Treasury Laws Amendment (Tax Reform No. 1) Bill 2026

Source: https://www.aph.gov.au/Parliamentary_Business/Bills_Legislation/Bills_Search_Results/Result?bId=r7493

Parliamentary progress

Progress

House of Representatives

Introduced and read a first time

28 May 2026

Second reading moved

28 May 2026

Notes

Documents and transcripts

Text of bill

First reading

Explanatory memoranda

Explanatory memorandum

Transcript of speeches

All second reading speeches

Minister's second reading speech

Proposed amendments

No proposed amendments have been circulated.

Schedules of amendments

No documents at present Notes

Referred to Committee (28/05/2026): Senate Economics Legislation Committee; Report due 22/06/2026

Official APH document links

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• Explanatory memorandum: https://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fems%2Fr7493_ems_a90ad43e-17d7-4cd3-859b-84ac4e6f3dea%22
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Official document - First reading

Source: https://parlinfo.aph.gov.au/parlInfo/download/legislation/bills/r7493_first-reps/toc_word/26072b01.docx;fileType=application%2Fvnd%2Eopenxmlformats%2Dofficedocument%2Ewordprocessingml%2Edocument

2025‑2026

The Parliament of the

Commonwealth of Australia

HOUSE OF REPRESENTATIVES

Presented and read a first time

Treasury Laws Amendment (Tax Reform No. 1) Bill 2026

No. , 2026

(Treasury)

A Bill for an Act to amend the law relating to taxation, and for related purposes

Contents

1 Short title 1

2 Commencement 1

3 Schedules 2

Schedule 1,CGT adjustments 3

Part 1,Main amendments 3

Income Tax Assessment Act 1997 3

Taxation Administration Act 1953 39

Part 2,Minimum rate of tax on capital gains 40

Income Tax Assessment Act 1997 40

Income Tax (Transitional Provisions) Act 1997 43

Part 3,Other amendments 45

Income Tax Assessment Act 1936 45

Income Tax Assessment Act 1997 45

Taxation Administration Act 1953 47

Part 4,Application of amendments 48

Schedule 2,Limit negative gearing for residential property to new builds 49

Income Tax Assessment Act 1997 49

Schedule 3,Working Australians tax offset 55

Part 1,Amendments 55

Division 1,Main amendments 55

Income Tax Assessment Act 1997 55

Division 2,Consequential amendments 58

Income Tax Assessment Act 1997 58

Part 2,Application 59

Schedule 4,Standard deduction for work‑related expenses 60

Part 1,Amendment of the Income Tax Assessment Act 1997 60

Income Tax Assessment Act 1997 60

Part 2,Amendment of the Fringe Benefits Tax Assessment Act 1986 66

Fringe Benefits Tax Assessment Act 1986 66

A Bill for an Act to amend the law relating to taxation, and for related purposes

The Parliament of Australia enacts:

1 Short title

This Act is the Treasury Laws Amendment (Tax Reform No. 1) Act 2026.

2 Commencement

(1) Each provision of this Act specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms.

Commencement information

Column 1

Column 2

Column 3

Provisions

Commencement

Date/Details

1. Sections 1 to 3 and anything in this Act not elsewhere covered by this table

The day this Act receives the Royal Assent.

2. Schedule 1, Part 1

The first 1 January, 1 April, 1 July or 1 October to occur after the day this Act receives the Royal Assent.

3. Schedule 1, Part 2

At the same time as the Income Tax Rates Amendment (Tax Reform No. 1) Act 2026 commences.

However, the provisions do not commence at all if that Act does not commence.

4. Schedule 1, Parts 3 and 4

The first 1 January, 1 April, 1 July or 1 October to occur after the day this Act receives the Royal Assent.

5. Schedule 2

The day after this Act receives the Royal Assent.

6. Schedules 3 and 4

The first 1 January, 1 April, 1 July or 1 October to occur after the day this Act receives the Royal Assent.

Note: This table relates only to the provisions of this Act as originally enacted. It will not be amended to deal with any later amendments of this Act.

(2) Any information in column 3 of the table is not part of this Act. Information may be inserted in this column, or information in it may be edited, in any published version of this Act.

3 Schedules

Legislation that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms.

Schedule 1,CGT adjustments

Part 1,Main amendments

Income Tax Assessment Act 1997

1 Subsection 100‑25(1)

After “there is an exception if”, insert “the CGT event happens before 1 July 2027 and”.

2 Subsection 100‑40(2) (before the note)

Omit all the words after “the reduced cost base of the asset.”, substitute:

One of the main differences is that the costs may be indexed for inflation in working out a capital gain for a CGT asset (which reduces the size of the gain), but not in working out a capital loss. Indexation is only available for certain entities and may not be available for the entire period the CGT asset is held.

3 Section 100‑50

Repeal the section, substitute:

100‑50 How to work out your net capital gain or loss

1. Reduce your capital gains for the income year by your capital losses for the income year. You need to reduce certain kinds of capital gains before you can reduce other kinds of capital gains. (If the capital losses for the income year exceed the capital gains, the difference is your net capital loss. You cannot deduct a net capital loss from your assessable income.)

2. Reduce any remaining capital gains by any unapplied net capital losses for previous income years. You need to reduce certain kinds of remaining capital gains before you can reduce other kinds of remaining capital gains.

3. Apply any quarantined amount relating to using or holding residential dwellings as residential accommodation to reduce certain kinds of remaining capital gains.

4. Reduce any remaining capital gains that are discount capital gains by the discount percentage.

Note: To find out what is a discount capital gain and the discount percentage, see Division 115.

5. If you carry on a small business, apply the small business concessions in further reduction of your capital gains (whether or not the gains are discount capital gains).

Note: For the small business concessions, see Division 152.

6. Add up any remaining capital gains. The total is your net capital gain.

Note: For the rules on working out your net capital gain or loss, see Division 102.

4 Paragraphs 102‑3(2)(a) and (c)

Repeal the paragraphs.

5 Subsection 102‑5(1)

Repeal the subsection, substitute:

(1) Your assessable income includes your net capital gain (if any) for the income year. You work out your net capital gain in this way:

Working out your net capital gain

Step 1. Reduce the *capital gains you made during the income year by the *capital losses (if any) you made during the income year as follows:

(a) first, reduce any *deferred non‑residential capital gains;

(b) then, reduce any *deferred residential capital gains;

(c) then, reduce any *non‑residential capital gains;

(d) then, reduce any *residential capital gains.

Note 1: Indexation may apply in relation to working out your capital gains: see Divisions 110 and 114.

Note 2: Some provisions of this Act (such as Divisions 104 and 118) permit or require you to disregard certain capital gains or losses when working out your net capital gain. Subdivision 152‑B permits you, in some circumstances, to disregard a capital gain made from a CGT event happening to a CGT asset you held for at least 15 years.

Note 3: If you have more than one capital gain within a category mentioned in paragraph (a), (b), (c) or (d), you can choose the order in which you reduce them.

Step 2. Apply any previously unapplied *net capital losses from earlier income years to further reduce the amounts (if any) remaining after the reduction of *capital gains under step 1. Make the further reductions in the same order as mentioned in step 1.

Note: Section 102‑15 explains how to apply net capital losses.

Step 3. Apply any quarantined amount referred to in paragraph 26‑155(1)(b) you have for the income year to reduce the amounts (if any) of any *deferred residential capital gains remaining after the reduction of *capital gains under step 2.

Note: Subsection 26‑155(1) deals with amounts relating to using or holding residential dwellings as residential accommodation.

Step 4. Apply any quarantined amount referred to in paragraph 26‑155(1)(b) you have for the income year remaining after step 3 to reduce the amounts (if any) of any *residential capital gains remaining after the reduction of *capital gains under step 2.

Step 5. Reduce by the *discount percentage each amount of any *discount capital gain remaining after the application of steps 1 to 4.

Note: Only some entities can have discount capital gains, and only if they have capital gains from certain CGT assets acquired at least a year before making the gains: see Division 115.

Step 6. If any of your *capital gains (whether or not they are *discount capital gains) remaining after step 5 qualify for any of the small business concessions in Subdivisions 152‑C, 152‑D and 152‑E, apply those concessions to each of those capital gains as provided for in those Subdivisions.

Note 1: The basic conditions for getting these concessions are in Subdivision 152‑A.

