08/12/2025 • 17 min read
Federal Budget 2026: SME Tax Changes Preview
Federal Budget 2026: SME Tax Changes Preview
Australian SMEs should plan now for the Federal Budget 2026 because the most likely “on the horizon” tax changes are not new headline rates, but tighter compliance and integrity measures (especially around small business CGT concessions, Division 7A, trust distributions, and deductions), continued ATO data-matching and enforcement, and possible re-shaping of small business depreciation and energy/investment incentives as temporary measures expire. From an Australian accounting practice perspective, the practical risk for 2026–27 is that cash tax outlays and audit exposure increase unless SMEs proactively clean up governance, substantiation, and entity-structure settings during the 2025–26 year.
What is a “Federal Budget 2026 preview” for SMEs, and why does it matter now?
A “Federal Budget 2026 preview” is a forward-looking assessment of plausible tax and compliance settings that may be announced in the 2026 Budget and then apply from Budget night, from 1 July 2026, or later start dates. It matters now because SME decisions being made in the 2025–26 year (asset purchases, entity changes, trust resolutions, dividend policies, R&D claims, contractor engagements, and property transactions) can lock in outcomes before any new integrity rules commence.
- The ATO’s sustained focus on small business tax compliance and the “tax gap”.
- Integrity measures historically targeting concessions where evidence is weak (CGT concessions, Division 7A, trust allocations, personal services income, and deductions).
- Ongoing digitisation and third‑party reporting expansion (banking, payment platforms, payroll, e‑invoicing).
Which SME tax changes are most likely in Federal Budget 2026?
The most likely SME-related tax developments in Budget 2026 fall into four categories: integrity, incentives, administration, and targeted relief. While the exact design cannot be confirmed before Budget release, these areas align with recurring ATO and Treasury focus.
1) Will there be further tightening of small business CGT concessions?
- Whether the entity is a “CGT small business entity” or satisfies the maximum net asset value test.
- Whether the asset is an “active asset”.
- Whether significant individual and participation percentage tests are met.
- Stronger substantiation and record-keeping expectations.
- Additional integrity rules to prevent “manufactured” eligibility shortly before sale.
- Administrative changes increasing ATO review activity pre- and post-lodgment.
- A family company sells a business premises used partly by a related entity. The SME expects the 15-year exemption. The ATO review risk increases if there is weak evidence of continuous active use and unclear related-party leasing terms. In 2025–26, the safest approach is to assemble contemporaneous evidence (leases, board minutes, business use records) and test eligibility early, not after signing heads of agreement.
- The ATO’s published guidance on small business CGT concessions and private ruling mechanisms should be used where facts are borderline. Consideration must be given to the statutory tests in ITAA 1997 Div 152.
2) Could Division 7A be reformed again (or policed harder)?
Stronger enforcement is highly likely, and technical reform remains possible given Division 7A’s ongoing complexity and frequent errors in SME groups with private companies. Division 7A is contained in Part III Division 7A of the Income Tax Assessment Act 1936 (ITAA 1936) and can treat certain loans, payments and debt forgiveness to shareholders/associates as unfranked dividends unless strict rules are met.
- Expanded audit and data-matching activity.
- ATO focus on “back-to-back” arrangements and unpaid present entitlements (UPEs) and related-party financing (depending on fact pattern and current ATO positions).
- A trading company pays personal expenses for a director and posts it to “Shareholder Loan”. If minimum yearly repayments (MYR) are missed or the agreement is not compliant, Division 7A exposure can arise. For 2025–26 planning, SMEs should adopt a disciplined process: compliant loan agreements, MYR schedules, and timely repayments—then document board decisions.
- Division 7A is legislated in ITAA 1936 and ATO guidance should be applied to ensure loan agreements, interest rates, and repayment timing align with requirements.
3) Are deductions and substantiation likely to come under more pressure?
- ATO guidance refreshes and targeted programs.
- Increased reliance on third-party data and anomaly detection.
- Deductions generally require a sufficient nexus to assessable income and are denied to the extent they are private or domestic under ITAA 1997. Substantiation rules apply to particular categories such as travel and car expenses.
- The ATO’s guidance on record keeping and work-related expenses is routinely updated and is used as the audit benchmark.
- An SME claims “marketing” for influencer spend, but the invoices and deliverables are unclear. Under enhanced review settings, the risk is not only denial of deduction but penalties for lack of reasonable care. The fix is operational: require compliant tax invoices, contracts, and evidence of business purpose.
4) Will investment incentives (instant asset write-off style measures) return or change?
A redesigned investment incentive is possible, particularly if government policy seeks productivity uplift, energy transition, or resilience for SMEs. However, the key practical planning issue is volatility: many write-off style rules are time-limited and threshold-based.
- Ensure asset registers and depreciation schedules are accurate.
- Maintain purchase/installation dates, taxable purpose evidence, and financing documentation.
- Model whether accelerated deductions cause later cash-tax spikes.
- Depreciating asset rules sit in ITAA 1997 Div 40 and related provisions. Temporary incentives are often implemented through amendments with specific start/end dates.
5) Could there be further changes to GST and BAS administration?
- Correctness of GST classification and tax invoice integrity.
- Increased data matching from payment platforms and e‑commerce.
