The Federal Government has begun introducing legislation to enact a number of tax changes announced in the May Federal Budget. The first bills introduced into Parliament cover proposed changes to the capital gains tax discount, negative gearing, the $1,000 standard tax deduction, and the Working Australians Tax Offset.
However, several important details remain unresolved. At this stage, legislation relating to the proposed minimum 30% tax rate on trusts has not yet been released. In addition, any proposed capital gains tax carve-out for start-ups has not been included in the current bill.
For investors, retirees, business owners and families with long-held assets, these changes may have significant implications for future tax planning, investment decisions and asset sale strategies.
Why the Changes Matter
The proposed reforms represent a major shift in how capital gains may be taxed in Australia.
Under the current system, individuals and trusts are generally entitled to a 50% capital gains tax discount where an eligible asset has been held for more than 12 months. This has provided a relatively simple and well-understood framework for investors.
Under the proposed new system, from 1 July 2027, the existing 50% CGT discount would be replaced with an inflation-adjusted method for newly acquired assets. Rather than automatically discounting a capital gain by 50%, the cost base of an asset would be indexed for inflation, with tax then applying to the remaining real gain.
In simple terms, the new system is designed to tax gains above inflation, rather than gains that are merely the result of rising prices over time.
While this may benefit investors whose assets have only grown in line with inflation, it may result in higher tax for investors whose assets have produced strong real returns.
Key Areas Still Unclear
Although legislation has now been introduced for some of the proposed tax measures, a number of practical issues remain unresolved.
Two of the most important areas yet to be finalised are:
- How gains will be apportioned for assets held across both tax systems
Investors who already own assets before 1 July 2027 may need to calculate part of their gain under the current 50% discount system and part of their gain under the new inflation-adjusted system. The exact methodology for this apportionment has not yet been confirmed. - The definition of “new residential dwellings”
New residential dwellings are expected to receive more favourable treatment, including the ability to retain negative gearing and potentially choose between the old and new CGT discount methods. However, the precise definition of what qualifies has not yet been provided.
These details are expected to be addressed later through legislative instruments. This means the final practical application of the rules may not be known until after the main legislation has progressed further.
How the New CGT Discount System Would Work
From 1 July 2027, assets acquired after that date would be subject to the new inflation-adjusted CGT regime.
Under this method, the original cost base of the asset is adjusted for inflation over the ownership period. The investor is then taxed on the difference between the sale proceeds and the indexed cost base.
This means the taxable capital gain will depend on:
- the original purchase price;
- the sale price;
- how long the asset was held;
- inflation over the ownership period;
- the investor’s marginal tax rate; and
- whether the 30% minimum tax floor applies.
Example 1: Shares Purchased and Sold After 1 July 2027
Todd purchases shares in an ASX-listed company on 1 April 2028 for $10,000. He sells the shares on 31 August 2030 for $15,000.
Because the shares were purchased after the proposed new CGT regime begins, the inflation-adjusted method would apply.
Assuming the indexed cost base is $11,000, Todd’s taxable capital gain would be:
- Sale proceeds: $15,000
- Indexed cost base: $11,000
- Taxable capital gain: $4,000
If Todd is taxed at the top marginal tax rate of 47%, including Medicare levy, the tax payable on the capital gain would be $1,880.
Under the current 50% CGT discount system, only half of the $5,000 gain would be taxable. This would have resulted in a taxable gain of $2,500 and tax of $1,175.
In this example, Todd would pay more tax under the proposed new system because the asset produced a strong return above inflation.
Example 2: Retiree Selling Shares After 1 July 2027
Sally also purchases shares for $10,000 on 1 April 2028 and sells them on 31 August 2030 for $15,000.
As with Todd’s example, the indexed cost base is assumed to be $11,000, resulting in a taxable capital gain of $4,000.
Sally is retired in the year of sale. She receives $14,000 of investment income and a tax-free pension from her superannuation fund of $80,000.
Ordinarily, Sally’s taxable income would be below the tax-free threshold. However, under the proposed new regime, a minimum 30% tax floor would apply to the capital gain.
As a result, Sally would pay tax of $1,200 on the $4,000 capital gain.
Under the current 50% CGT discount system, Sally may have paid no tax, as her total taxable income would have remained below the tax-free threshold.
This is an important change for retirees. The proposed rules may reduce the ability to defer the sale of assets until retirement in order to benefit from lower marginal tax rates.
Assets Held Across Both CGT Systems
For assets already owned before 1 July 2027, the tax treatment may become more complex.
Where an asset is held across both the current and proposed regimes, the gain may need to be split into two components:
- The gain accrued before 1 July 2027, which may continue to be eligible for the current 50% CGT discount; and
- The gain accrued after 1 July 2027, which may be taxed under the new inflation-adjusted system.
The Government is expected to provide further guidance on how this split will be calculated. This may be based on a valuation as at 30 June 2027 or through a prescribed formula.
For clients with substantial investment properties, commercial property, share portfolios or long-held business assets, this valuation date may become highly important.
Example 3: Residential Investment Property Bought After 1985 and Sold After 1 July 2027
Clare purchased an established residential investment property on 1 May 1995 for $500,000.
On 30 June 2027, the property is worth $1.8 million. Clare later sells the property on 1 October 2035 for $2.5 million.
Because Clare owned the property before 1 July 2027, the gain is split between the current CGT system and the proposed new system.
Pre-1 July 2027 Gain
- Market value at 30 June 2027: $1.8 million
- Original cost base: $500,000
- Capital gain before discount: $1.3 million
- 50% CGT discount: $650,000
- Taxable gain under current system: $650,000
Post-1 July 2027 Gain
The indexed cost base from 1 July 2027 is assumed to be $2.2 million.