Note 2: Subdivision 152‑C does not apply to CGT events J2, J5 and J6. In addition, Subdivision 152‑E does not apply to CGT events J5 and J6.

Step 7. Add up the amounts of any *capital gains remaining after step 6. The sum is your net capital gain for the income year.

Note: For exceptions and modifications to these rules: see section 102‑30.

6 After section 102‑5

Insert:

102‑6 Meanings of the different categories of capital gains

Non‑residential capital gains

(1) If a *capital gain you make during an income year is not one to which subsection (5) applies, then so much of the capital gain as is not a *residential capital gain is a non‑residential capital gain.

Residential capital gains

(2) If a *capital gain you make during an income year:

(a) is not one to which subsection (5) applies; and

(b) arises from a *CGT event happening in relation to a *CGT asset that is or was a *residential dwelling;

then so much of the capital gain as is worked out as follows is a residential capital gain:

where:

post‑July 2027 ownership period means the number of days in so much of the following period:

(a) unless paragraph (b) applies,your *ownership period of the *CGT asset;

(b) if because of section 115‑215 you are taken to have made the *capital gain as a beneficiary of a trust,the trustee’s ownership period of the CGT asset;

as:

(c) is on or after 1 July 2027, and as ends on the day the *CGT event happens; and

(d) does not include a day or part of a day for which you can reasonably expect to disregard the capital gain because of Subdivision 118‑B (about the main residence exemption).

Note 1: If the CGT event is a realisation event mentioned in paragraph 112‑155(1)(c) or 112‑165(1)(c), subsection (4) of this section applies to your capital gain for the portion of your ownership period that is before 1 July 2027.

Note 2: If the CGT event happens (on or after 1 July 2027) in relation to a CGT asset that was a pre‑CGT asset just before 1 July 2027, your capital gain for the portion of your ownership period that is before 1 July 2027 is disregarded (see subsection 112‑175(2)).

residential accommodation days means the sum of:

(a) the number of days in the post‑July 2027 ownership period in which the *CGT asset is used, or held, solely for the provision of residential accommodation; and

(b) for each other day in the post‑July 2027 ownership period,the fraction of that day that represents the extent to which, on that day, the CGT asset is used, or held, for the provision of residential accommodation.

Deferred non‑residential capital gains

(3) If a *capital gain you make during an income year is one to which subsection (5) applies, then so much of the capital gain as is not a *deferred residential capital gain is a deferred non‑residential capital gain.

Deferred residential capital gains

(4) If a *capital gain you make during an income year:

(a) is one to which subsection (5) applies; and

(b) arises from a *CGT event happening in relation to a *CGT asset that is or was a *residential dwelling;

then so much of the capital gain as is worked out as follows is a deferred residential capital gain:

where:

pre‑July 2027 ownership period means the number of days in so much of the following period:

(a) unless paragraph (b) applies,your *ownership period of the *CGT asset;

(b) if because of section 115‑215 you are taken to have made the *capital gain as a beneficiary of a trust,the trustee’s ownership period of the CGT asset;

as:

(c) ends on 30 June 2027; and

(d) does not include a day or part of a day for which you can reasonably expect to disregard the capital gain because of Subdivision 118‑B (about the main residence exemption).

residential accommodation days means the sum of:

(a) the number of days in the pre‑July 2027 ownership period in which the *CGT asset is used, or held, solely for the provision of residential accommodation; and

(b) for each other day in the pre‑July 2027 ownership period,the fraction of that day that represents the extent to which, on that day, the CGT asset is used, or held, for the provision of residential accommodation.

Does the capital gain arise from a deemed sale on 30 June 2027?

(5) This subsection applies to a *capital gain you have made if:

(a) paragraph 112‑160(3)(a) or 112‑170(3)(a) treats you as having made the capital gain; or

(b) because of section 115‑215, you are taken to have made the capital gain as a beneficiary of a trust in relation to the trust’s deferred gain (within the meaning of paragraph 112‑170(3)(a)).

Note 1: Subsection 112‑160(3) covers individuals who are Australian residents. Subsection 112‑170(3) covers trusts.

Note 2: Paragraph (b) can cover a capital gain taken to have been made by any of the trust’s beneficiaries, not just beneficiaries who are individuals and Australian residents.

Note 3: Section 112‑175 applies to assets that were pre‑CGT assets on 30 June 2027. Section 112‑175 has the effect that a capital gain from a CGT event happening on or after 1 July 2027 in relation to such an asset will be either a residential capital gain or a non‑residential capital gain.

7 Section 102‑30 (table item 2AA)

Omit “and small business concessions”, substitute “, small business concessions and indexation”.

8 Subsection 110‑36(1)

Repeal the subsection, substitute:

Indexation for working out capital gains of Australian resident individuals or trusts for CGT events happening on or after 1 July 2027

(1A) The cost base of a *CGT asset also includes indexation of the elements of the cost base (except the third element) for the purposes of working out the *capital gain of an individual or a trust from a *CGT event happening in relation to the CGT asset if:

(a) the CGT event happens on or after 1 July 2027; and

(b) the requirements of Division 114 are met.

Note 1: This subsection does not extend to foreign residents or temporary residents (see section 114‑25).

Note 2: This subsection is mainly relevant for a trust to the extent that the trust’s beneficiaries are individuals who are Australian residents (see Subdivision 115‑C and section 114‑25).

Note 3: This subsection extends to the capital gain of an individual that is attributable to a partnership of which the individual is a partner.

Note 4: If an asset (including a pre‑CGT asset) was held on 30 June 2027, it may be taken to have been sold just before, and reacquired on, 1 July 2027 (see subsections 112‑155(2), 112‑165(2) and 112‑175(2)). For such an asset, indexation because of this subsection will happen only for the period the asset is held on or after 1 July 2027 (see subsection 960‑275(1B)).

Indexation for working out capital gains in other circumstances

(1) The cost base of a *CGT asset also includes indexation of the elements of the cost base (except the third element) for the purposes of working out the *capital gain of an entity from a *CGT event happening in relation to the CGT asset if:

(a) the most recent *acquisition of the CGT asset is at or before 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999; and

(b) for an entity that is an individual or a trust,the CGT event happens before 1 July 2027, and not because of subsection 112‑155(2) or 112‑165(2); and

(c) the requirements of Division 114 are met.

Note: For paragraph (b), indexation is not applicable for working out a capital gain arising:

(a) directly from a CGT event taken to have happened under subsection 112‑155(2); or

(b) directly or indirectly from a CGT event taken to have happened under subsection 112‑165(2).

Instead, capital gains from such CGT events may be discount capital gains.

9 Subsection 110‑36(2)

After “cost base includes indexation”, insert “because of subsection (1)”.

10 At the end of subsection 110‑36(2)

Add:

Note 3: This subsection only applies for an individual or a trust for a CGT event happening before 1 July 2027 (see paragraph (1)(b)).

11 Subsection 110‑36(3)

After “cost base includes indexation”, insert “because of subsection (1)”.

12 After subsection 112‑5(6)

Insert:

(6A) Subdivision 112‑E contains operative provisions setting out some deemed sales and reacquisitions that may result in a modification to the general rules.

13 At the end of Division 112

Add:

Subdivision 112‑E,Deemed sales just before, and reacquisitions on, 1 July 2027

Table of sections

112‑155 Australian resident individuals,deemed sale just before, and reacquisition on, 1 July 2027

112‑160 Australian resident individuals,defer a gain or loss from the deemed sale until the later realisation event happens

112‑165 Trusts,deemed sale just before, and reacquisition on, 1 July 2027

112‑170 Trusts,defer a gain or loss from the deemed sale until the later realisation event happens

112‑175 Pre‑CGT assets,deemed sale just before, and reacquisition on, 1 July 2027

112‑180 Pre‑CGT assets,defer a gain from CGT event K6 from the deemed sale until the later realisation event happens

112‑185 Method for apportioning capital gains and losses between realisation events and earlier deemed CGT events

112‑155 Australian resident individuals,deemed sale just before, and reacquisition on, 1 July 2027

Application

(1) This section applies in relation to a *CGT asset of yours if:

(a) on 30 June 2027, the asset is not a *pre‑CGT asset; and

(b) you are an individual who *acquired the asset and then held it throughout the period:

(i) starting at a time before 1 July 2027; and

(ii) ending at the end of 30 June 2027; and

(c) you continue to hold the asset until a *realisation event happens in relation to the asset on or after 1 July 2027; and

(d) if it were assumed that you make a *discount capital gain from the realisation event,section 115‑105 (about foreign or temporary residents) would not apply to the discount capital gain; and

(e) the asset is not an asset for which either of the following sections applies in relation to a *capital gain you make in relation to the realisation event:

(i) section 115‑102 (about new residential dwellings etc.);

(ii) section 115‑125 (about affordable housing).