- Enhanced focus on GST fraud and phoenixing behaviours.
- GST law is primarily in A New Tax System (Goods and Services Tax) Act 1999. The ATO’s GST rulings and determinations provide binding views on specific issues and are frequently relied upon in disputes.
- A construction SME with mixed taxable and input-taxed supplies misclassifies GST on progress claims. A compliance uplift in 2026–27 could convert “small BAS errors” into persistent audit adjustments. The solution is to implement GST mapping controls and periodic BAS reconciliations.
How should SME owners plan in 2025–26 to be “Budget 2026 ready”?
SMEs should act as though compliance expectations will rise, because that is the most consistent direction of travel. From an accounting practice perspective, the most effective preparation steps are operational, not speculative.
- Finalise trust distribution minutes and beneficiary reporting processes early.
- Formalise related-party arrangements (leases, management fees, inter-entity loans).
- Keep contemporaneous evidence for deductions (contracts, invoices, logbooks).
- Small business CGT concessions (Div 152) readiness if a sale is possible in the next 24 months.
- Division 7A exposure scan: loans, payments, company-paid expenses, UPEs, forgiveness, and refinancing.
- Faster, more reliable month-end close reduces BAS and year-end errors that become audit flags.
- Practical KPI target: close and reconcile key accounts monthly, not annually.
- Model outcomes with and without accelerated deductions.
- Test debt covenant and dividend capacity if tax payments increase.
How do compliance pressures intersect with “AI accounting software Australia” and automation?
The strongest structural trend is that ATO enforcement is increasingly data-led, so SMEs and practices need faster, cleaner data and stronger audit trails. This is where AI accounting software Australia and accounting automation software materially changes risk and profitability.
- Faster reconciliation reduces “suspense clean-up” at year-end (a common audit trigger).
- Structured working papers reduce the chance of missing Division 7A, GST, or trust issues.
- Consistent mapping and GST enforcement reduces BAS rework.
How can MyLedger help practices respond to Budget 2026 risk (vs Xero, MYOB, QuickBooks)?
MyLedger is designed for Australian accounting practices facing rising compliance and margin pressure, and it directly targets the biggest practical issue with Budget-driven integrity measures: time and evidentiary quality.
- Automated bank reconciliation:
- AI-powered reconciliation (AI auto-categorisation):
- ATO integration accounting software:
- Automated working papers:
- Pricing model for practices:
- When integrity rules tighten, the cost is in review time, not in software subscription alone.
- A platform that reduces reconciliation time by ~85% overall and enables handling ~40% more clients without additional staff directly offsets the compliance uplift.
What are practical examples of “Budget-style” integrity issues SMEs should fix now?
These are the recurring issues that become expensive under tighter review settings:
- Division 7A: company-paid private costs, undocumented loans, missed MYR, or “parking” balances in shareholder loan accounts.
- Trust distributions: late or inconsistent resolutions; beneficiary reporting mismatches.
- GST classification: mixed supplies, adjustments, and incomplete tax invoices.
- Contractor vs employee risk: PAYG withholding and superannuation guarantee exposure if classification is wrong.
- Motor vehicle claims: logbook quality and private use adjustments.
- Small business CGT concessions: active asset evidence, turnover/net asset tests, and related-party complexities.
How should accounting firms communicate Budget 2026 uncertainty to SME clients?
The correct professional posture is to separate “law as enacted” from “policy risk” and document advice accordingly.
- Confirm current law position with legislative references (ITAA 1997, ITAA 1936, GST Act).
- Identify areas historically targeted by integrity measures (CGT concessions, Division 7A, deductions).
- Agree an action plan focused on evidence, governance, and month-end controls.
- Consider ATO private rulings for high-value uncertain positions.
It should be noted that budget announcements may include start dates that apply from Budget night, from 1 July, or transitional rules. Engagement letters and scopes should explicitly address this uncertainty.
Next Steps: How Fedix can help your practice get Budget 2026 ready
Fedix supports Australian practices preparing for higher compliance expectations by reducing manual work and improving audit-ready outputs.
- Standardise monthly close using MyLedger automated bank reconciliation (10–15 minutes per client vs 3–4 hours).
- Implement BAS reconciliation and GST enforcement workflows to reduce rework and ATO exposure.
- Automate Division 7A schedules and MYR tracking to prevent inadvertent deemed dividends.
- Use automated working papers to create consistent evidence packs for reviews and year-end.
Learn more at home.fedix.ai and consider piloting MyLedger on a subset of SME clients so your team can quantify time saved and error reduction before the 2026–27 year.
Conclusion: What should SMEs and practices do before Budget 2026?
The most defensible Budget 2026 preparation is to assume increased integrity focus and to “bulletproof” the areas that routinely fail under review: CGT concessions evidence, Division 7A discipline, deduction substantiation, and GST classification. Practices that adopt AI-powered reconciliation and automated working papers—particularly with ATO-integrated workflows—will be better positioned to maintain margins while meeting higher client expectations and ATO scrutiny.
Disclaimer: Tax laws and ATO administrative positions are complex and subject to change, including through Budget announcements and subsequent legislation. This content is general information for Australian accounting professionals and should not be relied on as legal or tax advice for specific circumstances. Consider obtaining tailored advice and, where appropriate, an ATO private ruling.