Changes to capital gains tax (CGT) are set to take effect from 1 July 2027, changing the way some future capital gains are calculated and taxed.
For property investors, shareholders and business owners, CGT can have a significant impact when an asset is eventually sold. While the changes don’t commence immediately, decisions made now, and the value accumulated before 1 July 2027, may become important down the track.
There is a lot to understand, so as part of Week 2 our Budget Breakdown, we’re answering some of the key questions about what is changing and what it could mean for you.
What changes to capital gains tax have been announced?
From 1 July 2027, the Government proposes to replace the current 50% CGT discount with a system based on inflation indexation for affected assets.
Under the proposed system, the original cost base of an asset would be adjusted for inflation when calculating the taxable capital gain.
A minimum 30% tax would also apply to real capital gains accruing from 1 July 2027.
How does CGT work now?
Under the current rules, individuals and eligible trusts that sell an asset they have owned for at least 12 months can generally access a 50% CGT discount.
For example, if an eligible investor makes a $100,000 capital gain:
- the 50% discount reduces the taxable capital gain to $50,000
- that amount is then included in their taxable income and taxed at the applicable rate.
How would the new system work?
Rather than automatically discounting an eligible capital gain by 50%, the proposed system would take inflation into account.
The cost base of an asset would be indexed to reflect inflation over the period it was held. The taxable capital gain would then be calculated using this inflation-adjusted cost base.
The intention is to distinguish between an increase in value caused by inflation and the ‘real’ increase in the value of the asset.
A minimum 30% tax would then apply to real capital gains accruing from 1 July 2027.
When do the changes start?
The proposed changes are due to commence on 1 July 2027.
Importantly, transitional arrangements mean gains accumulated before this date would continue to be treated under the existing CGT discount rules.
This means the changes don’t simply apply the new treatment to all of the growth an existing investment has experienced.
Instead, for an existing asset eventually sold after 1 July 2027, the capital gain may effectively need to be considered in two periods:
- the gain accumulated before 1 July 2027
- the gain accumulated from 1 July 2027 onwards.
What could this look like for an existing investment?
Consider an investment property:
- purchased in 2020 for $500,000
- valued at $850,000 on 1 July 2027
- eventually sold in 2030 for $1 million
The property’s increase in value up to 1 July 2027 is $350,000. Under the transitional arrangements, this portion of the gain would continue to be treated under the existing CGT discount rules.
The subsequent increase in value from $850,000 to $1 million would fall under the new CGT regime.
This means the capital gain would effectively be split between the existing and new systems rather than the new rules applying retrospectively to the entire gain.
This is a simplified example for illustrative purposes only. The actual tax calculation will depend on the final legislation, applicable indexation and individual circumstances.
Will existing investments need to be valued?
Under the proposed arrangements, existing assets may need a value as at 1 July 2027 to establish the point at which the new CGT treatment begins.
For property, this could involve a formal valuation or another approved valuation method.
A valuation could also be obtained after 1 July 2027 and applied retrospectively to determine the asset’s value at that date.
Further guidance about valuation requirements and acceptable methods will be important as we move closer to commencement.
Are past gains affected?
The changes are prospective.
Gains accumulated before 1 July 2027 would continue to receive the existing CGT treatment, even where the asset isn’t sold until after the new rules commence.
Assets sold before 1 July 2027 will continue to be subject to the existing rules.
What stays unchanged?
A number of important CGT concessions and exemptions remain, including:
- the main residence exemption
- the small business CGT concessions
- the existing affordable housing CGT concession
This means the family home will continue to be exempt from CGT where the existing eligibility requirements for the main residence exemption are met.
What about eligible new residential properties?
Eligible new-build residential properties will receive different treatment.
Investors in eligible new residential properties will be able to choose between:
- the existing 50% CGT discount
- the new inflation indexation method and associated tax treatment
As we discussed in Week 1, this is part of the Government’s broader objective of encouraging investment into new housing supply.
What could the changes mean for property investors?
For some property investors, the changes could affect the after-tax return ultimately received from an investment.
They may also make factors such as the following more important when assessing a property strategy:
- whether to purchase an established property or eligible new build
- how long an investment is likely to be held
- the timing of a future sale
- the interaction between tax, cash flow and borrowing
We may also see some investors reconsider the types of properties they purchase as the new arrangements become clearer.
The important point is that tax is only one component of an investment decision. A decision to buy, hold or sell an asset shouldn’t be made purely in response to a tax change.
What could the changes mean for business owners?
CGT isn’t only a property issue. For many business owners, the value accumulated in their business represents a significant part of their long-term wealth and, potentially, their retirement plan.
A future sale of a business can trigger a capital gain, so changes to the way those gains are calculated could influence:
- succession planning
- retirement planning
- the timing of a future business sale
- the expected after-tax proceeds from that sale
This makes understanding the transitional arrangements particularly important for owners who have spent many years building value in their business.
Could service-based businesses be affected differently?
Potentially. Much of the value in a service-based business can come from goodwill, client relationships, recurring revenue and years spent building the business, rather than significant physical assets.
Inflation indexation may therefore produce a different outcome for these businesses than it does for businesses with substantial property, plant or other physical assets.
The eventual outcome will depend on the business, its structure and the circumstances surrounding a future sale.
What happens to the Small Business CGT Concessions?
The four existing Small Business CGT Concessions are set to remain.
Where the eligibility requirements are met, these concessions can significantly reduce, and in some circumstances eliminate, CGT arising from the sale of an active business asset.
From 1 July 2027, the turnover threshold for the 50% active asset reduction is also proposed to increase from $2 million to $10 million. While these concessions remain, the broader CGT changes could still affect the overall tax outcome when a business is sold.
For business owners considering succession or a future sale, it will therefore be important to understand how the existing concessions and new CGT rules work together.
What about businesses operating through discretionary trusts?
Many Australian businesses and investments are held through discretionary trust structures.
Separate changes have also been proposed for the taxation of discretionary trusts, which could interact with the CGT changes for some business owners and investors.
We’ll look specifically at discretionary trusts in future editions of The Budget Breakdown.
What should you do now?
With the changes not due to commence until 1 July 2027, there is time to understand what they could mean for your existing assets and longer-term plans.
For investors, that may mean considering how the changes fit within an existing investment strategy before buying or selling an asset.
For business owners, it may be an opportunity to review longer-term succession, retirement or business sale plans and understand the potential tax implications well before a transaction takes place.
Most importantly, avoid making a significant investment or business decision based on the headline changes alone. If you’re considering buying or selling an investment, planning the future sale of your business or simply want to understand how the CGT changes could affect you, speak with the Financially Sorted team about your circumstances.
The proposed CGT changes are due to apply from 1 July 2027. Further legislative detail and guidance may affect how the rules apply to particular assets and circumstances.
Still confused?
If you’re considering buying or selling an investment, planning the future sale of your business or simply want to understand how the CGT changes could affect you, speak with the Financially Sorted team about your circumstances.