3 June 2026
Further to the 2026-27 Federal Budget announcements, on 28 May 2026 the Labor government introduced draft legislation[1] to Parliament to implement capital gains tax (“CGT”) and negative gearing reform.
Much has been made of the announcements in the media which, if passed, will effectively replace the 50% CGT discount with cost base indexation, introduce a 30% minimum tax rate on capital gains and limit the availability of negative gearing on residential property to new residential dwellings.
This Client Alert does not seek to engage in an analysis of the merits of the proposed tax reform. Instead, it is intended to provide an overview of how the measures currently stand to apply in practice based on the detail contained in the draft legislation. It also comments on a number of practical and planning issues for private groups and their advisers.
Transitioning to Indexation
In broad terms, the 50% discount for Australian resident individuals and trusts will be replaced with cost base indexation for capital gains arising from 1 July 2027.
Before discussing how capital gains are to be calculated in future under the cost base indexation method, it is first necessary to understand the proposed transitional arrangements for CGT assets held at midnight on 30 June 2027 (“Existing CGT Assets”).
To this effect, the legislation seeks to deem any Existing CGT Assets to be sold on 30 June 2027 and then immediately re-acquired by the taxpayer on 1 July 2027. The capital proceeds for this deemed disposal and re-acquisition are either:
the market value of the asset just before 1 July 2027; or
if an “apportioning method” is chosen by the taxpayer, the capital proceeds using that method.
The legislation provides no detail at this stage of how the apportioning method will work as this depends on a method prescribed by the Minister by legislative instrument which remains unpublished.
As to the deemed CGT event:
Any capital gain or loss arising on the deemed disposal of an Existing CGT Asset is disregarded and deferred until the asset is ultimately realised by the taxpayer under a subsequent realisation event (i.e. CGT event). At this point, the deferred gain/loss will crystallise.
Deferred capital gains are categorised as either “deferred residential capital gains” or “deferred non-residential capital gains”.
As the name suggests, “deferred residential capital gains” are deferred gains relating to Existing CGT Assets that are (or were) residential dwellings, and “deferred non-residential capital gains” are all other deferred gains relating to Existing CGT Assets.
Pre-CGT assets will become post-CGT assets with no deferred capital gains or losses. These assets will receive a market value cost base as at 1 July 2027.[2]
It is not intended for the deemed disposal and re-acquisition to have any income tax effects beyond the operation of the CGT provisions referred to above. This includes preserving the original asset acquisition date for the purposes of the 12 month holding rule and the small business CGT concessions.
The New CGT Method Statement
A new CGT method statement is proposed to replace the existing framework in division 102 of the Income Tax Assessment Act 1997 (Cth) (“ITAA97”).
The new CGT method statement would require taxpayers to calculate their capital gains as follows:
STEP NO. | DESCRIPTION |
1. | Separate the taxpayer’s capital gains into four categories for the income year, being:
Then apply current year capital losses against the taxpayer’s capital gains in the above order. These capital losses will include any 30 June 2027 deferred losses crystalised in the year of the realisation event. |
2. | Apply any carry forward capital losses to any remaining capital gains again in the above order. |
3. | Apply any quarantined amounts against any deferred residential capital gains. “Quarantined amounts” are effectively carry forward tax losses on negatively geared residential investments – see further below. |
4. | Apply any remaining quarantined amounts against residential capital gains. |
5. | Apply the 50% discount to any qualifying discount capital gains, namely:
|
6. | Where applicable, apply the small business CGT concessions[3] to any remaining capital gains. |
7. | Total any remaining capital gains to calculate the taxpayer’s net capital gain for inclusion in the taxpayer’s assessable income. |
The intention of categorising capital gains in the above manner appears to be to restrict the application of “quarantined amounts” (tax losses from negative gearing of residential dwellings) to residential capital gains (deferred or otherwise) and not apply quarantined amounts to other types of capital gains.[4]
Cost Base Indexation
Cost base indexation will be available to Australian resident individuals or trusts (including individuals and trusts that are partners in partnership) on capital gains arising from CGT events happening on or after 1 July 2027.[5] This will require the CGT asset to have been held for at least 12 months.