Deemed sale and reacquisition

(2) For the purposes of this Part, Part 3‑3 and Subdivision 960‑M, you are taken:

(a) to have sold the asset just before 1 July 2027, with your *capital proceeds for that sale taken to be the amount applying under subsection (3); and

(b) to have *acquired the asset again just after that sale for an amount equal to those capital proceeds.

Note 1: The sale under paragraph (a) happens on 30 June 2027, and the reacquisition under paragraph (b) happens on 1 July 2027.

Note 2: Any capital gain or loss you make from the sale on 30 June 2027 is disregarded (and deferred) until the income year in which the realisation event happens. You can wait until then before working out the amount of the capital gain or loss (see section 112‑160).

Note 3: Subdivision 960‑M deals with indexation of a CGT asset’s cost base.

(3) The *capital proceeds are taken to be equal to:

(a) unless paragraph (b) applies,the asset’s *market value just before 1 July 2027; or

(b) if you choose to use an apportioning method determined under section 112‑185,the amount of capital proceeds worked out using that method.

(4) For the purposes of paragraph 103‑25(1)(a), the *realisation event is the relevant *CGT event for such a choice.

Note 1: Section 103‑25 sets out rules for making choices.

Note 2: This subsection and section 103‑25 mean you do not have to make a choice until the day you lodge your income tax return for the income year in which the realisation event happens (see paragraph 103‑25(1)(a)).

Note 3: The realisation event is the event mentioned in paragraph (1)(c).

(5) Except for the purposes of section 112‑185 (about making apportioning determinations), none of the following apply in relation to a sale and acquisition mentioned in paragraphs (2)(a) and (b) for which a choice is made under paragraph (3)(b):

(a) Subdivisions 112‑A, 112‑B, 112‑C and 112‑D (about modifications of the cost base and reduced cost base);

(b) sections 116‑25 to 116‑60 (about modifications of the general rules about capital proceeds).

112‑160 Australian resident individuals,defer a gain or loss from the deemed sale until the later realisation event happens

Application

(1) This section applies in relation to a *CGT asset of yours if, under paragraph 112‑155(2)(a), you make:

(a) a *capital gain (the initial notional gain); or

(b) a *capital loss (the initial notional loss);

in respect of the asset (disregarding subsection (2) of this section).

Note: The initial notional gain or loss is made from the sale that is taken to happen at the end of 30 June 2027 (see paragraph 112‑155(2)(a)), and is disregarded under subsection (2) of this section.

Disregard the initial notional gain or loss because it is to be deferred

(2) Disregard the initial notional gain or the initial notional loss, except for the purposes of subsection (3) or (4).

Deferring an initial notional gain

(3) If you made an initial notional gain, then for the purposes of Division 102:

(a) in the income year in which the *realisation event happens in relation to the *CGT asset,you are treated as having made a *capital gain (your deferred gain):

(i) for the *CGT event that happens under paragraph 112‑155(2)(a) (the deemed CGT event); and

(ii) that is a *discount capital gain if the initial notional gain is a discount capital gain; and

(iii) that is equal to the amount of the initial notional gain; and

(b) disregard section 102‑20 in relation to your deferred gain; and

(c) for the purposes of subparagraph (a)(ii) of this subsection, in working out whether the initial notional gain is a discount capital gain, treat the deemed CGT event as if it happens on the day the realisation event happens; and

(d) in working out whether, under step 6 of the method statement in subsection 102‑5(1), your deferred gain qualifies for any of the small business concessions, treat the deemed CGT event as if it happens on the day the realisation event happens.

Note 1: For paragraph (a), the realisation event is the CGT event referred to in paragraph 112‑155(1)(c).

Note 2: Paragraph (c) is relevant for working out whether the 12‑month rule in subsection 115‑25(1) is satisfied for the initial notional gain.

Note 3: If the initial notional gain is a discount capital gain, then under step 5 of the method statement in subsection 102‑5(1), the 50% discount mentioned in paragraph 115‑100(aa) can apply to your deferred gain.

Deferring an initial notional loss

(4) If you made an initial notional loss, then for the purposes of Division 102:

(a) in the income year in which the *realisation event happens in relation to the *CGT asset,you are treated as having made a *capital loss (your deferred loss) equal to the amount of the initial notional loss; and

(b) disregard section 102‑20 in relation to your deferred loss.

Note: You may make a separate capital loss from the realisation event for the period starting on 1 July 2027. In working out whether you make a capital loss from the realisation event for this period, you are taken to have acquired the CGT asset at the time, and for the amount, mentioned in paragraph 112‑155(2)(b).

Working out whether concessions are available for a capital gain from the realisation event

(5) In working out when you *acquired the *CGT asset for the purposes of working out whether your *capital gain resulting from the *realisation event is a *discount capital gain, disregard the sale and acquisition under subsection 112‑155(2).

Note: If you make a capital gain from the realisation event in respect of the asset, this subsection is relevant for working out whether the 12‑month rule in subsection 115‑25(1) is satisfied for the capital gain.

(6) In working out whether, under step 6 of the method statement in subsection 102‑5(1), your *capital gain resulting from the *realisation event qualifies for any of the small business concessions, disregard the sale and acquisition under subsection 112‑155(2).

Note: Subsections (5) and (6) refer to the capital gain from the realisation event for the period starting on 1 July 2027. The sale and reacquisition under subsection 112‑155(2) remain relevant for working out the amount of this capital gain, just not for whether this capital gain:

(a) is a discount capital gain; or

(b) qualifies for any of the small business concessions.

112‑165 Trusts,deemed sale just before, and reacquisition on, 1 July 2027

Application

(1) This section applies in relation to a *CGT asset of a trust estate if:

(a) on 30 June 2027, the asset is not a *pre‑CGT asset; and

(b) the trustee *acquired the asset and then held it throughout the period:

(i) starting at a time before 1 July 2027; and

(ii) ending at the end of 30 June 2027; and

(c) the trustee continues to hold the asset until a *realisation event happens in relation to the asset on or after 1 July 2027; and

(d) if it were assumed that the trust estate makes a *discount capital gain (the primary trust gain) from the realisation event,at least one beneficiary of the trust makes, because of section 115‑215, a discount capital gain in relation to the primary trust gain for which:

(i) for a beneficiary who is an individual,section 115‑110 (about foreign or temporary residents) does not apply; or

(ii) for a beneficiary that is another trust (other than a *complying superannuation entity),section 115‑120 (about foreign or temporary residents) does not apply; and

(e) the asset is not an asset for which either:

(i) section 115‑102 (about new residential dwellings etc.); or

(ii) section 115‑125 (about affordable housing);

applies in relation to all of the *capital gains that, because of section 115‑215, are made by the beneficiaries of the trust in relation to the capital gain the trust estate makes in relation to the realisation event.

Deemed sale and reacquisition

(2) For the purposes of this Part, Part 3‑3 and Subdivision 960‑M, the trustee is taken:

(a) to have sold the asset just before 1 July 2027, with the trustee’s *capital proceeds for that sale taken to be the amount applying under subsection (3); and

(b) to have *acquired the asset again just after that sale for an amount equal to those capital proceeds.

Note 1: The sale under paragraph (a) happens on 30 June 2027, and the reacquisition under paragraph (b) happens on 1 July 2027.

Note 2: Any capital gain or loss the trust estate makes from the sale on 30 June 2027 is disregarded (and deferred) until the income year in which the realisation event happens. The trustee (and beneficiaries) can wait until then before working out the amount of the capital gain or loss (see section 112‑170).

Note 3: Subdivision 960‑M deals with indexation of a CGT asset’s cost base.

(3) The *capital proceeds are taken to be equal to:

(a) unless paragraph (b) applies,the asset’s *market value just before 1 July 2027; or

(b) if the trustee chooses to use an apportioning method determined under section 112‑185,the amount of capital proceeds worked out using that method.

(4) For the purposes of paragraph 103‑25(1)(a), the *realisation event is the relevant *CGT event for such a choice.

Note 1: Section 103‑25 sets out rules for making choices.

