% minimum tax on distributions to adult beneficiaries.

This article walks through the treatment of each structure, the policy rationale behind the carve-outs, and the implications for investors considering restructuring.

SMSFs and Super Funds: Fully Excluded

Super funds including self-managed super funds (SMSFs), retail funds, industry funds, and corporate funds are completely excluded from the negative gearing and CGT reforms. Their existing tax arrangements continue unchanged.

What this means in practice

• SMSF residential property holdings continue to enjoy current tax treatment.
• Limited recourse borrowing arrangements (LRBAs) continue under existing rules.
• Concessional 15% tax on rental income and 10% effective CGT (on assets held 12+ months in accumulation phase) continue.
• Tax-free pension phase treatment continues for properties supporting retirement income streams.

Implications for SMSF investors

The exclusion of SMSFs from the reform is one of its most significant features. SMSF property investment retains all current tax advantages relative to personally-held investment property post-1 July 2027. This may make SMSF property a more relatively attractive structure for some investors though it remains subject to the usual SMSF complexity, limited diversification considerations, and member benefit rules.

Widely Held Trusts: Excluded

Widely held trusts typically large managed investment trusts (MITs), listed property trusts, and similar collective investment vehicles are excluded from the reform. Their existing tax arrangements continue.

The rationale: widely held trusts are not vehicles used by individual investors to manage personal property holdings. They are pooled investment structures with many unit-holders, and treating them under the new rules would create unnecessary complexity without serving the policy objective.

Investors with exposure to residential property via REITs, A-REITs, or similar listed/unlisted property trusts see no change to their underlying investment tax treatment.

Discretionary Trusts: A Separate Measure

Discretionary trusts (commonly called "family trusts") are not excluded from a separate budget measure targeting trust-based income splitting. From 1 July 2027, distributions to adult beneficiaries from discretionary trusts holding investment income face a 30% minimum tax.

How the measure works

• Applies to distributions of investment income (including rental income and capital gains on investment property) from discretionary trusts.
• Applies to distributions made to adult beneficiaries (over 18).
• Imposes a minimum effective tax rate of 30% on the distribution, regardless of the beneficiary's marginal rate.
• Beneficiaries with marginal rates above 30% pay at their marginal rate (no change).
• Beneficiaries with marginal rates below 30% pay 30% (a tax increase).

What's excluded from the measure

• Distributions to corporate beneficiaries (typically taxed at the company rate, currently 30% in any event)
• Distributions to minors (already subject to minor's tax rules)
• Trusts not holding investment income (e.g. trading trusts running a business)

Trust-Held Property Implications

For investors who hold residential investment property through a discretionary trust, the combination of the negative gearing reform and the discretionary trust measure produces important practical consequences:

• The trust itself faces the same negative gearing rules as an individual investor (grandfathering, new build exception, carry-forward for non-qualifying property).
• Trust losses do not flow through to beneficiaries' wage income in any event (trust loss rules already prevent this).
• When the trust realises a capital gain and distributes to adult beneficiaries, the 30% minimum tax applies.
• Streaming gains to lower-income beneficiaries (a historical tax planning strategy) is significantly less effective.

The overall effect: trust-held property loses some of its previous flexibility. Investors with existing trust structures should review whether the structure remains optimal.

Why the Government Excluded These Structures

SMSFs and super funds

Super is a politically protected category. Disrupting super fund property investment would be perceived as undermining retirement savings a third-rail issue politically. The Government chose to leave super arrangements untouched to focus the reform on personal residential property investment.

Widely held trusts

Widely held trusts serve a collective investment function distinct from individual property investment. Including them in the reform would generate compliance complexity for pooled vehicles without serving the policy goal of redirecting individual investment toward new construction.

Discretionary trusts (targeted)

Conversely, discretionary trusts are widely seen as a vehicle for income splitting by high-income earners. The 30% minimum tax measure addresses this specific issue, separately from the negative gearing reform.

Restructuring Considerations

Should you move property into an SMSF?

The exclusion of SMSFs creates a structural advantage relative to personal ownership post-1 July 2027. However, transferring existing property to an SMSF triggers CGT and stamp duty, and limited recourse borrowing arrangements have specific compliance requirements. Restructuring is rarely tax-efficient most investors should leave existing holdings where they are.

For new property acquisitions where SMSF ownership is being considered, the calculation should account for the new build exception (which preserves personal ownership tax advantages for new construction).

Should you move out of a discretionary trust?

Moving property out of a discretionary trust to personal ownership triggers CGT (deemed disposal) and stamp duty in most states. The frictional costs typically exceed the marginal tax benefit. Most investors with trust-held property should retain the structure but plan distributions carefully under the new rules.

Should you start a new discretionary trust?

The 30% minimum tax substantially reduces the income-splitting benefit of new discretionary trusts. For pure property investment, personal ownership (potentially with a spouse) typically produces comparable outcomes with less complexity post-1 July 2027.