Indexation will apply to each element of cost base that is incurred on or after 1 July 2027 except the third element (i.e. the costs of owning the CGT asset, such as rates, land taxes, repairs and insurance – noting that these costs will usually be deductible if the asset is income generating). This will allow taxpayers to index expenses such as:
acquisition costs;
incidental costs relating to the acquisition of the CGT asset or relating to the CGT;
capital expenditure to increase or preserve the asset’s value, or move/install the asset; and
capital expenditure to establish, preserve or defend title to the asset.
Indexation under the new measures will take place on an expense-by-expense basis. That is, each item of expenditure will have a unique indexation factor by dividing the “index number” in the quarter of the CGT event against the index number for the quarter in which the expenditure was incurred.[6]
Consistent with the current cost base indexation measures, the index number is the All Groups Consumer Price Index (CPI) published by the Australian Bureau of Statistics for each quarter.
The cost base indexation measures will inevitably be more complicated for taxpayers and their advisers to apply in practice in comparison to the “flat” 50% discount. Taxpayers will be required to keep detailed records of their expenditure in relation to the CGT asset, the element of cost base the expenditure falls into, the quarter in which the expenditure is incurred and the relevant index number for the quarter in which the expenditure is incurred.
Where an Existing CGT Asset is disposed of (or another realisation event occurs) on or after 1 July 2027, the taxpayer calculates their capital gain based on two components, namely:
the initial deferred gain/loss calculated from the asset’s acquisition date until 30 June 2027 (to which the 50% discount may apply for gains); and
the subsequent gain/loss calculated from 1 July 2027 to the time of the realisation event (to which the new cost base indexation rules will apply for gains).
In calculating the taxpayer’s capital gain at the time of the realisation event, the draft legislation requires the taxpayer to assume that the CGT asset was acquired at its original acquisition date (and not on 1 July 2027) and subject to a CGT event on the date of the realisation event (and not on 30 June 2027) so that the 12 month holding requirement for the 50% discount is not disrupted by the deemed CGT event.[7]
The availability of the 50% discount on the initial notional gain of a trust will depend on whether beneficiaries of the trust, which are not foreign or temporary residents, are assessed on to the initial notional gain (see below). This will often require the beneficiary to be specifically entitled to the gain.
The draft legislation also requires the taxpayer to calculate their capital gain based on the availability of small business CGT concessions to both components of the capital gain at the time of the realisation event – and not on 30 June 2027. This raises potential planning issues for taxpayers and their advisers in situations where the concessions may be available now but not in future income years based on, for instance, the trajectory of the business and its anticipated aggregated turnover.
The calculation of the initial notional gain/loss for the taxpayer on the happening of the realisation event is further complicated in circumstances where the asset was acquired on or after 20 September 1985 but prior to 11:45am (ACT time) on 21 September 1999 and is subject to frozen indexation under section 110-36.
Where a CGT asset owned by an individual or a trust is subject to frozen indexation, a capital gain happening in relation to the CGT asset will now be calculated as follows:
No. | CGT Event | Calculation of Capital Gain |
1. | CGT event prior to 1 July 2027 (but not covered by Item 2). | Capital proceeds less indexed cost base or choice to apply 50% discount (i.e. existing rules apply). |
2. | Deemed CGT event prior to 1 July 2027 by operation of new rules. | Deferred capital gain is capital proceeds less:
|
3. | CGT event following 1 July 2027. | Capital proceeds less indexed cost base (new rules), plus deferred capital gain under deemed CGT event. |
In essence, the draft legislation removes the choice between frozen indexation and the 50% discount for taxpayers who originally acquired their CGT asset prior to 11:45am (ACT time) on 21 September 1999 where a CGT event (other than the deemed disposal/acquisition) does not happen on or before 30 June 2027.[8]
Example – Calculating Post-30 June 2027 Capital Gains |
Consider an Australian resident individual who owns a commercial property acquired in 2001. ㅤ Immediately prior to 1 July 2027, the property had a market value of $5 million and a cost base of $1 million. ㅤ The property was subject to the deemed disposal and re-acquisition rules under section 112-155(2). The individual does not choose the Minister’s apportionment method for capital proceeds, meaning that the capital proceeds from the deemed disposal and re-acquisition are equal to the market value of the property immediately prior to 1 July 2027. ㅤ As a result of the deemed disposal and re-acquisition of the property, the individual has a deferred non-residential capital gain in the amount of $4 million. ㅤ The individual disposes of the property by way of sale on 1 July 2032, giving rise to CGT event A1. At the time of the disposal, the property sold for $8 million and an indexed cost base of say $6.5 million (being indexation of the $5 million deemed acquisition cost on 1 July 2027). ㅤ The disposal constitutes a “realisation event” for the purposes of the new measures. ㅤ The individual is taken to have made two capital gains in the 2033 income year, namely:
As the individual is an Australian resident and held the property for greater than 12 months, the 50% discount will apply to reduce the deferred capital gain from $4 million to $2 million. However, the 50% discount will not apply to the $1.5 million capital gain. The $1.5 million capital gain has been already reduced by the cost base indexation from 1 July 2027 until the time of the CGT event. ㅤ Ignoring the application of any losses or the small business CGT concessions, the net capital gain of the individual on the disposal of the property is $3.5 million. |
Pre-CGT Assets
A significant outcome of the proposed measures is the loss of pre-CGT status for all assets held before 20 September 1985.
