Changes to the capital gains tax discount

Article

Published: May 12, 2026

The Government announced that it will replace the current 50% capital gains tax (CGT) discount with an indexation method for assets held for more than 12 months. This change will apply to most CGT assets held by individuals, trusts, and partnerships, including pre-1985 CGT assets. Further, a 30% minimum tax rate will apply to net capital gains under the revised indexation method. Transitional arrangements will ensure that the changes only affect capital gains arising on or after 1 July 2027. Gains realised before this date will continue to be eligible for the 50% CGT discount, and capital gains on pre-1985 assets realised before 1 July 2027 will remain exempt from CGT.

This year’s Federal Budget does not include proposed changes to the existing CGT concessions for the main residence exemption or the small business CGT concessions. Additionally, recipients of income support payments, including Age Pension recipients, will be exempt from the minimum tax rate.

Replacement of 50% CGT discount with cost base indexation

The current 50% CGT discount was introduced in 1999 to approximate the impact of inflation on investment gains. Under this method, assets that grow in value and are sold after a relatively short time horizon may have an inflation-adjusted tax liability considerably lower than similar investments with longer investment horizons.

From 1 July 2027, the 50% CGT discount will be replaced by cost base indexation for assets held longer than 12 months. This method adjusts the asset's original cost base for inflation, so only the real gain above inflation is taxed.

The 30% minimum tax will apply to net capital gains calculated under this method, with the stated intention of aligning the tax rate with the average tax rate paid by workers during their working lives.

Transitional arrangements

The changes will only apply to capital gains arising on or after 1 July 2027. Gains realised before this date will continue to benefit from the 50% CGT discount. Capital gains on pre-1985 assets realised before 1 July 2027 will remain exempt from CGT.

There is no significant detail in the budget papers relating to how these transitions will be managed.

New residential property investor choice and income support exemptions

Investors in new residential properties can choose between the 50% CGT discount or the cost base indexation method with the 30% minimum tax. Income support payment recipients, including Age Pensioners, will be exempt from the minimum tax rate.

BDO comment

The retrospective changes to subject pre-CGT assets disposed of after 1 July 2027 to CGT are the most controversial of these measures. Taxpayers who have held assets for decades may face substantial tax liabilities. It is currently not clear how the transition of pre-CGT assets into the taxation system will occur. A market value will likely be required, as otherwise owners of such assets will need cost base records that the law has not required them to keep.

The introduction of a 30% minimum tax on net capital gains may also impact taxpayers with lower incomes, as this rate exceeds the marginal tax rate for those earning under $45,000. The stated purpose of the 30% minimum tax is to reflect the average tax rate paid by workers during their working lives. However, if that were the correct justification, we would expect to see a flat tax rate (rather than a minimum tax rate) applied to all capital gains.

Exempting income support recipients from the minimum tax is welcome, as it provides some relief to the disadvantaged.

Maintaining the 50% discount option for new residential properties is a positive incentive to encourage investment in new housing, which could help increase supply in high-demand markets.

Taxpayers should prepare for these changes by reviewing their portfolios and seeking advice on the most tax-effective strategies under the new rules, once the details become clear. Further guidance from the Government will be important to clarify implementation details and address any uncertainties.

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