Productivity improvement was a strong focus of this budget, with several initiatives and funding announcements designed to increase productivity through a reduction in red tape and more streamlined approval processes. Productivity measures also include speeding up the process for migrants’ overseas qualifications to be recognised in Australia and overhauling a test used to select skilled migrants.
On the taxation side for businesses there was the extension of existing measures, alongside two significant tax reforms that relate to company tax losses.
Business tax loss reforms
To encourage investment and sensible risk taking, the Government is reforming tax loss treatment. This is also said to improve resilience of firms through temporary shocks. There are two measures proposed, aimed at two different stages and sizes of business.
The first is tax loss carry back:
- For years commencing on or after 1 July 2026.
- For companies with aggregated annual global turnover of less than $1 billion.
- Carry back a tax loss and offset it against tax paid up to two years earlier.
- The loss carry back only applies to revenue losses and will be limited by a company’s franking account balance.
The second is loss refundability for small start-up companies:
- For years commencing on or after 1 July 2028.
- For companies with aggregated annual turnover of less than $10 million.
- Generate a tax loss in their first two years of operation.
- Utilise the loss to generate a refundable tax offset.
- The offset is limited to the value of fringe benefits tax and withholding tax on wages paid in respect of Australian employees in the loss year.
Electric Vehicle discount
This is a fringe benefits tax initiative that has operated since July2022 to accelerate the uptake of electric vehicles. It has proven to be successful, particularly with strong interest in electric vehicles given the surge in oil price driven by the war in the Middle East. Given the program offers an FBT exemption on certain vehicles it is also starting to prove costly for the Government.
The Government announced that the FBT discount will be reduced to 25% from 1 April 2029, meaning a 15% statutory formula rate will apply instead of a 20% rate. The following transitional rules are in place from 1 April 2027 until 1 April 2029:
- All eligible electric cars will retain the FBT discount rate that was in place when the arrangement commenced.
- The full discount will remain in place and be applicable to EVs costing $75,000 or less, described as “cars valued up to and including $75,000”. We await clarity on whether this is a drive away price, or a GST exclusive price or some other basis.
- Electric cars valued over $75,000 and under the fuel-efficient luxury car tax threshold ($91,387 for 2026 financial year) provided between 1 April 2027 and 1 April 2029 will be eligible for the 25% discount on the statutory formula rate.
Whilst this is an FBT exemption that provides benefit for wage earners and employees of businesses, it can also act as part of an employee value proposition.
Small Business $20,000 Instant Asset Write-off extended to 30 June 2025
Last year’s budget was the first in many years that didn’t mention any increase to the Small Business Instant Asset Write-off. An increase to $20,000 was still legislated for another year following the budget anyway. Now the Government has moved to make the $20,000 asset write-off limit for small businesses a permanent feature.
In its current form, for small businesses with aggregated turnover under $10 million, the $20,000 threshold applies on a per asset basis, so small businesses can instantly write off multiple assets that each cost less than $20,000 excluding GST. Assets valued at $20,000 or more (which cannot be immediately deducted) can continue to be placed into the small business simplified depreciation pool and depreciated at 15 per cent in the first income year and 30 per cent each income year thereafter.
Small business dynamic PAYG instalment option
The Government will also provide $10.9 million to the Australian Taxation Office to expand its pilot of dynamic pay as you go (PAYG) instalment calculations and will expand access to monthly payments. From 1 July 2027, small and medium businesses will be able to opt in to reporting and paying PAYG instalments monthly and to using an ATO-approved calculation embedded in accounting software to calculate and vary their instalments. This will support businesses by enabling tax instalments to better reflect real-time business activity. Taxpayers with a demonstrated history of non‑compliance will be required to report and pay PAYG instalments monthly.
Research and Development (R&D) Tax Incentive
The Government is seeking to simplify and better target the R&D Tax Incentive, with a number of changes from 1 July 2028:
- Increase the offset for core R&D expenditure by around 25 to 50 per cent, through a 4.5 percentage point increase in core R&D offset rates.
- Reduce the intensity threshold from 2 per cent to 1.5 per cent, enabling more firms that engage in substantial core R&D to qualify for higher offset rates.
- Remove the eligibility of supporting R&D expenditure for the R&DTI.
- Enable growing firms to retain access to the refundable tax offset for longer by increasing the turnover threshold for the highest offset rate from $20 million to $50 million.
- For firms below the $50 million turnover threshold, maintain older firms’ eligibility for the higher offset rate while limiting refundability to firms under 10 years of age.
- Lift the maximum R&DTI expenditure threshold from $150 million to $200 million.
- Improve assurance on smaller claims by lifting the minimum expenditure threshold from $20,000 to $50,000, with research activities valued below this amount required to be undertaken with a registered Research Service Provider or Cooperative Research Centre to be eligible for the R&DTI.
Global Anti‑Base Erosion Rules (Pillar Two) Side-by-Side Package Implementation
This is for businesses that are part of a multinational group that has worldwide turnover exceeding €750 million in two of the last four years. It can include local subsidiary companies of foreign groups.
The Government will amend Australia’s global and domestic minimum tax legislation, introduced in 2024, to implement the side‑by‑side package agreed by the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting on 5 January 2026. Implementing the side‑by‑side package will ensure Australia’s global minimum tax rules are consistent with those of other implementing jurisdictions, and will deliver on the Government’s commitment to support the OECD/G20 efforts to reform the international corporate tax system.
For more information on the May 2026 Federal Budget please click here for our overview.
