There is a certain irony at the heart of the 2026–27 Budget’s capital gains tax reforms.
The 50% CGT discount was introduced in 1999 as a simplification measure, as indexation had become a compliance nightmare for accountants.
Twenty-seven years later we are going back, and the complex indexation calculations the 1999 reforms were designed to eliminate are being reinstated.
However, we’re not exactly turning back the clock. What was problematic in a world of paper files and early desktop software is now a far simpler task using technology and artificial intelligence.
What is changing
From 1 July 2027, the 50% CGT discount for individuals, trusts, and partnerships will be replaced with two new mechanisms: cost base indexation (adjusting the cost base for inflation using CPI quarterly indices) and a 30% minimum tax rate on net capital gains for assets held more than 12 months.
The 30% rate operates as a floor – it is only relevant where a taxpayer’s marginal rate on the gain would otherwise fall below that threshold. For most investors with meaningful capital gains, their marginal rate will already be at or above 30%, meaning the floor has little practical effect.
The more significant change for most investors is the return of indexation itself.
CGT indexation: What’s in and what’s out
Several important carve-outs apply, though the precise mechanics of each will depend on the legislation when it is introduced:
- The main residence exemption is unchanged.
- Superannuation funds retain the existing one-third CGT discount.
- Age Pension and income support recipients are exempt from the 30% minimum tax.
- New build residential properties are proposed to retain more favourable CGT treatment for investors on sale.
Critically, pre-CGT assets are not expected to be exempt. This means that gains accruing after 1 July 2027 on assets acquired before 1985 are anticipated to fall within the new framework, which would be a material change for clients holding long-standing assets.
Assets held at 1 July 2027 will have their gain split at the transition date: pre-2027 gains under current rules, post-2027 gains under the new framework. For real property, a formal valuation at the transition date is the most important planning step available.
A short history of CGT
To understand why the return of indexation is significant, it helps to remember why it was abandoned in the first place.
The original CGT indexation system was introduced with CGT itself in 1985 and required taxpayers to adjust the cost base of each asset element for inflation between acquisition and sale, using quarterly CPI figures published by the ABS.
For a simple asset held for a few years, this process was manageable. However, for assets held across decades, with multiple cost base elements, part disposals, trust distributions, or complex ownership structures, it was a compliance minefield that produced inconsistent outcomes.
The 50% discount was therefore introduced in 1999 as a pragmatic fix. It was a policy compromise that traded precision for workability.
The current Government’s view is that this compromise has now run its course and a return to indexation is fairer – taxing real gains rather than nominal ones.
Indexation AIn’t what it used to be
CGT indexation may have been abolished for good reason in the 90s, but those reasons do not exist in the present day.
The legislative formula, once confirmed, will be fixed, and CPI data is publicly available and structured. The inputs for the calculations are therefore knowable, and the output is a number. There is no judgement or creative thinking involved. An AI dream.
We live in a time where AI tools are highly accessible for this type of rules-based, data-intensive, repetitive task. The oppressive time spent on calculations, and the likelihood of inconsistencies and errors, are greatly reduced.
The firms and practitioners who will serve clients well under the new rules are those who have integrated AI tools into their workflows – not to replace professional judgment, but to handle the computational load that indexation reintroduces.
What this means for investors
The return of indexation is not a reason to panic.
Although we’re awaiting the draft legislation and the details therein, investors holding significantly appreciated assets can begin conversations with their legal and financial advisers about a pre-July 2027 valuation to lock in the gain split.
Anyone holding a portfolio of CGT assets should expect their advisers to be working through the indexation calculations across each asset to quantify the tax position under the new framework.
And anyone with pre-CGT assets, acquired before 1985, will require specific advice on their exposure to the new rules for post-2027 gains.
If you would like to discuss the CGT changes and what they mean for your investments, estate plan, or business structure, please reach out to our team.
Further reading
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