Chartered Accountants Australia and New Zealand (CA ANZ) has lodged a submission on the draft legislation and explanatory materials for Tranche 2 capital gains tax (CGT) and negative gearing reforms.

While supporting the Government’s commitment to tax reform, CA ANZ has raised concerns about the tight implementation timeframe. Significant work remains to finalise legislation, issue ATO guidance, update systems and develop compliance tools before the proposed 1 July 2027 commencement date. The managed funds industry is expected to face particular challenges due to the extensive system changes required to accommodate the CGT reforms.

Key CGT issues

CA ANZ notes that further legislation is still required to address several complex areas, including mixed resident status, CGT rollovers and deceased estates.
The submission also identifies a range of technical issues affecting trusts and managed investment trusts (MITs), including:

• the treatment of trusts that have other trusts, rather than individuals, as beneficiaries
• interactions between indexed capital gains and CGT event E4
• uncertainty regarding affordable housing concessions for MITs that are public unit trusts
• the need for additional guidance on applying the new rules through chains of trusts.

Review of proposed apportionment method

A key concern raised in the submission is the proposed methodology for apportioning capital gains between pre and post-1 July 2027 periods where taxpayers do not obtain a market valuation.

CA ANZ argues that the proposed compounding growth formula may disadvantage taxpayers who cannot afford professional valuations because it generally allocates a greater proportion of gains to the post-1 July 2027 period. This results in more gains being taxed under the indexation regime rather than benefiting from the 50 per cent CGT discount.

The submission recommends Treasury consider a simpler straight-line methodology, supported by safe harbours for small taxpayers. CA ANZ says this approach would be easier to understand, reduce compliance costs and produce fairer outcomes, particularly where significant capital improvements have been made before 1 July 2027.

New residential dwelling rules

CA ANZ welcomes greater certainty around the proposed definition of a new residential dwelling and supports the introduction of four alternative tests for determining eligibility. However, it says further guidance is needed for mixed-use properties and buildings that retain residential characteristics while being used for commercial purposes, such as heritage terraces converted into offices.

CA ANZ is concerned about as the breadth of the proposed anti-avoidance rule, recommending the rule be based on a principal or dominant purpose test and that the Commissioner be given discretion to address inadvertent breaches.

Negative gearing

The submission highlights the need for clarification about the interaction between the new residential dwelling rules and the vacant land provisions.