Note 2: This subsection and section 103‑25 mean the trustee does not have to make a choice until the day the trustee lodges the trust’s income tax return for the income year in which the realisation event happens (see paragraph 103‑25(1)(a)).

Note 3: The realisation event is the event mentioned in paragraph (1)(c).

(5) Except for the purposes of section 112‑185 (about making apportioning determinations), none of the following apply in relation to a sale and acquisition mentioned in paragraphs (2)(a) and (b) for which a choice is made under paragraph (3)(b):

(a) Subdivisions 112‑A, 112‑B, 112‑C and 112‑D (about modifications of the cost base and reduced cost base);

(b) sections 116‑25 to 116‑60 (about modifications of the general rules about capital proceeds).

(6) To avoid doubt, subsection (2) applies only for the purposes of the provisions mentioned in that subsection. For example, it does not apply for the purposes of Subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 (about unpaid present entitlements).

112‑170 Trusts,defer a gain or loss from the deemed sale until the later realisation event happens

Application

(1) This section applies in relation to a *CGT asset of a trust estate if, under paragraph 112‑165(2)(a), the trust estate makes:

(a) a *capital gain (the initial notional gain); or

(b) a *capital loss (the initial notional loss);

in respect of the asset (disregarding subsection (2) of this section).

Note: The initial notional gain or loss is made from the sale that is taken to happen at the end of 30 June 2027 (see paragraph 112‑165(2)(a)), and is disregarded under subsection (2) of this section.

Disregard the initial notional gain or loss because it is to be deferred

(2) Disregard the initial notional gain or the initial notional loss, except for the purposes of subsection (3) or (4).

Deferring an initial notional gain

(3) If the trust estate made an initial notional gain, then for the purposes of Division 102 and Subdivision 115‑C:

(a) in the income year in which the *realisation event happens in relation to the *CGT asset,treat the trust estate as having made a *capital gain (the trust’s deferred gain):

(i) for the *CGT event that happens under paragraph 112‑165(2)(a) (the deemed CGT event); and

(ii) that is a *discount capital gain if the initial notional gain is a discount capital gain; and

(iii) that is equal to the amount of the initial notional gain; and

(b) disregard section 102‑20 in relation to the trust’s deferred gain; and

(c) for the purposes of subparagraph (a)(ii) of this subsection, in working out whether the initial notional gain is a discount capital gain, treat the deemed CGT event as if it happens on the day the realisation event happens; and

(d) in working out whether, under step 6 of the method statement in subsection 102‑5(1), the trust’s deferred gain qualifies for any of the small business concessions, treat the deemed CGT event as if it happens on the day the realisation event happens.

Note 1: For paragraph (a), the realisation event is the CGT event referred to in paragraph 112‑165(1)(c).

Note 2: Paragraph (c) is relevant for working out whether the 12‑month rule in subsection 115‑25(1) is satisfied for the initial notional gain.

Note 3: If the initial notional gain is a discount capital gain, then under step 5 of the method statement in subsection 102‑5(1), the 50% discount mentioned in paragraph 115‑100(ab) can apply to the trust’s deferred gain.

Note 4: A beneficiary of the trust may also be taken to have made, because of section 115‑215, a capital gain in relation to the trust’s deferred gain.

Deferring an initial notional loss

(4) If the trust estate made an initial notional loss, then for the purposes of Division 102:

(a) in the income year in which the *realisation event happens in relation to the *CGT asset,treat the trust estate as having made a *capital loss (the trust’s deferred loss) equal to the amount of the initial notional loss; and

(b) disregard section 102‑20 in relation to the trust’s deferred loss.

Note 1: For paragraph (a), the realisation event is the CGT event referred to in paragraph 112‑165(1)(c).

Note 2: The trust estate may make a separate capital loss from the realisation event for the period starting on 1 July 2027. In working out whether the trust estate makes a capital loss from the realisation event for this period, the trust estate is taken to have acquired the CGT asset at the time, and for the amount, mentioned in paragraph 112‑165(2)(b).

Note 3: The trust’s deferred loss, and any separate capital loss referred to in note 2, are taken into account to work out whether the trust estate has a net capital gain for the income year in which the realisation event happens. If the trust estate does, then a beneficiary of the trust may also be taken to have, because of section 115‑215, an extra capital gain for that income year.

Working out whether concessions are available for a capital gain from the realisation event

(5) In working out when the trustee *acquired the *CGT asset for the purposes of working out whether the trust estate’s *capital gain resulting from the *realisation event is a *discount capital gain, disregard the sale and acquisition under subsection 112‑165(2).

Note: If the trust estate make a capital gain from the realisation event in respect of the asset, this subsection is relevant for working out whether the 12‑month rule in subsection 115‑25(1) is satisfied for the capital gain.

(6) In working out whether, under step 6 of the method statement in subsection 102‑5(1), the trust estate’s *capital gain resulting from the *realisation event qualifies for any of the small business concessions, disregard the sale and acquisition under subsection 112‑165(2).

Note 1: Subsections (5) and (6) refer to the capital gain from the realisation event for the period starting on 1 July 2027. The sale and reacquisition under subsection 112‑165(2) remain relevant for working out the amount of this capital gain, just not for whether this capital gain:

(a) is a discount capital gain; or

(b) qualifies for any of the small business concessions.

Note 2: A beneficiary of the trust may also be taken to have made, because of section 115‑215, a capital gain in relation to the capital gain of the trust estate referred to in subsections (5) and (6).

112‑175 Pre‑CGT assets,deemed sale just before, and reacquisition on, 1 July 2027

(1) This section applies in relation to your asset if:

(a) the asset is a *pre‑CGT asset on 30 June 2027; and

(b) you continue to hold the asset until a *realisation event happens in relation to the asset on or after 1 July 2027.

Deemed sale and reacquisition

(2) For the purposes of this Part, Part 3‑3 and Subdivision 960‑M, you are taken:

(a) to have sold the asset just before 1 July 2027, with your *capital proceeds for that sale taken to be the amount applying under subsection (3); and

(b) to have *acquired the asset again just after that sale for an amount equal to those capital proceeds.

Note 1: This subsection causes the asset to cease to be a pre‑CGT asset, and for the first element of the asset’s cost base to be reset, on 1 July 2027 (see paragraph 149‑10(a) and subsection 110‑25(2)).

Note 2: The sale under paragraph (a) happens on 30 June 2027, and the reacquisition under paragraph (b) happens on 1 July 2027.

Note 3: Any capital gain or capital loss you make from the sale on 30 June 2027 is disregarded (see subsection 104‑10(5)).

Note 4: For the purposes of working out whether you make a capital gain or capital loss from the realisation event, you are taken to have acquired the CGT asset at the time, and for the amount, applying under paragraph (b).

Note 5: Subdivision 960‑M deals with indexation of a CGT asset’s cost base.

(3) The *capital proceeds are taken to be equal to:

(a) unless paragraph (b) applies,the asset’s *market value immediately before 1 July 2027; or

(b) if you choose to use an apportioning method determined under section 112‑185,the amount of capital proceeds worked out using that method.

(4) For the purposes of paragraph 103‑25(1)(a), the *realisation event is the relevant *CGT event for such a choice.

Note 1: Section 103‑25 sets out rules for making choices.

Note 2: This subsection and section 103‑25 mean you do not have to make a choice until the day you lodge your income tax return for the income year in which the realisation event happens (see paragraph 103‑25(1)(a)).

(5) Except for the purposes of section 112‑185 (about making apportioning determinations), none of the following apply in relation to a sale and acquisition mentioned in paragraphs (2)(a) and (b) for which a choice is made under paragraph (3)(b):

(a) Subdivisions 112‑A, 112‑B, 112‑C and 112‑D (about modifications of the cost base and reduced cost base);

(b) sections 116‑25 to 116‑60 (about modifications of the general rules about capital proceeds).

(6) To avoid doubt, subsection (2) applies only for the purposes of the provisions mentioned in that subsection. For example, it does not apply for the purposes of Subdivision EA of Division 7A of Part III of the Income Tax Assessment Act 1936 (about unpaid present entitlements).

112‑180 Pre‑CGT assets,defer a gain from CGT event K6 from the deemed sale until the later realisation event happens

Application

(1) This section applies if:

(a) you own *shares in a company or an interest in a trust; and

(b) under subsection 112‑175(2), you are taken to have sold the shares or interest (the deemed sale) and acquired them again; and

(c) *CGT event K6 happens on 30 June 2027 as a result of the deemed sale, and you make a *capital gain from this CGT event (the initial notional gain); and

(d) you continue to hold the shares or interest until a *realisation event happens in relation to them on or after 1 July 2027.