In this respect, and as stated above, the draft legislation will deem all pre-CGT assets to have been sold on 30 June 2027 and re-acquired on 1 July 2027.[9] This deeming provision applies to all taxpayers that hold pre-CGT assets, including companies.
It is noted that:
Any capital gains arising from the deemed disposal of a pre-CGT asset on 30 June 2027 are disregarded under the existing regime, with the exception of CGT event K6 (which advisers would be aware applies to pre-CGT shares in companies and interests in trusts acquired before 20 September 1985 in circumstances where the company or trust has post-CGT property meeting or exceeding the 75% net value threshold).[10]
If CGT event K6 is triggered on the deemed disposal date, the taxpayer’s capital gain is still deferred until the taxpayer realises their shares or trust interests after 1 July 2027.[11]
To determine the capital proceeds from the deemed disposal and the new cost base of the CGT asset re-acquired on 1 July 2027, the taxpayer can choose between market value (which will apply as a default option) or the apportioning method to be set out in a legislative instrument to be made by the Minister. This choice must be made on or before the day the entity’s income tax return is lodged for the income year of the realisation event.
Any capital gains accruing from 1 July 2027 on what was previously a pre-CGT asset will then be subject to the new cost base indexation measures.
Trust Taxpayers
A number of observations can be drawn from the draft legislation in relation to trusts that are subject to CGT events:
Under the draft legislation, the availability of the 50% discount on a deferred capital gain for Existing CGT Assets requires at least one beneficiary that is not a foreign or temporary resident to be assessed on a discount capital gain assumed to be made by the trust from the realisation event.[12] This appears to require that a qualifying beneficiary is assessed on the initial notional gain in the income year of the realisation event. Care will need to be taken by taxpayers and their advisers in many cases in ensuring that a specific entitlement in a qualifying beneficiary is created in this respect.
Similar to the “backing out” of the 50% discount for specifically entitled beneficiaries that are not entitled to the 50% discount under the current measures, there is a need to “back out” cost base indexation where the specifically entitled beneficiary is not eligible for cost base indexation under the new rules (e.g. a corporate beneficiary).
In circumstances where the new cost base indexation rules result in a trust not making a net capital gain, the draft legislation extends the application of subdivision 115-C to nonetheless allow for the streaming of the capital gain to one or more beneficiaries based on an assumption that indexation does not apply.
The draft legislation contains new reporting requirements for trustees to provide certain information to beneficiaries regarding attributable capital gains under subdivision 115-C as required for the beneficiaries to comply with their own obligations under the tax legislation. The information will be specified in a legislative instrument of the Commissioner.
As to the final point, it is Treasury’s intention that a failure for the trustee to comply with the new reporting requirements results in the imposition of an administrative penalty under the Taxation Administration Act 1953 (Cth). It might be expected that this will create more complexities for trustees in administering trust estates, particularly in the year of a CGT event.
Minimum Tax Rate for Capital Gains
In addition to the above changes, the draft legislation introduces a minimum tax rate of 30% on capital gains that are realised by individual taxpayers (or attributed to individual taxpayers as beneficiaries of trusts) on or after 1 July 2027.
