What was announced?
The Budget announces the end of the 50% CGT discount for individuals and trusts, replaced by cost base indexation and a 30% minimum tax rate on capital gains for assets held over 12 months, from 1 July 2027. Importantly, pre-CGT assets (acquired before 20 September 1985) will no longer be fully exempt if sold after 1 July 2027 – only their post 1 July 2027 capital growth will be taxed, with any earlier gain still exempt. The reforms are prospective and not yet law, pending legislation and possible refinements.
Under current law, individuals and most trusts pay tax on only half of a long-term capital gain on assets held for more than 12 months. Pre-1985 assets are currently fully exempt from CGT when sold. However, the 2026 Federal Budget proposes to fundamentally overhaul these settings from 1 July 2027 as follows:
- 50% discount abolished – the 50% CGT discount will cease to apply for disposals on or after 1 July 2027. There is no apportionment contemplated, the discount will simply no longer be available. Instead, cost base indexation will be used, akin to the method in place before 1999. This means taxpayers will only be taxed on “real” capital gains, with their asset’s cost base uplifted by CPI inflation from acquisition to the date of sale. Please note, the government has allowed a choice, only for investors in new residential, to apply either the 50% CGT discount or indexation.
- 30% minimum tax rate on gains – a floor tax rate of 30% on real capital gains accruing after 1 July 2027 will apply to individuals, trusts, and partnerships. If a taxpayer’s marginal rate on the gain is below 30%, they will still pay 30% on that gain through a top-up tax, ensuring no large capital gain slips out at minimal tax. However, recipients of means-tested income support (like Age Pension) are exempt from this 30% minimum if they receive a payment in the year of the sale.
- Pre-CGT assets no longer exempt – for the first time since CGT was introduced in 1985, assets acquired before 20 September 1985 (“pre-CGT assets”) will come within the CGT regime for disposals after 1 July 2027. Crucially, only the capital growth that happens after 1 July 2027 would be taxable that is, the gain accrued before that date remains exempt, preserving the benefit for past appreciation.
The proposed changes broadly cover all CGT assets held by individuals, trusts, and partnerships for more than 12 months (including property, shares, business assets, etc.). Companies and superannuation funds are not directly affected (companies already have no discount and pay 30% tax on gains; super funds’ one-third discount is not addressed in this measure). Main residences remain fully exempt from CGT, and current small business CGT concessions are unchanged.
The Government’s stated rationale is to improve tax fairness and economic efficiency. Returning to indexation is meant to tax only real investment gains and avoid over/under taxing of inflationary gains. The 30% minimum CGT rate is intended to curb tax-motivated timing of asset sales (e.g. realising gains in low-income years) and ensure high-wealth individuals pay at least a 30% rate on their profits. Additionally, by limiting investor tax advantages, these reforms, together with the proposed negative gearing changes, are aimed at levelling the playing field for first home buyers and moderating speculative pressures in the housing market.
Who could it affect the most?
Individual investors and family groups who hold investment assets such as rental properties, shares, or business assets in a trust and who plan to realise capital gains after 1 July 2027 will be affected. High-income investors will face larger tax increases on their gains. Trust structures commonly used by family businesses or investors will also be affected, as trusts generally pass capital gains through to beneficiaries who currently benefit from the 50% discount. In this scenario, a higher proportion of gains will be taxed under the proposed changes. Pre-CGT assets will, for the first time since the introduction of CGT, be brought to tax where disposals occur on or after 1 July 2027. However, subject to transitional provisions, CGT, thankfully, is only expected to apply on the growth in value after 1 July 2027.
Companies (other than base rate entity’s paying tax at 25%) are unaffected by this change as they do not currently access the CGT discount and already pay full tax on any capital gains. Superannuation funds (which currently have a one-third discount) are not mentioned in the measure presumably, their 33.3% CGT discount remains unchanged. Additionally, for assets disposed before 1 July 2027, the 50% CGT discount will continue to be available.
Practical implications for affected taxpayers
Given the depth of the proposed changes, the CGT implications are expected to vary depending upon when the CGT asset was acquired and when the capital gain ultimately occurs.
Transitional rules for assets held at 1 July 2027 (including pre-CGT assets):
- Taxpayers will need to establish the market value of the asset at 1 July 2027.
- This value becomes the starting cost base for the proposed new regime.
- Any increase in value after that date will be:
- adjusted for inflation using CPI (cost base indexation); and
- taxed at the taxpayer’s marginal rate, subject to a 30% minimum tax.
Taxpayers will be able to determine the 1 July 2027 value by either:
- obtaining a market valuation, or
- using an ATO approved apportionment method (with tools to be provided by the ATO)
30% minimum tax – applying to real capital gains arising after 1 July 2027:
- If a taxpayer’s marginal tax rate on the gain is below 30%, a top up tax will apply so the effective rate is 30%.
- If their marginal rate is above 30%, the higher rate applies as normal.
- Recipients of means tested income support will be exempt from the minimum tax if they receive a payment in the year the gain is realised.
Worked Example
Let’s say hypothetically, Emma purchased an investment property in 1984 for $100,000. The property’s market value as at 1 July 2027 is $1,000,000. Emma decides to sell the property in August 2028 for $1,100,000. CPI inflation between July 2027 and sale is 5% and Emma’s marginal tax rate is 47%.
Current law
If sold before 1 July 2027, the property is a pre CGT asset and the entire capital gain is exempt.
Proposed law
If sold after 1 July 2027, the proposed transitional approach would apply to not tax the increase in value from its original cost of $100,000 in 1984 to its market value of $1,000,000 on 1 July 2027. The CGT calculated on sale of the property in August 2028 is calculated as follows:
1 July 2027 cost base = $1,000,000 index at 5% = $1,050,000
Sale proceeds = $1,100,000 – $1,050,000 = $50,000 capital gain @ 47% marginal rate = $23,500.
Note: if Emma’s marginal tax rate was 15% her capital gain would be $7,500 but, under the new rules, would require a ‘top-up’ of an additional 15% to ensure the 30% minimum tax is paid. This would bring Emma’s total CGT impost to $15,000.
For investors and family businesses, this change will increase the CGT on the sale of real estate, shares, and other investments held by individuals or through trusts. Professional commentary has raised that it will narrow the tax advantage of long-term investment significantly, especially in high-growth assets. The complexity of administering two sets of CGT rules over time will also prove challenging. The ATO has indicated it will issue guidance on how to track assets acquired before and after 1 July 2027 to ensure taxpayers apply the rules correctly.
What’s next?
With these changes largely prospective in nature and still subject to legislated being drafted, there’s no immediate need to rush to sell assets. For now, the key step is to stay informed and plan instead of panic. Until the law is settled, any structural changes to rearrange asset holdings are premature but planning for potential outcomes is prudent. Moore Australia will continue to monitor these developments and provide guidance to help taxpayers navigate the new tax rules with confidence and clarity.
