Major tax reform and spending cuts: What you can expect in this year's 'ambitious' federal budget

Incoming changes to negative gearing, the capital gains tax (CGT) discount and trusts will have a one-year grace period as the federal government prepares to defend a broken election promise.

Treasurer Jim Chalmers has pledged to deliver an "ambitious" set of reforms today in the face of global conflict and rising inflation, which he said are holding the economy "hostage".

The budget will contain three central packages — tax reform, savings, and productivity and investment — that are set to address intergenerational inequity issues and make systems fairer for younger people.

Here is what you can expect when Chalmers delivers one of the most significant budgets in decades tonight.

BUDGET LIVE UPDATES: Negative gearing changes expected within hours

Changes to property tax benefits

Changes to the CGT discount, negative gearing and trusts are all but confirmed to be included in the budget.

Prime Minister Anthony Albanese, who promised not to reform those policies during last year's election campaign, is defending the incoming changes as the "right decision is to do the right thing with the right policies".

"People are frustrated. Issues like intergenerational equity. People are worried that younger Australians are never going to get a crack at home ownership," he told the ABC.

"And that's not just the young people themselves, of course, that's their parents and their grandparents."

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It's unclear how the government will change the trio of tax benefits, whether it will include winding them back, grandfathering the provisions or limiting their usage.

The Australian Financial Review reported the changes, whatever they are, will not take effect until July 2027 in order to prevent a surge of buyers.

Critics have blamed the combination of the CGT discount and negative gearing for contributing to the housing crisis, with a Greens-led Senate inquiry earlier this year finding they are flawed and benefit investors over first-home buyers.

An Oxfam report earlier this year found nearly half the beneficiaries of the CGT discount were 24,000 of Australia's richest people.

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The government hasn't confirmed the changes, but has repeatedly failed to rule them out when given the chance, with Chalmers and Albanese instead saying the budget will tackle intergenerational unfairness in the tax system and housing market.

"We've also got serious challenges in the housing market when it comes to how difficult it is for people, particularly young people, to get a toehold in the market," Chalmers said.

If reformed, it would be the first time the CGT discount is rolled back since the Howard government raised it to 50 per cent in 1999 and the first time negative gearing is changed since it was temporarily limited by the Hawke/Keating government in 1987.

In his pre-budget speech in March, Chalmers said the tax reform package would also make the system simpler and sustainable and drive business investment but only "if we can afford to".

"How much of that we can do in May depends a bit on fiscal considerations, international developments, and also, of course, cabinet deliberations," he said at the time.

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$300 more back at tax time

The Australian has reported the federal government will offer taxpayers an earned income offset, which could see people paying between $200 and $300 less at tax time this year.

The report framed the offset as a one-off cost-of-living relief measure, rather than an ongoing offer.

Albanese has refused to confirm whether the offset will be included in the budget.

"It's a whole lot of speculation out there in budgets and that's what happens. Some of it right, some of it's wrong," he said last week.

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Big savings

In a press conference with Finance Minister Katy Gallagher, Chalmers said the budget would be more concentrated on responsible spending and savings than the anticipated tax reforms.

"What you will see in the budget is, in gross terms, there will be more dollars in savings than dollars in revenue upgrades. There will also be more dollars in savings than dollars in tax reform," he said last week.

"The point that I'm making there is that savings and spending restraint is doing a lot of the heavy lifting in the very responsible budget that Katy and I will hand down."

Gallagher said the budget will include savings from every government department, with savings already identified in defence, NDIS and external labour.

"This is essentially extending the existing savings measure we have put in place in previous budgets, and it will also have significant savings from unallocated funding across a number of departments," she said.

The Australian Financial Review reported the public service is facing sweeping job cuts, with thousands of positions to be lost under the budget's spending cuts.

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EV tax breaks wound back

Chalmers and Energy Minister Chris Bowen last week announced they will wind back the electric vehicle fringe benefits tax (FBT) discount from April 2027 in a move estimated to create $1.7 billion in savings over five years.

"The current New Vehicle Efficiency Standards has seen a dramatic increase in the availability of affordable EV models, and now is the right time to focus the FBT exemption on these cars," they said in a joint statement.

"The new rules will encourage manufacturers to offer more affordable and cheaper to run EVs in the Australian market."

From April 2027, the full discount will only apply to electric vehicles costing $75,000 or less.

Electric vehicles costing more than $75,000 but less than the luxury car tax threshold will receive a 25 per cent discount on their tax.

From April 2029, all electric vehicles below the luxury car threshold will receive the 25 per cent discount.

The changes come after the popular policy caused a surge in electric vehicles on Australian roads and cost the budget $1.4 billion in 2025-26, up from the initial $90 million forecast.

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NDIS cuts

Health Minister Mark Butler announced $15 billion would be cut from the National Disability Insurance Scheme (NDIS) over the next four years to clamp down on ballooning costs and prevent it from becoming "an ATM for shonks, grifters, fraudsters and crooks".

Changes include tighter criteria, standardised and evidence-based assessments, fraud prevention and reduced spending on social and community participation per participant and daily activities.

Initial modelling shows the changes will reduce the number of people on the NDIS from 760,000 to 600,000 by the end of the decade.

"It costs too much and is growing too fast," Butler said in April.

"We can't afford for the NDIS to continue growing at its current rate."

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Defence boost

Defence will receive an additional $53 billion over the next decade, increasing spending to 3 per cent of Australia's GDP by 2033 under the NATO methodology.

US President Donald Trump has been pressuring Australia and NATO countries to raise their defence spending, complaining that the US does a lot of the heavy lifting.

The funding boost, announced last month by Defence Minister Richard Marles, was partly paid for by the sale of military land and will deliver greater warfare capabilities, systems and communications.

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Rail line between Sydney and Canberra

An extra $100 million will be provided for upgrades to the rail line between Sydney and Canberra.

The federal government will foot half the bill, while the NSW and ACT governments contribute $25 million each.

There will be about five years of ongoing upgrades, including investigations into new express services, new boom gates and lights at level crossings, improvements to track alignments and turnouts and station and stabling improvements.

The 321-kilometre corridor includes the Sydney Trains-operated line between Sydney Central station and Macarthur, the Southern Line through the Southern Highlands to Goulburn, and the Country Regional Network branch line into Canberra.

The government has previously set aside almost $2.8 billion for the rail network and building a high-speed rail between Newcastle and Sydney.

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Cheaper fuel

The federal government halved the fuel excise and removed the Heavy Vehicle Road User Charge from April 1 to June 30 to provide some relief for motorists facing soaring fuel costs, which will be funded in the budget.

The measure was estimated to reduce fuel costs by 26.3 cents per litre and almost $19 on a 65-litre tank.

The Australian Competition and Consumer Commission is monitoring fuel prices across the country to ensure the cost savings are being passed on.

Chalmers has ruled out extending the fuel excise cut and the removal of the Heavy Vehicle Road User Charge after June.

More announcements

• $10 billion fuel security package to boost the national stockpiles by more than 10 days, extra storage facilities and a study into expanding the country's fuel refining capabilities.
• $1.8 billion over five years to make Medicare Urgent Care Clinics permanent.
• An additional $25 billion for public hospitals in the new five-year National Health Reform Agreement.
• $74 million over two years to set up a national centre to fight terrorism and online threats.
• $500 million to speed up housing approvals through environmental law reforms.
• $1000 instant receipt-free tax deduction for work-related expenses for about 6.2 million workers.
• Reducing the private health insurance rebate for those over 65 to the same level as everyone else.
• New Payday Super rules mandating employers to pay superannuation at the same time as salary and wage payments will come into effect from July 1.

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