CGT Reform 2027 Australia: Indexation Replaces 50% Discount

Australia CGT reform 2027 — indexation replaces 50% discount

From 1 July 2027, the 50% Capital Gains Tax discount — a feature of Australia's tax system for individuals and trusts since 1999 — will be replaced by a new indexation system with a 30% minimum tax floor. Pre-1985 assets will be brought into the CGT net for gains accruing after the implementation date. This is the most significant structural change to Australian capital gains taxation in a generation.

Data in this article reflects legislation and announced measures as at 5 July 2026, sourced from the ATO, Treasury, and Budget 2026-27 papers.

What is changing

The reform has four interconnected elements:

Replacement of the 50% CGT discount with cost base indexation plus a 30% minimum tax floor
Pre-CGT assets brought into the tax net for gains accruing after 1 July 2027
Negative gearing quarantining from 1 July 2027 for established property acquired after 7:30 PM AEST 12 May 2026
Discretionary trust minimum tax of 30% from 1 July 2028

How the new indexation system works

Under the current system, an individual who holds an asset for more than 12 months pays tax on only 50% of the nominal capital gain. For a top-bracket taxpayer, this produces an effective CGT rate of 22.5%.

Under the new system from 1 July 2027:

The cost base of the asset is indexed by inflation over the holding period
If the indexed gain exceeds 70% of the nominal gain, the taxpayer pays tax on 70% of the nominal gain (the 30% minimum tax floor)
If the indexed gain is less than 70% of the nominal gain, the taxpayer pays tax on the indexed amount

This means the new system delivers the better of indexation and the 30% minimum floor — not the worst of both.

Practical impact

Consider an asset purchased for $500,000 and sold for $800,000 after 5 years, during a period of 3% annual inflation:

Current 50% discount: Taxable gain = $150,000 (half of $300,000 nominal gain)
New indexation method: Indexed cost base ≈ $579,637. Taxable gain ≈ $220,363, with 30% floor at $210,000

For shorter holding periods, the current 50% discount is generally more favourable. For very long holding periods with substantial inflation, the new indexation method could produce a lower taxable gain. The 30% floor ensures the government always collects tax on at least 70% of the nominal gain.

New builds: the election

First investor purchasers of newly built residential property can elect between the old 50% discount method and the new indexation method. This preserves a meaningful tax incentive to invest in new housing supply, aligning with the government's broader housing affordability objectives.

The election is available only to the first investor purchaser — subsequent owners of that property must use the indexation system.

Pre-CGT assets: a new tax frontier

Assets acquired before 19 September 1985 (the date CGT was introduced) have been exempt from CGT for nearly 40 years. From 1 July 2027, any capital gain accruing after that date on a pre-CGT asset will be taxable under the new indexation system.

For assets that have never been valued, the market value at 1 July 2027 will become the cost base. This creates a practical challenge for owners of pre-CGT assets with no recent valuation history. Obtaining a professional valuation before or around the implementation date will be essential to establishing a defensible cost base.

The change affects:

Long-held family homes that have never been sold (though the main residence exemption continues to apply)
Family farms and primary production land
Investment properties purchased before September 1985
Shares in pre-1985 companies
Collectables and personal use assets (where applicable)

Negative gearing quarantining

From 1 July 2027, rental losses on established residential property acquired after 7:30 PM AEST on 12 May 2026 can only offset:

Rental income from other properties
Capital gains from residential property

Losses cannot reduce tax on salary, business income, or other non-property income. Unused losses can be carried forward indefinitely.

Who is exempt?

Pre-cutoff acquisitions: Property acquired before the cutoff date retains full negative gearing
SMSFs and complying super funds: Not subject to quarantining
Widely held trusts: Exempt from the new rules
Build-to-rent developments: Not subject to quarantining
First investor purchaser of new builds: Retains full negative gearing

FRCGW: 2026-27 withholding rules

The Foreign Resident Capital Gains Withholding (FRCGW) system requires purchasers to withhold 15% of the sale price on all Australian taxable real property and pay it to the ATO. Since 1 January 2025, there is no minimum property value threshold — the 15% withholding applies to every transaction.

Australian resident vendors can avoid withholding by obtaining an ATO clearance certificate before settlement. Foreign resident vendors can apply for a variation notice if the 15% withholding exceeds their expected tax liability.

Discretionary trust minimum tax

From 1 July 2028, discretionary trusts will be subject to a 30% minimum tax on distributed income. This does not apply to:

Income from primary production
Income distributed to vulnerable minors
Pre-12 May 2026 testamentary trusts

A restructure window runs from 1 July 2027 to 30 June 2030, allowing trusts to reorganise without triggering CGT. Corporate beneficiaries receive no credit for the 30% trustee tax, meaning combined effective rates could reach approximately 45-51%.

FAQ

When exactly does the 50% CGT discount end?

The 50% CGT discount applies to assets sold up to and including 30 June 2027. Assets sold on or after 1 July 2027 will be subject to the new indexation system with the 30% minimum tax floor.

Should I sell assets before 1 July 2027?

It depends on your holding period, inflation expectations, and marginal tax rate. For assets held 5-10 years, the current 50% discount will generally produce a better outcome. For very long-held assets (20+ years) during periods of significant inflation, the new indexation system could be more favourable. Seek professional tax advice.

Do I need a valuation for my pre-1985 property?

If you own a pre-CGT asset, obtaining a professional market valuation as close to 1 July 2027 as possible is strongly recommended. The valuation will establish your cost base for future CGT calculations.

Can I still negative gear property purchased in 2026-27?

Yes. Property acquired before 7:30 PM AEST on 12 May 2026 retains full negative gearing. Property acquired after that date but before 1 July 2027 can still be negatively geared against all income until 30 June 2027, after which losses are quarantined.

What happens to capital losses under the new system?

Capital losses continue to be carried forward and can offset capital gains. The new indexation rules apply only to the calculation of the taxable gain; losses are offset against the resulting amount.