Key takeaways:
- The current 50% CGT discount will remain in place until 30 June 2027
- From 1 July 2027, the 50% CGT discount will no longer apply to newly acquired CGT assets, except for new builds
- CGT assets that straddle the two periods will operate under an on-going transitional regime
- From 1 July 2027, the ability to access lower marginal tax rates on capital gains will no longer be available
- The blanket exemption for pre-CGT assets will come to an end after 42 years
Overview of CGT changes
The Government is reforming the Capital Gains Tax (CGT) system by introducing an indexation regime similar to that used between September 1985 – September 1999. From 1 July 2027, the 50% CGT discount will be replaced by cost base indexation for assets held for at least 12 months.
This applies to all CGT assets held by individuals, trusts and partnerships.
Australia had cost base indexation up to September 1999, and while the detailed information on the proposed changes hasn’t yet been released, the indexation rules are expected to be similar to the pre-1999 approach. The 50% CGT discount was introduced to encourage investment, reduce complexity in the tax system and make Australia more internationally competitive. It was envisaged that this would encourage people to invest in shares and businesses, take entrepreneurial risks and hold investments for longer.
The current Government, in returning to the pre-1999 CGT position, believes that these changes are fairer and will tax investment gains at the same rate as other income, with one concession being the allowance for inflation.
The 50% CGT discount meant that half of any capital gain was tax-free, if the asset was held for more than 12 months. The indexed cost base, on the other hand, adjusts the purchase price for inflation when calculating the capital gain.
A side effect of the 50% CGT discount is the complexity in deciding on which structures to hold assets in, given the 50% CGT discount is not available to companies. Therefore, taxpayers have been incentivised (from a CGT perspective) to hold assets in non-corporate structures, such as trusts. While the new regime is not expected to allow companies to use indexation, the proposed 30% minimum tax on discretionary trusts is likely to make structuring decisions more complex than they currently are.
While nothing has been said about the impact of indexation on capital losses, it is expected that such losses are unindexed as they were under the pre-1999 approach. This means that, if a sale price of an asset sits between its indexed and unindexed cost base, no gain or loss would arise.
Who wins or loses under the proposed changes depends on various factors including the amount of the cost base of the asset, and the rate of inflation during the holding period. One of the bigger impacts will likely be on investments in startup businesses. In many instances, founders create businesses and have nominal or no cost base in the shares in the business. After building up a business, the owner can sell out (for instance, to private equity, or on the stock exchange) and realise a large capital gain. The capital gain in many instances equates to the final selling price. Under the 50% CGT discount, half of this gain is tax-free. However, under indexation, as there is no cost base to index, almost all of the gain will be subject to CGT.
Transitional arrangements for CGT
- All CGT assets, other than new builds, will be subject to either the old regime, the new regime or the transitional regime. CGT assets sold before 1 July 2027 (‘old regime’)
All eligible CGT assets: no changes in the current CGT treatment (50% CGT discount fully available) - CGT assets acquired from 1 July 2027 (‘new regime’)
CGT assets acquired from 1 July 2027 (other than new builds) will be treated fully under the new regime (cost base indexation and a minimum tax rate of 30% on real capital gain) - CGT assets acquired before 1 July 2027 and sold after 1 July 2027 (‘transitional regime’)
CGT assets acquired before 1 July 2027 but sold after 1 July 2027 will be taxed under a transitional regime under which:- for the portion of the gain made pre-1 July 2027: the 50% CGT discount will apply to the difference between the asset’s cost base and its value at 1 July 2027 and taxed at marginal rate
- for the portion of the gain made post-1 July 2027: indexation will be used to calculate the capital gain accruing from 1 July 2027 (using the asset’s value at 1 July 2027 as the asset’s cost base) and the gain will be taxed at a minimum of 30%.
An asset’s value at 1 July 2027 will be determined by taxpayers who will be able to:
- seek a valuation of the asset as at 1 July 2027 (e.g., using quoted prices for assets such as shares); 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.
30% minimum tax on capital gains
From 1 July 2027, a 30% minimum tax rate will be imposed on capital gains, regardless of the taxpayer’s marginal tax rate for the income year. This measure is related to the 30% minimum tax rate applied to discretionary trusts and is expected to operate in a similar fashion when trusts make capital gains.
This measure will operate alongside changes to the CGT discount and the reintroduction of CGT cost base indexation, as noted above.
Together, these changes form part of a range of new measures that reduce concessions and strategies previously available to taxpayers. The introduction of a 30% minimum tax rate on capital gains undermines the established strategy of deferring sales of CGT assets to years where taxpayers anticipated lower marginal tax rates.
Income support recipients (including pensioners) will be exempt from the 30% minimum tax rate to ensure low income and low wealth taxpayers are not disadvantaged. Gains made by such taxpayers would continue to be taxed at their marginal tax rate.
New builds
As part of the Government’s policy to encourage new builds of residential properties, investors who invest in new builds, even after the new regime commences on 1 July 2027, will be able to choose the 50% CGT discount regime or the new Indexation regime on the full gain.
The definition of new builds is the same as that in the negative gearing measures. Example: Investment property vs new build
Consider a taxpayer who purchases an investment property for $1,000,000 on 1 July 2028.
On 1 July 2033, she sells the property for $1,500,000 – making a nominal gain of $500,000.
As the property was purchased after 1 July 2027, her capital gains are subject to the new regime. Assuming an inflation rate of 2.5% per year, the indexed cost base of the investment property is calculated to be $1,131,408 (using compounding).
The taxpayer’s capital gain under cost base indexation is therefore the difference between the sale price of $1,500,000 and the indexed cost base of $1,131,408, which is $368,592.
In comparison, if the investment property was a new build, the 50% CGT discount could apply to reduce the nominal gain of $500,000 to $250,000. This is $118,592 lower and would be taxed at marginal rates, as opposed to a minimum 30% rate.
Pre-CGT
Where assets acquired before 20 September 1985 (‘pre-CGT assets’) are sold, or are subject to another CGT event, before 1 July 2027, the legacy rules will continue to apply and provide an exemption from CGT (subject to some existing exceptions).
Where they are held beyond this date, such CGT assets will effectively have their cost base ‘reset’ based on their value at 1 July 2027. Taxpayers can either seek a valuation of the assets at this date or use specified methodologies that will be made available by the ATO.
From that point, capital gains will be calculated based on the increase in value from 1 July 2027 until the date of any future CGT event (e.g., sale) and will be subject to the other new CGT measures such as indexation of cost base and the minimum 30% tax rate.
An example of how this could operate in practice is as follows:
| Original purchase date | 1 January 1983 (i.e. asset purchased pre-1985) |
| Original purchase cost | $50,000 |
| Market value at 1 July 2027 | $800,000 (Capital gain of $750,000 up to 1 July 2027 is exempt) |
| Sale date | 30 June 2030 |
| Sale price | $1,000,000 |
| Capital Gain | ($1,000,000 – $800,000 cost base indexed from 1 July 2027 to 30 June 2030) |
Related budget analysis
