CGT time travel – replacing 50% CGT discount with cost base indexation

CGT cost base indexation is not a new or an obsolete concept – it was frozen at 30 September 1999 when 50% CGT discount became law around the same time.

Under the current CGT regime, the cost base indexation rules remain as an alternative option to the 50% CGT discount for assets acquired on or before 11.45am on 21 September 1999 and held for more than 12 months.

Commencing from 1 July 2027, the proposed changes under the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 replace the 50% CGT discount with the indexation method except for qualifying new residential dwellings and affordable housing investments and certain grandfathered gains pre-1 July 2027,

How current indexation works

Indexation applies to individual elements of the cost base of a CGT asset and is calculated by multiplying the relevant element of the cost base by an ‘indexation factor’. The indexation factor is generally calculated as follows:

Indexation factor = index number for quarter ending 30 September 1999/index number for quarter in which the expenditure was incurred

The index numbers for the purpose of calculating the indexation factor are quarterly All Groups Consumer Price Index (‘CPI’) numbers published by the Australian Statistician.

If indexation is used for the cost base, 50% CGT discount cannot apply and the taxpayer can choose the option which provides a better tax outcome.

Proposed indexation rules

Under the proposed changes, from 1 July 2027, the general 50% CGT discount will be effectively removed for all CGT events and the cost base will be indexed for inflation in relation to assets held for at least 12 months.

The new indexation rules apply to Australian resident individuals and trusts.

For a CGT event occurring on or after 1 July 2027:

1. the cost based includes inflation indexation;
2. indexation applies to all cost base elements except the third element (ownership costs);
3. the gain is calculated using the indexed cost base.

The indexation factor for expenditure in an element of the cost base and incurrent on or after 1 July 2027 is calculated as follows:

Indexation factor = Index number for the quarter in which the CGT event happens/index number for quarter in which the expenditure was incurred

Transition rules

For assets owned before 1 July 2027:

1. the asset is deemed to be sold just before 1 July 2027 at market value;
2. it is deemed to be reacquired on 1 July 2027 for that market value;
3. the gain or loss up to 30 June 2027 is deferred until a realisation CGT event happens, and
4. a separate gain or loss arises for the period after 1 July 2027 using the reset cost base.

Once a realisation CGT event happens, the deferred notional gain is also realised and if such notional gain is a discount capital gain, the 50% discount can apply to such gains. Any part of the gain post 1 July 2027 is then calculated under the new regime and may receive cost base indexation rather than the ordinary 50% discount.

Pre-CGT assets

If a CGT asset is a pre-CGT asset on 30 June 2027, and the taxpayer continues to hold it after that date, the proposed transition rule deems the taxpayer to have sold the asset immediately before 1 July 2027 and to have re-acquired it immediately after 1 July 2027.

The notional capital proceeds are taken to be equal to the asset’s market value immediately before 1 July 2027 (unless an alternative apportionment method is chosen under a future determination).

Unlike post CGT assets, any accrued gain of pre CGT assets up to 30 June 2027 is preserved as ‘tax free’. Any part of the gain post 1 July 2027 is then calculated under the new regime and may receive cost base indexation.

Effectively while the gains of pre-CGT assets up to 30 June 2027 remains tax-free, the ‘pre-CGT’ status ends on 1 July 2027, with any future grown becoming taxable from that date onwards.

Implications and considerations

Although cost base indexation is not new, the proposed removal of the 50% CGT discount and the end of pre-CGT status from 1 July 2027 may have broader implications than the real estate measures targeted in the 2026 Federal Budget. The changes may also affect other asset classes, including non-real estate investments, business interests and deceased estates.

Taxpayers and their advisors should review their personal and trust asset holdings, with particular attention to the following matters, so they are best prepared to manage the implications of the new regime if and when it becomes law:

1. Residency: confirm the taxpayer’s tax residency. Non-residents generally do not benefit from either the 50% CGT discount or the proposed indexation regime. If a taxpayer expects to trigger a CGT event in Australia, they may wish to take necessary and appropriate steps to establish their tax residency in Australia;
2. Cost base records: identify the value of each cost base element for each CGT asset before and after 1 July 2027. Taxpayers should also confirm whether they have sufficient records to substantiate those values;
3. Holding period: identify which assets are intended to be held long term and which may be held for a shorter period. The existing 50% CGT discount may produce a better outcome for shorter-term holdings, such as assets held for 12 to 48 months. Indexation may be more beneficial for longer-term holdings;
4. Current regime outcomes: assess the potential tax consequences of disposing of CGT assets under the existing 50% discount and indexation rules;
5. Proposed regime outcomes: assess the potential tax consequences for CGT assets under the proposed indexation rules; and
6. Pre-CGT assets: consider how the proposed regime may affect assets that currently have pre-CGT status.

If you need further assistance please contact our Tax Law team on (03) 5273 5273 or email info@coulterlegal.com.au.