Disregard the initial notional gain because it is to be deferred

(2) Disregard the initial notional gain, except for the purposes of subsection (3).

Deferring an initial notional gain

(3) For the purposes of Division 102:

(a) in the income year in which the *realisation event happens in relation to the *CGT asset,you are treated as having made a *capital gain (your deferred gain):

(i) for the *CGT event K6 mentioned in paragraph (1)(c); and

(ii) that is a *discount capital gain if the initial notional gain is a discount capital gain; and

(iii) that is equal to the amount of the initial notional gain; and

(b) disregard section 102‑20 in relation to your deferred gain.

Note 1: If the initial notional gain is a discount capital gain, then under step 5 of the method statement in subsection 102‑5(1), the 50% discount mentioned in paragraph 115‑100(aa) or (ab) can apply to your deferred gain.

Note 2: For a trust, a beneficiary of the trust may also be taken to have made, because of section 115‑215, a capital gain in relation to the deferred gain.

112‑185 Method for apportioning capital gains and losses between realisation events and earlier deemed CGT events

(1) The Minister may, by legislative instrument, determine a method for apportioning *capital gains and *capital losses between:

(a) *realisation events happening on or after 1 July 2027 in relation to *CGT assets; and

(b) earlier *CGT events relating to those CGT assets that are taken to have happened under subsection 112‑155(2), 112‑165(2) or 112‑175(2).

(2) For such a *CGT asset, such a method must take into account:

(a) the *acquisition of the *CGT asset that is taken to have happened under paragraph 112‑155(2)(b), 112‑165(2)(b) or 112‑175(2)(b); and

(b) any expenditure (including indexation) in an element of the *cost base or *reduced cost base of the CGT asset on or after 1 July 2027; and

(c) any other matter the Minister considers relevant.

(3) For such a *CGT asset, such a method must enable the following to be worked out:

(a) the *capital proceeds for the sale of the CGT asset that is taken to have happened under paragraph 112‑155(2)(a), 112‑165(2)(a) or 112‑175(2)(a);

(b) the *cost base and *reduced cost base of the CGT asset when it is taken to have been *acquired under paragraph 112‑155(2)(b), 112‑165(2)(b) or 112‑175(2)(b).

The method may also enable other things to be worked out.

14 Section 114‑1

Repeal the section, substitute:

114‑1 Indexing elements of cost base

(1) In working out the *cost base of a *CGT asset under subsection 110‑36(1A), index expenditure incurred in each element (except the third element).

Note 1: The expenditure can include giving property (see section 103‑5).

Note 2: Subdivision 960‑M shows you how to index amounts (see subsections 960‑275(1B) and (1C) in particular).

Note 3: You have to work out the cost base of a CGT asset if a CGT event happens in relation to it or if there is a cost base modification.

Note 4: You cannot index expenditure in the third element (costs of ownership) (see subsection 960‑275(4)).

(2) In working out the *cost base of a *CGT asset under subsection 110‑36(1), index expenditure incurred in each element (except the third element) at or before the time mentioned in paragraph 110‑36(1)(a).

Note 1: The expenditure can include giving property (see section 103‑5).

Note 2: Subdivision 960‑M shows you how to index amounts. Indexation under subsection 110‑36(1) does not take account of inflation after 30 September 1999 (see subsections 960‑275(2) and (3)).

Note 3: You have to work out the cost base of a CGT asset if a CGT event happens in relation to it or if there is a cost base modification.

Note 4: You cannot index expenditure in the third element (costs of ownership) (see subsection 960‑275(4)).

Note 5: Indexation under subsection 110‑36(1) is not relevant to expenditure incurred after 11.45 am on 21 September 1999 or any expenditure relating to a CGT asset acquired after that time.

15 Subsection 114‑5(2)

Omit all of the words before the table (including the heading), substitute:

Indexation for some entities only if indexation chosen

(2) Indexation is not relevant for the purposes of working out under subsection 110‑36(1):

(a) the *cost base of a *CGT asset; and

(b) the *capital gain of an entity mentioned in an item of the table from a *CGT event happening in relation to the CGT asset after 11.45 am (by legal time in the Australian Capital Territory) on 21 September 1999;

unless the relevant entity mentioned in that item chooses that the cost base includes indexation.

16 Subsection 114‑5(3)

Repeal the subsection (not including the note), substitute:

(3) Indexation is not relevant for the purposes of working out under subsection 110‑36(1):

(a) the *cost base of a *CGT asset; and

(b) the *capital gain of a *life insurance company from a *CGT event happening after 30 June 2000 in respect of a CGT asset that is a *complying superannuation asset;

unless the company chooses that the cost base includes indexation.

17 Subsection 114‑10(1)

Repeal the subsection, substitute:

(1) You only index expenditure in the *cost base of a *CGT asset because of subsection 110‑36(1A) or (1) for a *CGT event happening in relation to the asset if you, or the entity whose cost base is being worked out, had *acquired the asset at least 12 months before the time of the CGT event.

Note: Generally, expenditure is indexed from when it is incurred: see subsection 960‑275(1B) or (2). The exception is when there is an acquisition that did not result from a CGT event. The first element in this case is indexed from when the expenditure was paid: see subsection 960‑275(1C) or (3).

18 Subsection 114‑10(2)

Omit “5 exceptions”, substitute “6 exceptions”.

19 At the end of subsection 114‑10(2)

Add:

; and • one for a sale and reacquisition taken to have happened under subsection 112‑155(2), 112‑165(2) or 112‑175(2): see subsection (9).

20 At the end of section 114‑10

Add:

Sales and reacquisitions taken to have happened in relation to adjustments to the 50% capital gains discount

(9) Disregard subsections 112‑155(2), 112‑165(2) and 112‑175(2) for the purposes of applying the 12 month rule.

21 Subsection 114‑15(1)

After “indexation”, insert “because of subsection 110‑36(1A) or (1)”.

22 Subsection 114‑15(6) (note)

Omit “960‑275(3)”, substitute “960‑275(1C) or (3)”.

23 Section 114‑20

Before “you index”, insert “when indexing that element because of subsection 110‑36(1A) or (1),”.

24 After section 114‑20

Insert:

114‑25 Residency requirements for individuals for indexation to be included in a cost base under subsection 110‑36(1A)

(1) This section sets out requirements for indexation to be included under subsection 110‑36(1A) in the *cost base of a *CGT asset for the purposes of working out your *capital gain from a *CGT event happening in relation to the *CGT asset if:

(a) you are an individual; and

(b) the CGT event happened while you were holding the CGT asset (as a result of earlier *acquiring it).

Note: This section applies for working out a capital gain you make from directly holding the asset. A similar result arises for any capital gain you make indirectly as a beneficiary of a trust (see Subdivision 115‑C, in particular subsections 115‑225(4) and (5)).

(2) You must be neither a foreign resident nor a *temporary resident at any time during the period (the testing period):

(a) starting on the later of 1 July 2027 and the day of *acquiring the *CGT asset; and

(b) ending on the day the *CGT event happens.

(3) For the purposes of subsection (2), if:

(a) another individual owned the *CGT asset on a particular day before the testing period ends; and

(b) on that day, that individual was one of the following (that individual’s residency status):

(i) an Australian resident (but not a *temporary resident);

(ii) a temporary resident;

(iii) a foreign resident; and

(c) section 115‑30 treats you as having *acquired the CGT asset when that individual, or an earlier owner of the CGT asset, acquired it;

you are treated as having the same residency status on that day as that individual had on that day.

(4) Section 115‑30 applies to subsections (2) and (3) of this section in a corresponding way to the way that section applies in relation to section 115‑105.

Note: Section 115‑30 has special rules about when assets are acquired.

114‑30 Asset requirements for indexation to apply for a cost base worked out under subsection 110‑36(1A)

(1) This section sets out requirements for indexation to be included under subsection 110‑36(1A) in the *cost base of a *CGT asset for the purposes of working out your *capital gain from a *CGT event happening in relation to the CGT asset if:

(a) you are an individual; and

(b) you make the capital gain directly or, because of section 115‑215, as a beneficiary of a trust.

