Federal Budget 2026–27: A fundamental shift in Capital Gains Tax: Pre-CGT assets, indexation and minimum tax
Pre-CGT assets
The Government has announced a significant change to the capital gains tax (CGT) treatment of assets acquired on or before 19 September 1985. From 1 July 2027, these assets will no longer be fully exempt from CGT. Instead, capital gains arising after that date will become taxable, while gains accrued before 1 July 2027 will continue to be exempt.
This proposal represents a fundamental shift in the long-established treatment of pre-CGT assets and has important implications for long held investments, business structures, and succession planning.
Transitional treatment and cost base reset
Under the proposed transitional rules, gains on pre-CGT assets will be calculated by reference to a deemed cost base equal to the asset’s market value at 1 July 2027. This mechanism is intended to ensure that only post transition gains are subject to tax, effectively quarantining gains accrued up to that date.
While in principle this approach preserves the tax-free treatment of historical gains, it places critical importance on the valuation of assets at the transition point. The market value adopted at 1 July 2027 will directly determine the amount of any future taxable gain.
Valuation methods and practical concerns
Taxpayers will be permitted to determine market value at 1 July 2027 using one of two methods. They may obtain a formal valuation, or they may adopt a prescribed apportionment methodology that estimates the asset’s value based on its rate of growth over the ownership period.
Both approaches present practical and strategic considerations. Formal valuations may involve cost and the potential for dispute, while prescribed methodologies may not appropriately provide for the value of the particular assets at the 1 July 2027 test time. In either case, the absence of a contemporaneous arm’s length transaction means that valuation outcomes are likely to be more susceptible to being contested.
Key valuation and characterisation issues
The valuation at the transition date of 1 July 2027 will be critical to determining future tax outcomes. Where assets are complex, unique, or closely held, establishing an appropriate market value may be inherently difficult, particularly where value is driven by intangibles rather than readily observable market data. In the absence of an arm’s length transaction, differing views may reasonably arise as to the appropriate value to adopt.
The proposed changes may also bring forward questions about the characterisation of assets, including whether components such as goodwill should be treated as pre-CGT as at a particular point in time. These issues have traditionally been resolved only on disposal, often many years later. Under the new regime, they may need to be considered much earlier, i.e. closer to 1 July 2027, potentially well before any realisation event occurs.
Policy shift and unresolved issues
This announcement represents a marked departure from the longstanding policy position that assets acquired on or before 19 September 1985 sit entirely outside the CGT regime. From a policy perspective, it introduces retrospective complexity into arrangements that have often been maintained for decades on the assumption of enduring tax treatment.
Notably, the Budget materials do not explain how the proposed changes are intended to interact with the existing integrity rules that currently apply to pre‑CGT assets. They are also silent on whether gains that remain exempt under the transitional rules will be treated as pre‑CGT amounts for the purpose of concessional distributions on the liquidation of a company or the vesting of a trust.
Indexation and minimum 30% tax on capital gains
From 1 July 2027, the Government proposes to replace the existing 50% CGT discount for all assets held longer than 12 months with inflation-adjusted indexation, coupled with a minimum 30% tax on capital gains.
The delayed effective start date creates three distinct scenarios for affected taxpayers being resident individuals, trusts and partnerships to consider for their investments held for over 12 months:
- The 50% CGT discount will be available in full for all assets purchased and sold before 1 July 2027;
- Indexation and minimum 30% tax will apply for all assets purchased and sold from 1 July 2027; and
- Transitional measures will apply to assets purchased prior to 1 July 2027 and sold after 1 July 2027.
In line with the proposed changes to negative gearing, investors who purchase new residential properties from 1 July 2027 will have the option of choosing to apply the existing 50% CGT discount or the indexation and minimum tax model.
Indexation of CGT cost base
Under the pre-1999 rules, the CGT cost base of an asset was indexed for inflation to ensure that only the “real” capital gain was brought to tax. The application of these rules necessitated careful record-keeping, as the date on which each component of the cost base was incurred had to be identified in order to determine the appropriate indexation factor to apply on disposal. As precise details of the proposed indexation were not made available in the Government’s announcement, it remains to be seen how closely the new regime will stick to the pre-1999 script.
It is likely that indexation would not apply to the reduced cost base of an asset such that it cannot apply to create or increase a capital loss. This may be significant where debt is used to fund investments, as indexation cannot create a loss on loan repayment, unlike equity financing where indexation may reduce a capital gain on disposal.
