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This is the post we've wanted to write for a while. Capital gains tax is one of the most misunderstood areas of the Australian tax system, and the changes in this Budget make it more important than ever to understand properly. We'll start from first principles, because the Budget changes only make sense once you understand what we're changing from.
Part 1: What is Capital Gains Tax, and how is it actually calculated?
Let's clear up the biggest misconception first.
CGT is not a separate tax. It is not a different rate. It is your normal income tax, applied to a capital gain.
When you sell an asset at a profit, that profit, your capital gain, is added to your other taxable income for that year, and you pay income tax on the total at your usual marginal rate. If you're in the 37% tax bracket, your capital gain is taxed at 37%. If you're in the 45% bracket, it's taxed at 45%. There is no special CGT rate. The "CGT" label simply describes the rules used to calculate what the gain actually is. However it might be worth reading this as the rules have changed based on who owns the entity, and we could be facing a minimum tax regime of 30%.
This surprises many people, particularly those who have heard that "CGT is only 15%" or similar, that figure typically comes from a misapplication of the 50% discount, which we'll explain shortly.
Part 2: How is the capital gain actually calculated?
The starting point is your cost base, what the asset effectively cost you. This is not simply what you paid for it. The cost base is built up over the life of your ownership and includes several components.
What goes into the cost base:
The purchase price is the foundation. To that, you add the incidental costs of acquisition, things like stamp duty, legal fees, and agent's commissions paid when you bought. You also add any capital expenditure you've incurred to improve the asset over the years, renovations to an investment property, for example, or significant upgrades that added value.
What reduces the cost base:
Here is the part many people miss. If you have claimed depreciation deductions on the asset, for example, the building allowance or plant and equipment depreciation on an investment property, those claimed depreciation amounts reduce your cost base dollar for dollar. This is not optional and it's not negotiable. Every dollar of depreciation you've claimed over the years comes off your cost base when you eventually sell. Read more about the changes to negative gearing here, as that game has fundamentally changed too.
This catches people off guard regularly. A client buys an investment property for $600,000, claims $80,000 in depreciation over ten years, and assumes their cost base is still $600,000. It isn't, it's $520,000. When they sell, they're paying tax on a larger gain than they expected.
The basic calculation:
Sale price, less selling costs (agent fees, legal fees etc.), less your adjusted cost base = capital gain.
A simple example: you buy an investment property for $600,000. You spend $50,000 on a renovation (capital, not repairs). You claim $30,000 in depreciation over the years. You sell for $900,000, paying $20,000 in agent and legal fees.
That $260,000, before any discount, gets added to your other income for the year and taxed at your marginal rate.
Part 3: The 50% CGT Discount; what it is and where it came from
Before 1999, Australia used a different system. Instead of a flat discount, the cost base was adjusted for inflation using the Consumer Price Index (CPI). So if inflation had eroded 20% of the purchasing power of your original investment, your cost base was increased by 20%, and only the "real" gain above inflation was taxed. This was called cost base indexation.
In 1999, following the Ralph Review of Business Taxation, the Government replaced indexation with a simpler flat discount, if you had held the asset for more than 12 months, you simply halved the capital gain before adding it to your income. This was the 50% CGT discount, and it has been in place ever since.
The logic was that a blunt 50% discount was simpler to administer and would roughly approximate the inflation adjustment for most investors. For a period, that was broadly true. But over 25 years, as property prices have grown far faster than inflation, particularly in capital cities, the 50% discount has become far more generous than a pure inflation adjustment would have been. In many cases investors have been receiving a much larger tax concession than inflation alone would justify.
To use our example above: with the 50% discount, the $260,000 gain is halved to $130,000 before being taxed. At a marginal rate of 37%, the tax payable would be around $48,100. Without the discount, tax would be around $96,200. The discount is worth nearly $48,000 in this case.
Part 4: What is changing from 1 July 2027?
The Government is making two significant changes to CGT, both effective from 1 July 2027.
Change 1: Replacing the 50% discount with cost base indexation
The 50% CGT discount is being abolished and replaced with the original pre-1999 system of cost base indexation. Your cost base will be adjusted upward by CPI each year you hold the asset, and only the gain above inflation will be taxable. Rather than halving the nominal gain, you only pay tax on the real gain, the amount by which your asset has grown beyond inflation.
Whether this is better or worse than the old 50% discount depends entirely on how your asset has performed relative to inflation. If your asset has grown strongly in real terms, well above inflation, indexation will result in more tax than the old 50% discount, because the real gain will be larger than half the nominal gain. If your asset has grown only modestly in real terms, close to inflation, indexation could result in less tax.