(2) The *CGT asset must not be an asset for which either of the following sections applies in relation to the *capital gain:

(a) section 115‑102 (about new residential dwellings etc.);

(b) section 115‑125 (about affordable housing).

Note 1: If you are a beneficiary of a trust, the requirements in this section do not affect whether indexation is included in the cost base of the CGT asset for the purposes of working out whether the trust estate makes a capital gain. If section 115‑102 or 115‑125 (the discount section) applies for your capital gain, then in working out your capital gain:

(a) the cost base will be adjusted to remove the effect of indexation (see subsection 115‑225(5)); and

(b) instead, the discount relating to the discount section applies (see paragraph 115‑215(4)(a)).

Note 2: However, the result in paragraphs (a) and (b) of note 1 does not happen for your capital gain if the trust chooses under the discount section for that section not to apply. If the trust makes this choice, the indexation included in the cost base of the CGT asset will flow through to working out your capital gain (see subsection 115‑215(3)(a)).

25 Division 115 (heading)

Omit “trusts’ net capital gains”, substitute “certain trust capital gains”.

26 Section 115‑1

After “net income of trusts with net capital gains”, insert “(and in certain other circumstances)”.

27 At the end of section 115‑1

Add:

For a discount capital gain from a CGT event happening on or after 1 July 2027, a discount of at least 50% continues to be available if the CGT event relates to a new residential dwelling, to the provision of affordable housing, or to other CGT assets of a kind determined by the Minister.

28 Paragraph 115‑100(a)

Repeal the paragraph, substitute:

(a) 50% if section 115‑102 (about new residential dwellings etc.) applies to the gain; or

(aa) 50% if:

(i) the gain is made by an individual from a *CGT event happening before 1 July 2027; and

(ii) neither section 115‑105 nor 115‑110 (about foreign or temporary residents) applies to the gain; or

(ab) 50% if:

(i) the gain is made by a trust (other than a trust that is a *complying superannuation entity) from a *CGT event happening before 1 July 2027; and

(ii) section 115‑120 (about foreign or temporary residents) does not apply to the gain; or

29 At the end of section 115‑100

Add:

; or (f) 0% if none of the above paragraphs applies to the gain.

30 After section 115‑100

Insert:

115‑102 New residential dwellings etc.

(1) This section applies to a *discount capital gain if:

(a) you are an individual; and

(b) neither section 115‑105 nor 115‑110 (about foreign or temporary residents) applies to the discount capital gain; and

(c) either:

(i) you make the discount capital gain from a *CGT event happening on or after 1 July 2027 in relation to a *CGT asset covered by subsection (2); or

(ii) because of section 115‑215, Division 102 applies to you as if you had made the discount capital gain for a *capital gain of a trust covered by subsection (4); and

(d) where subparagraph (c)(ii) applies,the trust’s capital gain was made directly, or indirectly through one or more entities that are all covered by subsection (4), from a CGT event happening on or after 1 July 2027 in relation to a CGT asset covered by subsection (2).

Note: The discount percentage for the discount capital gain is 50% (see paragraph 115‑100(a)).

Kinds of CGT assets to which this section relates

(2) This subsection covers the following *CGT assets:

(a) a *new residential dwelling;

(b) a CGT asset of a kind determined under subsection (3).

(3) The Minister may, by legislative instrument, determine one or more kinds of *CGT assets to be covered by subsection (2).

Relevant trusts and interposed entities

(4) This subsection covers the following:

(a) a trust, other than a *superannuation fund or a public unit trust (within the meaning of section 102P of the Income Tax Assessment Act 1936);

(b) a partnership.

Note: For paragraph (a), a trust includes a managed investment trust.

Indexation may be able to be chosen as an alternative

(5) Despite subsection (1), the following person may choose for this section not to apply to the *discount capital gain:

(a) if you make the discount capital gain in the way described in subparagraph (1)(c)(i),you;

(b) if you make the discount capital gain in the way described in subparagraph (1)(c)(ii),the trustee of the trust.

Such a choice by the trustee applies to you in a similar way to a choice made by you for a gain covered by paragraph (a).

Note: Instead, the cost base of the CGT asset may be able to be indexed (see subsection 110‑36(1A)).

31 Subsection 115‑125(2) (note)

Omit “Note”, substitute “Note 1”.

32 At the end of subsection 115‑125(2)

Add:

Note 2: It may be possible to choose indexation as an alternative to a discount under this section (see subsection (6)).

33 Paragraph 115‑125(3)(b)

Repeal the paragraph.

34 At the end of subsection 115‑125(3)

Add:

Note: For paragraph (a), a trust includes a managed investment trust.

35 Paragraph 115‑125(4)(a)

Repeal the paragraph, substitute:

(a) either:

(i) 50% if neither section 115‑105 nor 115‑110 (about foreign or temporary residents) applies to the *discount capital gain; or

(ii) the *discount percentage that, apart from this section, would result from section 115‑115 if section 115‑105 or 115‑110 applies to the discount capital gain; and

36 At the end of section 115‑125

Add:

Indexation may be able to be chosen as an alternative

(6) If the percentage that would result from this section for you and the *discount capital gain is 60%, then, despite subsection (2), the following person may choose for this section not to apply to the discount capital gain:

(a) if you make the discount capital gain in the way described in subparagraph (2)(b)(i),you;

(b) if you make the discount capital gain in the way described in subparagraph (2)(b)(ii),the trustee of the trust.

Such a choice by the trustee applies to you in a similar way to a choice made by you for a gain covered by paragraph (a).

Note: Instead, the cost base of the CGT asset may be able to be indexed (see subsection 110‑36(1A)).

37 Section 115‑200

Omit “step 3”, substitute “step 5”.

38 At the end of subsection 115‑210(1)

Add:

Note: This Subdivision has an extended application under Subdivision 115‑CA (about trusts that would have net capital gains if indexation were disregarded).

39 Subsection 115‑215(4)

Omit “paragraph (3)(b) or (c)”, substitute “subsection (3)”.

40 Paragraph 115‑215(4)(a)

Omit “if the relevant trust gain was reduced under step 3 of the method statement in subsection 102‑5(1),”, substitute “if the relevant trust gain is a *discount capital gain (disregarding section 115‑20),”.

41 Before subsection 115‑225(2)

Insert:

Special rule if net income falls short of certain amount

42 At the end of section 115‑225

Add:

Special rule relating to indexation

(4) Subsection (5) applies if the *capital gain has been worked out using a *cost base that includes indexation because of subsection 110‑36(1A), and the amount mentioned in subsection (1) of this section:

(a) is being worked out for the purposes of subsection 115‑215(3) in circumstances where, had you:

(i) made the capital gain; and

(ii) *acquired and held any relevant *CGT asset in the same way as the trust estate did;

that indexation could not have applied to the cost base; or

(b) is being worked out for the purposes of subsection 115‑215(3) in connection with you having a resultant *discount capital gain to which section 115‑102 (about new residential dwellings etc.) or 115‑125 (about affordable housing) applies; or

(c) is being worked out for the purposes of subsection 115‑220(2) in relation to a beneficiary in circumstances where, had the beneficiary:

(i) made the capital gain; and

(ii) acquired and held any relevant CGT asset in the same way as the trust estate did;

that indexation could not have applied to the cost base; or

(d) is being worked out for the purposes of subsection 115‑220(2) in connection with a beneficiary having a resultant discount capital gain to which section 115‑102 (about new residential dwellings etc.) or 115‑125 (about affordable housing) applies; or

(e) is being worked out for the purposes of subsection 115‑222(4).

Note 1: For paragraph (a) or (c), indexation under subsection 110‑36(1A) is only applicable in relation to capital gains, of individuals and trusts, that arise from a CGT event that happens on or after 1 July 2027. In addition, residency requirements for individuals apply under section 114‑25.

Note 2: For paragraph (b) or (d), indexation may be able to be chosen by the trustee of a trust as an alternative to the discount percentage applying for a beneficiary’s attributed gain: see subsections 115‑102(5) and 115‑125(6).

Note 3: For paragraph (e), subsection 115‑222(4) relates to assessing trustees under section 99A of the Income Tax Assessment Act 1936.

(5) For the purposes of the provision mentioned in subsection (6) of this section, determine the amount of the *capital gain remaining assuming that:

(a) in working out the amount of the capital gain before any reductions under the method statement in subsection 102‑5(1) were applied, the *cost base was adjusted to remove the effect of indexation on its calculation; and

(b) the assumption in paragraph (a) did not result in any changes to the application of *capital losses, previously unapplied *net capital losses or quarantined amounts (including how much of each of those was applied) under that method statement to reduce the capital gain.