Transitional measures
Assets purchased prior to 1 July 2027 will be subject to transitional measures which will preserve the 50% CGT discount on the difference between the asset’s cost base and its value as at 1 July 2027.
The value of the asset on 1 July 2027 will be determined by:
- Seeking a valuation of the asset as at that date; or
- Using a specified formula that approximates the asset’s value at that date by reference to its growth rate and holding period. The Government states that the ATO will provide tools to taxpayers to determine this value.
As in the case of pre-CGT assets, where assets are complex, unique, or closely held, establishing an appropriate market value as at 1 July 2027 may be inherently difficult. In the absence of liquidity or observable market transactions, the resulting valuations may involve judgement and be more open to challenge. Accordingly, many taxpayers may resort to the specific formula method.
Capital gains accruing to the asset post 1 July 2027 will be subject to indexation and minimum 30% tax, and will be calculated by applying indexation to the value of the asset at 1 July 2027 as determined by one of the two methods outlined above.
Minimum 30% tax
In addition to indexation, the Government has proposed a minimum 30% tax to apply to real capital gains accruing from 1 July 2027 to deter taxpayers from deferring capital gains to income years in which they are subject to lower marginal tax rates.
Income support recipients, including Age Pension recipients, will be exempt from the minimum 30% tax.
Based on the individual tax rates for the 2028 income year, taxpayers with taxable income below $45,000 may face additional tax on capital gains to bring the effective rate on those gains up to 30%.
Example of the Transitional Measures and Minimum 30% Tax
Max is an individual investor who purchases an asset on 1 July 2025 for $4,000. At the transition date of 1 July 2027, the asset has increased in value to $14,000. Max subsequently sells the asset on 30 June 2028 for $35,000. In addition to the proceeds from the sale, Max also derives $10,000 of interest income in the 2028 income year.
The capital gain accrued on the asset to 1 July 2027 of $10,000 should be eligible for the 50% CGT discount . $5,000 of the capital gain after discount is included in Max’s taxable income in 2028.
From 1 July 2027 to the sale date, the asset increases in value by $21,000 (from $14,000 to $35,000). Assume that the cost base is increased by $1,000 after applying indexation to the asset’s value at 1 July 2027 of $14,000. This reduces the gain to $20,000, which Max must include in his taxable income in 2028.
Max’s taxable income for the 2028 income year is therefore:
- Interest income: $10,000
- Discounted capital gain (pre-1 July 2027): $5,000
- Indexed capital gain (post-1 July 2027): $20,000
- Total taxable income: $35,000
Based on the individual tax rates for the 2028 income year, taxable income of $35,000 would ordinarily put Max into the 14% tax bracket. In this case, the $20,000 post-1 July 2027 gain would be subject to extra tax so that the effective rate on that gain becomes 30%. If the ordinary tax rate applicable to that gain is 14%, then Max would pay an extra 16% of $20,000, which is $3,200. This means the total tax on that part of the gain would be $6,000.
In contrast, if Max also earned $40,000 of salary and wages in 2028, his total taxable income would be $75,000. In that case, no extra tax would apply to the post-1 July 2027 gain because his marginal tax bracket would already be 30%.
Example – alternative valuation method
For completeness, if the specified formula method is used to determine the value, based on the Treasury’s example, an implied annual growth rate of 106.06% would be applied for two years to the $4,000 cost base. This would give rise to a value at 1 July 2027 equal to $16,985. In this example, this can give rise to a higher value eligible for the CGT discount as compared to the market value on 1 July 2027 and could be a preferable method to use in this circumstance.
Exceptions
No CGT changes are being proposed for main residences or small business CGT concessions, and the existing 60% CGT discount for affordable housing will be retained.
Based on third party media reporting, we understand that complying superannuation funds, including SMSFs, will retain access to the 1/3 CGT discount.
The Budget proposals represent a seismic shift in the CGT and broader income tax landscape. This new CGT regime appears to favour longer-term, lower growth assets as compared to higher-growth and shorter-term investments. Given the pervasive nature of the changes, it is disappointing that further details were not available in the Budget announcements, such as how capital losses will be applied post 1 July 2027 or how capital gains distributed by trusts and managed funds will be treated for their beneficiaries/investors. Furthermore, the Government has only undertaken to consult on these changes for the tech and start up sector.
It is quaint to say that ‘the devil is in the details’, but there will be volumes of interaction rules which will need to be carefully considered to determine the full impact of these changes for the vast majority of our clients, including but not necessarily limited to individuals, trusts, private groups, and managed funds.