The Government's own data shows that for property investors over the past 20 years, inflation has on average accounted for around 33–45% of nominal capital gains. This means the 50% discount has generally been more generous than pure inflation compensation, and replacing it with indexation will increase the taxable gain for most property investors. Share investors are more variable, in some periods the discount has been about right, in others slightly stingy.
Change 2: A 30% minimum tax on real capital gains
On top of indexation, the Government is introducing a 30% minimum tax on real (post-indexation) capital gains from 1 July 2027. This applies to individuals, trusts and partnerships.
What this means in practice: once your capital gain has been calculated using cost base indexation, the tax you pay on that gain must be at least 30%, regardless of your actual marginal rate on your other income. If your marginal rate is already 30% or above on your other income, which applies to anyone earning above $45,000, this minimum tax has no additional effect. You'll pay your normal marginal rate anyway.
The minimum tax primarily targets people who would otherwise pay less than 30% on a capital gain, for example, retirees or semi-retired individuals who have low ordinary income in the year they sell an asset. The old strategy of timing asset sales to years of low income to capture the discount at a low marginal rate is now substantially blocked. Note that income support recipients, including Age Pension recipients, are specifically exempt from the minimum tax.
Part 5: What about assets you already own?
The transitional arrangements are critically important and have been designed to be genuinely fair.
For assets purchased before 1 July 2027 and sold after that date:
The gain is split into two parts. The gain that accrued up to 30 June 2027 is still calculated under the old rules, your original cost base, the 50% discount, your marginal rate. The gain that accrues from 1 July 2027 onwards is calculated under the new rules, indexation from that date and the 30% minimum tax.
To work out the value of your asset at 1 July 2027 (which becomes the new cost base for the second portion), you can either get a formal valuation, or use an ATO apportionment formula that estimates the value based on the average return over your holding period. ATO tools will be available to help with this calculation.
For assets purchased before 1985 (pre-CGT assets):
Assets bought before CGT was introduced in September 1985 have always been CGT-free. That continues, but only for gains that accrued before 1 July 2027. From that date, even pre-1985 assets will be subject to CGT on any further gains, using 1 July 2027 value as the cost base. This is a significant change for long-held assets, and anyone in this situation should be seeking advice well before the start date.
For new residential property purchases after Budget night:
Investors who buy a new build residential property have a choice when they eventually sell, they can use either the old 50% CGT discount, or the new indexation and minimum tax. Whichever produces the better outcome at the time of sale can be elected. This is a genuine concession to maintain investment in new housing supply.
Part 6: A worked example under the new system
Let's take a property purchased on 1 August 2027; after the new rules commence.
Purchase price: $700,000. Capital expenditure over 8 years: $60,000. Depreciation claimed: $40,000. Sold in 2035 for $1,050,000 with $25,000 in selling costs.
Assume CPI has risen 22% over the 8 years of ownership.
That $146,600 is added to other income and taxed at the higher of the person's marginal rate or 30%.
Compare this to what the old 50% discount system would have produced on the same numbers. The nominal gain is $1,025,000 minus $720,000 = $305,000. Halved to $152,500. At 37% marginal rate, tax of $56,425.
Under the new system, $146,600 at 37% = $54,242. In this particular example the outcomes are actually similar, because inflation has eaten up a meaningful chunk of the nominal gain. But in a higher-inflation or lower-growth environment, indexation benefits the investor. In a low-inflation, high-growth environment, indexation produces a larger taxable gain than the old 50% discount would have.
Part 7: What this means for you
If you currently own investment assets, property, shares, or other CGT assets, the key practical points are:
The gains you have built up to 1 July 2027 are protected under the old rules. There is no retrospective effect on existing gains. But from that date, any further appreciation is under the new regime.
Record keeping becomes even more important than before. Your cost base, every capital improvement, every year of depreciation claimed, all of this needs to be documented carefully, because indexation calculations will require accurate records going back to either your purchase date or 1 July 2027, whichever is later.
The strategy of timing asset sales to low-income years to minimise CGT, which has been common practice, particularly approaching retirement, is significantly curtailed by the 30% minimum tax. Planning around this needs to start earlier than it used to.
For assets held inside discretionary trusts, the CGT changes interact with the minimum trust tax changes covered in our earlier posts. The trust-level minimum tax and the CGT minimum tax are aligned at 30%, but how they interact in practice, particularly for assets that generate capital gains inside a trust, is another area to watch as the legislation is developed.
This post is general information based on the 2026–27 Federal Budget papers released 12 May 2026. It does not constitute personal financial or tax advice. Individual circumstances vary significantly and CGT calculations depend on the specific details of each asset and each person's tax situation. Please speak with us before making any decisions about buying, selling, or restructuring assets based on these changes.
Next in the series: Negative Gearing; what's changing, what's grandfathered, and what it means if you own an established investment property versus a new build.
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