(6) The provision is:

(a) if subsection (3) does not apply,paragraph (1)(a); or

(b) if subsection (3) applies,subparagraph (1)(a)(i) (as taken to be included because of subsection (3)).

43 At the end of Subdivision 115‑C

Add:

115‑235 Giving information to beneficiaries

(1) If a trust is covered by a determination under subsection (4), the trustee must:

(a) prepare a statement for each beneficiary of the trust who, because of subsection 115‑215(3), makes one or more *capital gains for an income year in relation to capital gains of the trust estate for the income year; and

(b) ensure the statement complies with subsection (2); and

(c) give the statement to the beneficiary within the period specified in, or worked out under, the determination.

Note: Section 286‑75 in Schedule 1 to the Taxation Administration Act 1953 provides an administrative penalty for breach of this subsection.

(2) The statement complies with this subsection if it:

(a) is in the *approved form; and

(b) states the amount of each of those *capital gains that the beneficiary makes; and

(c) sets out which of those capital gains are *non‑residential capital gains, *residential capital gains, *deferred non‑residential capital gains or *deferred residential capital gains; and

(d) sets out the effect of subsections 115‑215(4), and 115‑225(5) if applicable, in relation to each of those capital gains.

Note: Subsection 115‑215(4) deals with the status of capital gains as discount capital gains, and the effect of Subdivision 152‑C having been applied to the trust gain. Subsection 115‑225(5) makes adjustments to remove the effect of indexation on the cost bases of the relevant CGT assets.

(3) A trustee of a trust is not required to prepare and give a statement under subsection (1) for an income year if a report is given, or required to be given, under section 393‑10 in Schedule 1 to the Taxation Administration Act 1953 in respect of the trust estate for the *financial year that corresponds to the income year.

(4) The Commissioner may, by legislative instrument, determine that trustees of all or specified kinds of trusts are required:

(a) to prepare and give statements under subsection (1) to beneficiaries of the trusts; and

(b) to do so before the end of:

(i) a specified period; or

(ii) a period worked out using a specified method.

44 After Subdivision 115‑C

Insert:

Subdivision 115‑CA,Extended application of rules about trusts with net capital gains (disregarding indexation)

Guide to Subdivision 115‑CA

115‑250 What this Subdivision is about

This Subdivision extends the application of Subdivision 115‑C in certain circumstances where indexation is used in working out the cost base for trust estate capital gains, and Subdivision 115‑C does not otherwise apply because the trust estate does not have a net capital gain.

Table of sections

Operative provisions

115‑255 Extended application of Subdivision 115‑C,disregarding indexation

Operative provisions

115‑255 Extended application of Subdivision 115‑C,disregarding indexation

(1) In addition to its application under subsection 115‑210(1), Subdivision 115‑C applies as set out in this section if:

(a) a trust estate has one or more *capital gains that have been worked out using a *cost base that includes indexation because of subsection 110‑36(1A); and

(b) that Subdivision does not apply under subsection 115‑210(1) in relation to the trust estate for an income year; and

(c) that Subdivision would so apply if, in working out whether the trust estate has a *net capital gain for the income year, the following assumptions applied in relation to each of those capital gains:

(i) in working out the amount of the capital gain before any reductions under the method statement in subsection 102‑5(1) were applied, the *cost base was adjusted to remove the effect of indexation on its calculation;

(ii) the assumption in subparagraph (i) did not result in any changes to the application of *capital losses, previously unapplied *net capital losses or quarantined amounts (including how much of each of those was applied) under that method statement to reduce the capital gain.

(2) Subdivision 115‑C applies under this section as follows in relation to such a *capital gain of the trust estate (the trust gain):

(a) that Subdivision applies for the purposes of treating a beneficiary of the trust estate as having a related capital gain under subsection 115‑215(3) in circumstances where subsection 115‑225(5) would apply for working out the amount of the trust gain;

(b) if paragraph (a) applies,section 115‑235 applies for such a related capital gain;

(c) that Subdivision applies for the purposes of increasing the trustee’s assessable amount under subsection 115‑220(2) or 115‑222(4) in circumstances where subsection 115‑225(5) would apply for working out the amount of the trust gain.

(3) The reference to the trust estate’s net income in subsection 115‑215(1) does not limit the application of section 115‑215 for those purposes.

(4) To avoid doubt, subsection 115‑210(2) applies in relation to the application of Subdivision 115‑C under this section.

(5) To avoid doubt, a reference in a *taxation law to Subdivision 115‑C or a provision of that Subdivision includes a reference to that Subdivision, or that provision (as the case requires), as it applies because of this section.

45 Section 149‑10 (note)

Omit “Note”, substitute “Note 1”.

46 At the end of section 149‑10

Add:

Note 2: A CGT asset will cease to be a pre‑CGT asset on 1 July 2027 (see section 112‑175).

47 Section 152‑205 (example)

Repeal the example, substitute:

Note: The cost bases of CGT assets of an individual are indexed from 1 July 2027, reducing capital gains that arise after 1 July 2027. This reduction applies after indexation, allowing the indexed gain to be reduced by a further 50%.

48 After subsection 960‑275(1A)

Insert:

(1B) For indexation under subsection 110‑36(1A) of the *cost base of a *CGT asset (except the first element of the cost base of an asset covered by subsection (3)), the indexation factor for expenditure:

(a) in an element of the cost base; and

(b) incurred on or after 1 July 2027;

is:

The expenditure can include giving property: see section 103‑5.

Note 1: This includes expenditure taken to have been incurred on 1 July 2027 as mentioned in paragraph 112‑155(2)(b), 112‑165(2)(b) or 112‑175(2)(b).

Note 2: There are rules affecting when the expenditure was incurred: see Division 114.

(1C) For indexation under subsection 110‑36(1A) of the first element of the *cost base of a *CGT asset that is a *share in a company, or unit in a unit trust, the indexation factor for an amount in that first element that was paid to the company or trust at a time:

(a) after the asset was *acquired; and

(b) on or after 1 July 2027;

is:

The payment can include giving property: see section 103‑5.

Example: Peter acquires shares in a company. The shares are partly‑paid, and the company makes a call on the shares. Peter sells the shares to Narina before Peter is liable to pay the call.

The amount Narina paid to Peter for the shares is indexed under subsection 960‑275(1B) from the quarter in which she incurred the expenditure to acquire the shares.

The amount Narina later pays for the call on the shares is indexed in accordance with this subsection from the quarter in which she made that later payment.

49 Subsection 960‑275(2)

After “For indexation”, insert “under subsection 110‑36(1)”.

50 Subsection 960‑275(3)

After “For indexation”, insert “under subsection 110‑36(1)”.

51 Subsection 995‑1(1)

Insert:

deferred non‑residential capital gain has the meaning given by subsection 102‑6(3).

deferred residential capital gain has the meaning given by subsection 102‑6(4).

non‑residential capital gain has the meaning given by subsection 102‑6(1).

residential capital gain has the meaning given by subsection 102‑6(2).

Taxation Administration Act 1953

52 After subsection 286‑75(2) in Schedule 1

Insert:

(2AAA) You are also liable to an administrative penalty if:

(a) you are required under subsection 115‑235(1) of the Income Tax Assessment Act 1997 (giving information to beneficiaries) to prepare and give a statement to an entity (other than the Commissioner) by a particular day; and

(b) you do not give the statement to the entity by that day.

53 Paragraph 286‑80(2)(a) in Schedule 1

After “(1),”, insert “(2AAA),”.

Part 2,Minimum rate of tax on capital gains

Income Tax Assessment Act 1997

54 Section 4‑25

Omit “Subsection 392‑35(3)” (first occurring), substitute “Subsection 119‑10(1) or 392‑35(3)”.

55 Section 4‑25 (before the note)

Insert:

Note 1: Subsection 119‑10(1) increases some individuals’ tax liability by requiring them to pay extra income tax in relation to certain capital gains.

56 Section 4‑25 (note)

Omit “Note”, substitute “Note 2”.

57 At the end of section 102‑1

Add:

Some or all of your net capital gain may be subject to a 30% minimum tax (see Division 119).

