Budget changes to CGT discount

The Government has now legislated significant changes to Australia's capital gains tax (CGT) rules, with the new regime commencing on 1 July 2027.

For many Australians, these changes won't require immediate action. However, for investors, property owners and those planning for retirement, they could have a major impact on when assets are sold and how much tax is ultimately paid.

The good news is that there is still time to plan.

What's Changing?

Under the current rules, individuals who hold an asset for more than 12 months generally receive a 50% discount on any capital gain. The discounted gain is then taxed at the individual's normal marginal tax rate.

From 1 July 2027, that system changes.

The 50% CGT discount will be replaced with cost base indexation, meaning your purchase cost will be adjusted for inflation before your gain is calculated. While this means you'll only pay tax on the "real" gain, any gain calculated under the new rules will generally be subject to a minimum tax rate of 30%, even if your normal marginal tax rate is lower.

What Happens to Assets You Already Own?

One of the biggest concerns for many investors has been whether they lose the benefit of the existing CGT discount on assets they already own.

Fortunately, that's not the case.

If you own an asset before 1 July 2027 and sell it afterwards, the gain will effectively be split into two parts:

• the increase in value up to 1 July 2027 will continue to qualify for the existing 50% CGT discount; and

• any growth after that date will be calculated using the new inflation indexation method and will generally be taxed at the new minimum 30% rate.

In other words, the Government has effectively "grandfathered" gains that accrue before the new rules begin.

Timing Matters

The timing of a sale has always been an important tax planning tool—but it becomes even more important under the new rules.

At present, many people deliberately sell investments during years when their taxable income is low, allowing any discounted capital gain to be taxed at relatively low marginal tax rates.

From 1 July 2027, that strategy may no longer deliver the same tax savings because the new 30% minimum tax rate will apply to gains calculated under the indexation rules.

If you're already considering selling an investment in the next few years, it may be worth reviewing whether bringing that sale forward could produce a better tax outcome.

Why Retirees Should Pay Particular Attention

The changes are especially relevant for self-funded retirees.

Many retirees plan to sell investments after they stop working because their taxable income falls significantly in retirement.

Under the current rules, that often results in capital gains being taxed at relatively low marginal rates.

From July 2027, however, the minimum 30% tax rate could substantially reduce that benefit.

For some retirees, this could mean paying considerably more tax than they would under today's rules.

There Are Some Important Exceptions

Not everyone will be affected in the same way.

The Government has confirmed that recipients of certain government income support payments—including the Age Pension and JobSeeker—will be exempt from the new 30% minimum tax and will continue to pay tax at their normal marginal tax rates.

In addition:

• your family home remains fully exempt from CGT;

• complying superannuation funds retain their existing CGT concessions; and

• gains accruing after 1 July 2027 on certain pre-CGT assets will also come within the new system.

Don't Forget About Valuations

If you continue to own an asset after 1 July 2027, its market value on that date becomes an important figure because it determines how much of the gain falls under the old rules and how much falls under the new regime.

For listed shares, this should be straightforward.

For assets such as investment properties or privately owned businesses, obtaining reliable evidence of market value will be much more important.

While the ATO doesn't necessarily require a formal valuation in every case, having appropriate supporting evidence could prove invaluable if the value is ever questioned.

Could Indexation Actually Be Better?

Although much of the discussion has focused on the removal of the 50% discount, it's worth remembering that the new indexation method won't always produce a worse outcome.

For assets held over very long periods, or investments that have largely kept pace with inflation rather than experiencing strong real growth, indexation may actually reduce the taxable gain by more than today's discount.

The only way to know is to compare both methods based on your own circumstances.

Now Is the Time to Start Planning

While the changes don't begin until 1 July 2027, waiting until the last minute may limit your options.

Now is an ideal time to review:

• investments you may be planning to sell in the next few years;

• whether a sale before July 2027 could be beneficial;

• how future retirement plans may affect your tax position;

• whether capital losses could be used more effectively; and

• whether market valuations should be obtained for significant assets.

Every situation is different, and the best strategy will depend on your investment portfolio, future income and long-term financial goals.