- Sale price: $2.5 million
- Indexed cost base: $2.2 million
- Taxable gain under new system: $300,000
Total Taxable Capital Gain
Clare’s total taxable capital gain would be:
- Pre-1 July 2027 taxable gain: $650,000
- Post-1 July 2027 taxable gain: $300,000
- Total taxable gain: $950,000
At a 47% marginal tax rate, the tax payable would be $446,500.
If the entire gain had been taxed under the current 50% CGT discount system, the taxable gain would have been $1 million and the tax payable would have been $470,000.
In this particular example, Clare is slightly better off under the proposed new system because a portion of the later gain is reduced through inflation indexation.
However, the outcome will depend heavily on asset performance, inflation, holding period and final rules.
Example 4: Pre-CGT Commercial Property Sold After 1 July 2027
One of the more significant proposed changes is the treatment of pre-CGT assets.
Currently, assets acquired before 20 September 1985 are generally exempt from capital gains tax. Under the proposed regime, the gain accrued before 1 July 2027 would remain tax-free, but any gain after that date may become taxable.
Andy purchased a commercial property on 1 December 1980 for $100,000.
On 30 June 2027, the property is worth $2.4 million. Andy sells the property on 1 April 2032 for $3 million.
Because the property is a pre-CGT asset, the gain accrued up to 30 June 2027 remains disregarded.
Pre-1 July 2027 Gain
- Market value at 30 June 2027: $2.4 million
- Original cost: $100,000
- Gain accrued before 1 July 2027: $2.3 million
- Tax payable on this portion: Nil
Post-1 July 2027 Gain
The indexed cost base from 1 July 2027 is assumed to be $2.7 million.
- Sale price: $3 million
- Indexed cost base: $2.7 million
- Taxable capital gain: $300,000
At a 47% marginal tax rate, the tax payable would be $141,000.
Under the current rules, Andy’s tax bill would have been nil because the asset was acquired before 20 September 1985.
This change may be particularly relevant for families, business owners and long-term property holders who have historically treated pre-CGT assets as permanently tax-free.
Negative Gearing Changes
The first tranche of legislation also includes proposed changes to negative gearing.
While the full practical impact will depend on the final legislation and definitions, the proposed changes appear to preserve more favourable treatment for new residential dwellings.
This means the distinction between established residential property and newly constructed residential property may become increasingly important for investors.
For those considering purchasing investment property, the tax profile of the asset may be materially different depending on whether the property qualifies as a new residential dwelling under the final rules.
Financial Planning Implications
These proposed changes may have a number of important implications for financial planning.
1. Asset Sale Timing May Become More Important
Clients holding assets with large unrealised capital gains may need to consider whether selling before or after 1 July 2027 produces a better tax outcome.
This will not be the same for everyone. Some investors may benefit from the current 50% CGT discount, while others may prefer the new indexation method if their asset growth has been closer to inflation.
2. Valuations May Become Critical
For assets held across both systems, a valuation as at 30 June 2027 may become an important planning tool.
This may be especially relevant for:
- investment properties;
- commercial property;
- business premises;
- private company shares;
- family trust assets;
- long-held listed shares; and
- pre-CGT assets.
Accurate records and valuations may help determine how much of a future gain falls under each tax regime.
3. Retirees May Need to Reconsider Disposal Strategies
The proposed 30% minimum tax floor may reduce the benefit of waiting until retirement to realise capital gains.
For retirees with low taxable income, the current system can produce very favourable outcomes. Under the proposed rules, capital gains may still attract a minimum level of tax even where other taxable income is low.
This could affect retirement income planning, portfolio rebalancing, downsizing strategies and estate planning.
4. Pre-CGT Assets May No Longer Be Entirely Tax-Free
Families and business owners with assets acquired before 20 September 1985 should carefully consider the proposed changes.
While historic gains up to 30 June 2027 may remain protected, future gains after that date may become taxable. This is a major change for assets that have traditionally been treated as outside the CGT system.
5. Investment Selection May Change
The new system may change the relative attractiveness of different assets.
Investments that produce strong capital growth may face higher effective tax compared with the current discount system. Conversely, assets with lower real growth may benefit from inflation indexation.
Investors may increasingly consider:
- income versus capital growth;
- expected real return after inflation;
- ownership structure;
- holding period;
- tax rate at time of sale;
- liquidity needs; and
- estate planning objectives.
What Investors Should Do Now
At this stage, the legislation is not yet final and some important details remain outstanding.
However, investors should begin reviewing their position well before 1 July 2027.
Key areas to consider include:
- identifying assets with large unrealised capital gains;
- reviewing pre-CGT assets;
- considering whether valuations may be required;
- assessing the tax impact of selling before or after 1 July 2027;
- reviewing investment property ownership and gearing arrangements;
- considering the role of trusts, companies and superannuation structures;
- reviewing estate planning strategies; and
- seeking tax advice before making major asset sale decisions.
Cadre Capital Partners’ View
The proposed changes highlight the importance of proactive tax and investment planning.
While the final rules are still to be confirmed, the direction of reform suggests that investors may need to place greater emphasis on timing, asset selection, ownership structure and long-term tax efficiency.
For many clients, the key question will not simply be whether an investment has performed well, but how that return is ultimately taxed.
As the legislation develops, Cadre Capital Partners will continue to monitor the proposed changes and work with clients and their tax advisers to assess the potential impact on portfolios, retirement strategies and long-term wealth planning.