This means that taxpayers with a marginal tax rate of less than 30% will be required to pay an extra tax on an amount defined as the “minimum tax gap amount” such that they are subject to a minimum 30% tax rate on capital gains (before applying offsets) for the income year.
The minimum tax rate applies to a taxpayer’s “minimum tax capital gain” for an income year. This is the total of the amounts of residential and non-residential capital gains made by the taxpayer after applying step 6 of the above method statement (including capital gains attributed to the taxpayer as a beneficiary of a trust pursuant to section 115-215).[13]
The minimum tax rate will not, however, apply to:
Taxpayers assessed on capital gains who are recipients of income support payments, including the Age Pension, Disability Support Pension and JobSeeker. The precise payments are to be prescribed in a legislative instrument made by the Minister. It appears that this extends to a discretionary trust that creates a specific entitlement in a capital gain in favour of a beneficiary who is in receipt of an income support payment.
Deferred residential and deferred non-residential capital gains arising from the deemed disposal and re-acquisition of Existing CGT Assets, even where the assets are realised on or after 1 July 2027.[14]
Situations where the taxpayer has chosen to apply the CGT discount on the disposal of new residential dwellings or affordable housing, as opposed to applying indexation (see below).[15]
The draft legislation also provides that the minimum tax rate will apply for taxpayers that are Australian residents at any time during the income year.
Carve out for New Residential Dwellings and Affordable Housing
Taxpayers can still choose to apply the CGT discount to capital gains arising on the disposal of CGT assets which comprise new residential dwellings or affordable housing on or after 1 July 2027. The choice will apply for the whole holding period of the asset (even if the asset is purchased before and sold after 1 July 2027).[16]
The draft legislation provides that:
The CGT discount of 50% is available for individuals and trusts that dispose of new residential dwellings.[17] The draft legislation does not define assets which will comprise “new residential dwellings” and instead provides that the Minister will determine the necessary requirements for such dwellings by legislative instrument.
The additional CGT discount (of up to 60%) can continue to apply for dwellings used to provide affordable housing consistent with existing section 115-125. The additional discount broadly applies if the dwelling is used to provide affordable housing for at least three years from 1 July 2018.[18]
If a taxpayer chooses not to apply the CGT discount to such assets, the choice must be made on or before the day the entity’s income tax return is lodged for the income year in which the realisation event occurs.[19] With respect to trusts that make this choice, the choice cannot be altered by a beneficiary.
The Minister may also prescribe new classes of assets for which taxpayers can choose to apply the CGT discount.
As stated, if a taxpayer chooses to apply the CGT discount to such assets, the deemed sale and acquisition rules will not apply and capital gains on the disposal of these assets will not be subject to the minimum 30% tax rate.
Changes to Negative Gearing
The draft legislation seeks to deny deductions for expenditure that exceeds the assessable income derived from residential dwellings. This is referred to as the “quarantined amount”.[20]
As set out above in the proposed CGT method statement, the quarantined amount is carried forward by a taxpayer and then applied against any deferred residential capital gains and residential capital gains. The quarantined amount may also be applied against any positive net income derived from residential property in circumstances where there are no residential capital gains (deferred or otherwise).
Importantly, the quarantining of tax losses from negative gearing does not apply to taxpayers who held an ownership interest in, or had entered a contract to acquire an ownership interest in, a residential dwelling before 7:30 pm (AEST) on 2026-27 Federal Budget night i.e. 12 May 2026.[21] This includes dwellings that are converted from a main residence into an income producing asset.[22]
The new measures also do not apply to:
New residential dwellings.
Residential dwellings for certain activities or enterprises as may be prescribed by the Minister by legislative instrument.
Residential dwellings owned by widely held unit trusts or superannuation funds.
The draft legislation does not provide a definition of “new residential dwellings”. Instead, as stated above, the Minister must determine by legislative instrument the requirements for a residential dwelling to qualify as “new residential”, having regard to factors such as the type of dwelling, why the dwelling was constructed and whether the dwelling genuinely adds to housing supply. This of course leaves a significant degree of discretion on the Minister to effectively determine and change the law on these matters.
