Blast from the past, or an uncertain future?

Blast from the past, or an uncertain future?

In this week’s TaxVine,  Danielle Ou, Lawyer and Jonathan Ortner, Partner at Arnold Bloch Leibler, who also serves as Chair of The Tax Institute’s National SME Technical Committee, examine the draft CGT reforms in the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026.

The proposal to remove the CGT discount represents a major shift in Australia’s tax landscape. While the Bill also addresses negative gearing and introduces a tax offset for workers, this article focuses on the CGT changes.

Although framed as a return to pre-1999 settings through the reintroduction of indexation, the draft legislation goes much further, introducing a complex new CGT regime with deemed disposals, new capital gain categories, a minimum tax, housing concessions, expanded trust reporting, and reliance on future legislative instruments. This complexity is expected to increase further with the Government’s foreshadowed tranche 2 amendments to discretionary trusts.

What are the proposed CGT changes?

The Government’s stated policy intent is to level the playing field for first home buyers while maintaining incentives for new housing supply, and to enhance the fairness and sustainability of the tax system. It is difficult to understand then the rationale for applying these changes across all asset classes. Perhaps it is for simplicity, but simplicity is not what we have.

The key CGT amendments in the draft legislation include:

• repeal of the 50% CGT discount for individuals and trusts, replaced with cost base indexation from 1 July 2027;
• a 30% minimum tax on capital gains for Australian resident individuals; and
• inclusion of pre-CGT assets (acquired before 20 September 1985) in the CGT net for gains accruing from 1 July 2027.

On 19 May 2026, Anthony Albanese said “Our policies are very clear”. “What we are simply doing is returning the CGT system to what was there before 1999.” However, that is not quite true. There is no smoothing of capital gains over five years in recognition that one-off profits from asset sales could be lumpy and temporarily push taxpayers into higher tax brackets (which was available from 1985 to 1990). Indexation will not apply to companies which it formally could under the pre-1999 rules. And there was no such thing as a minimum 30% tax on capital gains. 

To increase the complexity, foreign residents and superannuation funds remain outside these changes. Targeted CGT discounts will be retained for affordable housing, new residential dwellings and “any other CGT asset determined by the Minister by legislative instrument” (you will see the latter pop up frequently in the draft legislation). 

The four new categories of capital gains

By trying to juggle the different treatments for capital gains arising pre- and post- 1 July 2027, and different treatment for residential properties due to the new negative gearing rules, the draft legislation creates four categories of capital gains: deferred non-residential, deferred residential, non-residential, and residential. 

In addition, capital losses must be applied in that order, reducing the likelihood that taxpayers will access the CGT discount for pre-1 July 2027 gains. 

To demonstrate, consider the following:

• Wei bought shares in 2018 and sells them in 2030, generating a $1 million deferred non-residential gain (which the CGT discount can be applied to) and a further $200,000 (inflation adjusted) non-residential gain.
• He also has $1 million in capital losses. Under mandatory loss ordering, these must first offset the $1 million discountable gain i.e. eliminating both the gain and any benefit from the discount.
• Wei is left with a $200,000 taxable gain, resulting in a $94,000 CGT liability (47%). Without mandatory loss ordering, his CGT liability would be $47,000.

The return of indexation post -1 July 2027

The central change is that the 50% CGT discount will be removed for most CGT assets from 1 July 2027. Indexation is the CPI ratio between the CGT event quarter and the expenditure quarter.

• Note that:
  • only cost-base expenditure incurred from 1 July 2027 onwards can be indexed; and
  • indexation is not available for reduced cost-base i.e. when there is a capital loss (this is no different however to the original regime).

To qualify for indexation under the proposed rules:

• For individuals — the taxpayer must have held the asset for at least 12 months and not have been a foreign or temporary resident at any time during the testing period (starting from the later of 1 July 2027 or actual acquisition date, through to the CGT event).
• For trusts — the trustee must have held the asset for at least 12 months, and a beneficiary must be assessable under section 115-215. Ineligible beneficiaries (foreign residents, temporary residents, or companies) must recalculate the gain to eliminate indexation.
• In other words, from 1 July 2027, if a taxpayer holds a CGT asset as a temporary resident or foreign resident at any time, even for a short period, they will lose access to the full benefit of indexation. This represents a departure from the current CGT discount regime, which permits an apportionment based on the period of residency.

To demonstrate, consider the following:

• James, an Australian resident, acquired listed equities on 1 December 2027, ceased residency on 1 January 2028, and returned on 1 July 2032, having elected not to trigger CGT event I1:
  • He is not deemed to have reacquired the shares under section 855 45 (as they are treated as Taxable Australian Property (TAP) assets).
  • He cannot apply indexation to his cost base when he sells his shares as he was a non-resident for a portion of the holding period.