The 2026 budget makes fundamental changes to the CGT regime which will alter how people evaluate investments, especially property given the changes to negative gearing which are discussed in a separate article.  

From 1 July 2027: 

• a 30% minimum tax on capital gains will apply to gains accruing after 1 July  
• pre-CGT assets (assets acquired before 20 September 1985) will be subject to CGT on gains post 1 July 2027, and 
• the 50% CGT discount will be replaced by indexation of the cost base.  

How will this apply? 

All these changes require a measurement of the value of an asset on 1 July 2027. This will require all investors to either: 

• obtain market valuations as of 1 July 2027, or 
• use a specified apportionment formula that estimates the asset’s value on 1 July 2027, based on its growth rate over the asset’s holding period. The ATO will provide tools to estimate this value for taxpayers. 

Will these changes affect all assets? 

No. To support housing supply, new residential properties will be able to choose between utilising: 

• the 50% discount or  
• cost base indexation and a 30% minimum tax on capital gains 

New builds are residential properties which genuinely add to supply. This will include:  

• dwellings constructed on vacant land, or  
• where existing properties are demolished and replaced with a greater number of dwellings.  

Knock-down rebuilds or substantial renovations that do not increase supply will not be eligible. 

A new build cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months. 

How will these measures be applied? 

Assets sold before 1 July 2027 are subject to the existing rules.  

Assets purchased on or after 1 July 2027 will be subject to the new rules. 

Assets purchased before 1 July 2027 but sold after 1 July 2027 will be subject to the existing rules for gains accruing to 1 July 2027 and the new rules for gains accruing after 1 July 2027.

Will it affect everyone? 

Recipients of means-tested income support payments, such as the Age Pension or JobSeeker, will be exempted from the minimum tax if they receive any payment in the financial year in which they realise the capital gain.  

Why change from the 50% discount to indexation? 

Capital gains are taxed concessionally compared to salary and wage income as the gain accrues over time, partly reflecting inflation, and the gains are only assessed when realised which can result in people being pushed into the next marginal tax bracket.  

Taxing 50% of the gain was not based on science, rather it was a quick and easy solution to replace the original indexation method of adjusting cost base for inflation, which was seen as complicated at the time. With automation advances indexation is no longer seen as complicated and is also seen as providing a more accurate method of calculating the real gain to be taxed.  

What is indexation?

Indexation of the cost base, like the 50% discount, is only available for assets that have been held for more than 12 months. Indexation is applied to the cost base – but not the step 3 ownership costs, for example, capital repairs. 

The cost base is multiplied by the indexation factor which is CPI when sold divided by the CPI when bought.  

The capital gain is then calculated as the sale proceeds less the indexed and unindexed cost base. Indexation cannot be used to generate a capital loss.  

What is the impact of indexation? 

It is unclear whether this change will result in revenue flowing into government coffers. A Parliamentary Budget Office paper notes that estimates are “highly sensitive to assumptions around future growth in CPI and asset prices, and the timing of asset purchases and sales” .

It is also unclear whether this change will improve intergenerational equity as older people may hold onto assets that deliver income rather than capital growth.  

This change may, however, change perceptions of fairness of the tax system. 

Indexed cost base compared to 50% discount of the gain? 

Whether indexation of the cost base provides a better/worse outcome than a 50% discount of a capital gain depends on growth rate of the asset, how long the asset has been held, and the inflationary environment.  

Broadly, but not in all cases: 

• In high inflation environments indexation provides a better result, while in low inflation environments the 50% discount on the gain provides a better result. 
• If an asset is a high growth asset, for example most hope that employee share schemes in starts ups will be, then the 50% discount of the gain provides a better result. Low or inflation paced growth assets, such as blue-chip investments, benefit the most from indexation of the cost base.  
• The longer you hold an asset the greater the proportion of the growth relates to inflation so indexation provides a better result. 

Will indexation apply to all assets and all taxpayers? 

Not all assets and taxpayers are affected by this change. There are specific carve outs for: 

• Superannuation funds – they will continue to have access the one third discount that results in a 10% tax on capital gains for assets not supporting pensions 
• New builds  

The remaining CGT exemptions and concessions remain unaffected, such as the CGT exemption for main residences, the four small business CGT concession and the 60% CGT discount applying to qualifying affordable housing.