The legislation also contains certain modifications to reduce the quarantined amount by the amount of any revenue gains on the realisation of a residential dwelling and to allow for the character of trust income as being derived from a residential dwelling to “flow through” to the beneficiary level and be applied against the beneficiary’s losses from residential property.[23]
Practical Observations and Outstanding Issues
A number of practical observations can be made in reviewing the draft legislation, namely:
The draft legislation does not deal with another significant policy proposal coming out of the 2026-27 Federal Budget, being the taxation of the income of discretionary trusts. Advisers would be aware that this announcement refers to a minimum 30% tax rate on trust net income. It is recommended that any planning steps associated with the CGT changes are not performed in isolation and instead take into account developments on the taxation of trusts, including how these measures interface with corporate beneficiaries.
The shift from the CGT discount to an indexation model will be particularly onerous for taxpayers that own investments with a low or nominal cost base, given that the benefit of indexation will be marginal. For instance, this will be a significant issue for founders of businesses who have subscribed for share capital at a nominal value in circumstances where the value of the enterprise increases materially over time. While small business CGT concessions could be available on an exit, access to these concessions is often highly restrictive given the net asset and turnover thresholds are not indexed. Further consultation by Treasury around the impact of the changes on start-up businesses is expected, however, the extent of any adjustments to the proposed regime to account for this issue remains to be seen.
Whilst CGT indexation is apparently justified as a return to the pre-21 September 1999 regime, companies do not enjoy the benefit of indexation under the draft legislation (as they did before 21 September 1999). Instead, companies will need to continue to apply frozen indexation on capital gains on pre-21 September 1999 acquired assets. The benefit of this is effectively “clawed back” when a company pays a dividend, with the indexed component being an unfranked dividend and existing section 47(1A)(b) of the Income Tax Assessment Act 1936 (Cth) resulting in a claw back on voluntary liquidation.
Companies are not impacted by the removal of the 50% discount. Companies will remain subject to a 30% corporate tax rate or a 25% corporate tax rate if the company is a “base rate entity”. Of course, capital gains comprising base rate entity passive income can, depending on their quantum, cause a company that would otherwise be a base rate entity with a 25% tax rate to become subject to a 30% tax rate. There also remains an issue as to how the franking credits in a company owned by a trust can be extracted tax-effectively in the context of the proposed minimum tax on trust income referred to above.
Self-managed superannuation funds are not affected by the proposed measures, including the minimum 30% tax rate on capital gains and the removal of the discount. As such, the one-third discount will continue to be available on CGT assets held by superannuation funds for at least 12 months.
Property developers and other taxpayers who hold and dispose of real property on revenue account are also not affected by the proposed measures. This would be evident to many advisers, but in the authors’ view this fact has been somewhat lost in the media.
As stated, taxpayers with Existing CGT Assets have a choice to elect a market value cost base for their assets as at 1 July 2027 or adopt the Minister’s apportioning method that is yet to be released. The choice does not need to be made until the tax return lodgement date for the income year in which the assets are ultimately realised by the taxpayer. Accordingly, taxpayers may wish to obtain asset valuations as at 1 July 2027 and then compare the CGT outcomes with the Minister’s apportionment method before committing to their choice.
Depending on the asset class involved, obtaining independent professional valuations may be impracticable or cost prohibitive (e.g. valuations for shares in private companies that carry on a business). That said, circumstances permitting, a market valuation on the “higher end” may be beneficial in circumstances where it allows for a large portion of the unrealised capital gain up to 30 June 2027 to be subject to the 50% discount, and a higher cost base for the purposes of indexation from 1 July 2027 onwards.
The small business CGT concessions are not altered by the draft legislation. Nonetheless, taxpayers who would previously have relied on concessions in conjunction with the 50% discount (for example, where the 15-year exemption did not apply) may now ultimately be subject to greater capital gains where cost base indexation does not outpace the 50% discount.
Taxpayers holding certain replacement assets acquired pursuant to income tax roll-over relief will have pre-existing deferred capital gains or losses. These gains and losses will be realised (and then deferred) under the proposed deemed disposal and re-acquisition rules.
For companies and trusts that hold assets acquired before 20 September 1985, there may be a need to consider whether division 149 (change in majority underlying interests) has already been triggered leading up the deemed disposal date of 30 June 2027 in order to determine whether such assets are still in fact pre-CGT assets and therefore brought into the CGT regime at market value on 1 July 2027.
For unit trusts (and other trusts in which a beneficiary has an interest for CGT purposes) qualifying for indexation on capital gains going forward, it can be expected that the capital gain sheltered by indexation will be “clawed back” when these amounts are paid to unitholders/beneficiaries with trust interests. Existing section 104-70 of the ITAA97 is likely to have this effect with no “cushioning of the blow” from CGT event E4, which from 1 July 2027 will no longer qualify for the 50% discount.
Negative gearing tax losses do not appear to be restricted for application against gains or future surplus income on the specific property concerned, but rather can be applied against capital gains or surplus income derived by the taxpayer on other residential dwellings. This would allow taxpayers with multiple residential investment properties (some of which are negatively geared and some of which are not) to still obtain the benefit of the tax losses on the negatively geared properties.
There are no consequential changes for the loss of pre-CGT status on assets. This may bear significantly on other aspects of the existing CGT legislation. For instance, from 1 July 2027 previous pre-CGT assets will not qualify for a market value cost base as at the date of the individual owner’s death. Moreover, many of the pre-CGT asset concessions on main residences (including those owned by deceased estates going forward) will now be irrelevant.
Thought should be given as to whether the loss of pre-CGT status on 30 June 2027 by the deemed disposal could be an opportunity to effect an actual (rather than a notional) disposal to a more tax effective structure, for instance, from an individual to a self-managed superannuation fund.
Following on from the above point, on the basis that pre-CGT status would be lost on 30 June 2027 in any event, primary producers (who do not appear to be adversely affected by the proposed changes to the taxation of trust income at 1 July 2028) may see fit to transfer pre-CGT land to trusts. This may have particular appeal where inter-generational duty relief is available.
The Way Forward
The proposed legislation discussed above represent significant structural changes to the operation of the CGT regime and present a challenging environment for taxpayers and their advisers in navigating the various complexities to achieve optimal outcomes. Of course, it should be borne in mind that the draft legislation may be subject to significant change as it progresses through Parliament. Advisers should therefore keep a “watching brief” on the developments, including the release of the draft legislation relating to the taxation of trust income.
Cowell Clarke’s Tax & Revenue group is well placed to assist accounting advisers and their clients in optimising outcomes and managing the issues posed by the proposed new measures.
[1] Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 (Cth) and Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026 (Cth).
[2] The market value is determined as the market value of the asset as at 1 July 2027 or the amount determined by adopting the Minister’s apportioning method – see proposed sections 112-175(3) and 112-185.
[3] With the exception of the 15-year exemption under subdivision 152-B of the ITAA97.
[4] See paragraph 1.80 of Explanatory Memorandum to Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 (Cth).
[5] Proposed section 110-36(1A).
[6] Proposed section 960-275(1B).
[7] Proposed sections 112-160(3)(c) and (5) (for individuals) and 112-170(3)(c) and (5) (for trusts).
[8] See also paragraph 1.46 of the Explanatory Memorandum.
[9] Proposed section 112-175.
[10] Section 104-230.
[11] Proposed section 112-180.
[12] Proposed section 112-165(1)(d).
[13] Proposed section 119-5(2)(a).
[14] Proposed section 119-5(2)(a) and paragraph 1.175 of the Explanatory Memorandum.
[15] Proposed section 119-5(b) and (c).
[16] Proposed section 114-30.
[17] See amendment to section 115-1.
[18] In broad terms, a dwelling is used to provide affordable housing if it is residential premises (excluding commercial residential premises) which is tenanted or available to be tenanted and is exclusively managed by an eligible housing provider: subdivision 980-A.
[19] Proposed section 115-102(5) and paragraph 1.142 of the Explanatory Memorandum.
[20] Proposed section 26-155(1)(a).
[21] Proposed section 26-155(2)(a) and (3).
[22] See example 2.4 of the Explanatory Memorandum.
[23] Proposed sections 26-155(6) and (7).
This publication has been prepared for general guidance on matters of interest only and does not constitute professional legal advice. You should not act upon the information contained in this publication without obtaining specific professional legal advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication and to the extent permitted by law, Cowell Clarke does not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting or refraining to act in relation on the information contained in this publication or for any decision based on it.