58 After Division 118

Insert:

Division 119,Minimum rate of tax on capital gains

Guide to Division 119

119‑1 What this Division is about

If you are an individual who is an Australian resident, you may have to pay extra income tax relating to certain capital gains you make during an income year to ensure a rate of tax of 30% on those gains (before applying offsets).

This Division sets out how to work out when extra income tax is payable and matters relating to the amount of that tax.

The requirement to pay extra income tax does not apply if you received certain payments during the income year.

Table of sections

Operative provisions

119‑5 Your minimum tax capital gain for an income year

119‑10 When extra income tax is payable on your minimum tax capital gain

119‑15 Exception for recipients of certain payments

Operative provisions

119‑5 Your minimum tax capital gain for an income year

(1) Your minimum tax capital gain (if any) for an income year is the total of the amounts of *capital gains (if any) covered by subsection (2) that are remaining after applying step 6 of the method statement in subsection 102‑5(1).

(2) This subsection covers a *capital gain you made during the income year, including because of section 115‑215 (about attribution of trust gains to beneficiaries), if:

(a) the capital gain is:

(i) a *residential capital gain; or

(ii) a *non‑residential capital gain; and

(b) section 115‑102 (about new residential dwellings etc.) does not apply to the capital gain; and

(c) section 115‑125 (about affordable housing) does not apply to the capital gain.

119‑10 When extra income tax is payable on your minimum tax capital gain

(1) You must pay extra income tax on your *minimum tax capital gain for an income year if:

(a) you are an individual; and

(b) you are an Australian resident at any time during the income year; and

(c) you have a *minimum tax gap amount for the income year.

Note: Section 12AA of the Income Tax Rates Act 1986 sets the rate at which you must pay extra income tax on your minimum tax capital gain. It does so in such a way that the extra income tax you must pay equals the minimum tax gap amount.

(2) Use this method statement to work out whether you have a minimum tax gap amount for the income year:

Method statement

Step 1. Multiply your *minimum tax capital gain for the income year by 30%.

Step 2. Work out your basic income tax liability for the income year under step 2 of the method statement in subsection 4‑10(3), disregarding this Division.

Step 3. Work out what the amount at step 2 of this method statement would be if your taxable income for the income year were reduced (but not below nil) by the amount of your *minimum tax capital gain.

Step 4. Subtract the amount at step 3 from the amount at step 2.

Step 5. Subtract the amount at step 4 from the amount at step 1.

Step 6. Round the result down to the nearest whole dollar if the result is not already a number of whole dollars.

Step 7. If the result (as rounded) is more than nil, you have a minimum tax gap amount for the income year equal to that amount.

119‑15 Exception for recipients of certain payments

(1) Section 119‑10 does not apply if you receive, at any time during the income year, a payment of a kind determined under subsection (2).

(2) The Minister may, by legislative instrument, determine a kind of payment for the purposes of subsection (1) if:

(a) such a payment is a social security payment (within the meaning of the Social Security Act 1991); or

(b) such a payment is made by an *Australian government agency under an *Australian law, and the eligibility for, or the amount of, the payment depends on one or more of the following:

(i) the recipient’s means or financial position;

(ii) the recipient’s impaired ability to work or incapacity.

59 Subsection 995‑1(1)

Insert:

minimum tax capital gain has the meaning given by section 119‑5.

minimum tax gap amount has the meaning given by subsection 119‑10(2).

Income Tax (Transitional Provisions) Act 1997

60 After Division 118

Insert:

Division 119,Minimum rate of tax on capital gains

Table of sections

119‑1 Application of Division 119 of the Income Tax Assessment Act 1997

119‑1 Application of Division 119 of the Income Tax Assessment Act 1997

Division 119 of the Income Tax Assessment Act 1997 applies in relation to capital gains from CGT events happening on or after 1 July 2027.

Part 3,Other amendments

Income Tax Assessment Act 1936

61 At the end of section 95AAA

Add:

Note: In this Division, a reference to Subdivision 115‑C of the Income Tax Assessment Act 1997 includes a reference to that Subdivision as it applies because of Subdivision 115‑CA of that Act (which extends the application of Subdivision 115‑C in certain circumstances to trusts that would have net capital gains if indexation were disregarded): see subsection 115‑255(5) of that Act.

62 Paragraph 100AB(4)(b)

Omit “steps 3 and 4”, substitute “steps 5 and 6”.

63 Subparagraph 102UW(b)(i)

Omit “steps 1 to 4”, substitute “steps 1 to 6”.

Income Tax Assessment Act 1997

64 Subsection 104‑71(4) (table item 1, column headed “Amount excluded”)

Omit “step 3”, substitute “step 5”.

65 Subsection 104‑71(4) (note 1)

Omit “Step 3”, substitute “Step 5”.

66 Subsection 104‑71(4) (notes 2 and 3)

Omit “step 3”, substitute “step 5”.

67 Paragraphs 115‑215(3)(a), (b) and (c)

Omit “step 3”, substitute “step 5”.

68 Paragraph 115‑215(4)(b)

Omit “step 3”, substitute “step 5”.

69 Paragraph 115‑220(2)(b)

Omit “step 3”, substitute “step 5”.

70 Paragraph 115‑222(4)(a)

Omit “step 3”, substitute “step 5”.

71 Paragraph 115‑225(1)(a)

Omit “steps 1 to 4”, substitute “steps 1 to 6”.

72 Subparagraph 115‑225(3)(a)(i)

Omit “steps 1 to 4”, substitute “steps 1 to 6”.

73 Subsection 115‑228(1) (definition of net financial benefit)

After “losses” (wherever occurring), insert “and quarantined amounts”.

74 Subsection 115‑228(1) (paragraph (b) of the definition of share of net financial benefit)

After “losses” (wherever occurring), insert “and quarantined amounts”.

75 At the end of section 115‑228

Add:

(4) In this section:

quarantined amount means a quarantined amount referred to in paragraph 26‑155(1)(b) (about using or holding residential dwellings as residential accommodation).

76 Section 152‑1

Omit “step 4”, substitute “step 6”.

77 Section 152‑1

Omit all the words after “against your capital gains”, substitute “and quarantined amounts to first reduce your capital gains (under steps 1 to 4) before you can use those 3 concessions to further reduce them”.

78 Section 152‑200

Omit “step 4”, substitute “step 6”.

79 Section 152‑205

Omit “step 3”, substitute “step 5”.

Taxation Administration Act 1953

80 Subsection 12‑405(2) in Schedule 1 (method statement, step 2, paragraph (b))

Omit “step 3”, substitute “step 5”.

81 Subsection 12A‑110(5) in Schedule 1 (method statement, step 2)

Omit “step 3”, substitute “step 5”.

Part 4,Application of amendments

82 Application of amendments,Division 102

The amendments made by:

(a) Part 1 of this Schedule of Division 102 of the Income Tax Assessment Act 1997; or

(b) Part 3 of this Schedule that relate to Division 102 of the Income Tax Assessment Act 1997;

apply in relation to assessments for the income year that includes 1 July 2027 and for later income years.

83 Application of amendments,section 115‑125

The amendments made by Part 1 of this Schedule of section 115‑125 of the Income Tax Assessment Act 1997 apply in relation to CGT events happening on or after 1 July 2027.

84 Application of amendments,Subdivision 115‑C

(1) Subject to subitem (2), the amendments of Subdivision 115‑C of the Income Tax Assessment Act 1997 made by Part 1 of this Schedule apply in relation to assessments for the income year that includes 1 July 2027 and for later income years.

(2) Section 115‑235 of the Income Tax Assessment Act 1997, as inserted by Part 1 of this Schedule, applies in relation to the income year that includes 1 July 2027 and later income years.

(3) Subdivision 115‑CA of the Income Tax Assessment Act 1997, as inserted by Part 1 of this Schedule, applies in relation to assessments for the income year that includes 1 July 2027 and for later income years.

Schedule 2,Limit negative gearing for residential property to new builds

Income Tax Assessment Act 1997

1 At the end of Division 26

Add:

26‑155 Using or holding residential dwellings

General rule

(1) If the amounts relating to the using or holding of *residential dwellings as residential accommodation that you could otherwise deduct for an income year exceed your assessable income from using or holding residential dwellings as residential accommodation for the income year, this Act applies to the amount of the excess as follows:

(a) it is not deductible for that income year;

(b) it is an amount (a quarantined amount) that could be applied in accordance with the method statement in section 102‑5 (about working out your net capital gain) for that income year;

(c) to the extent any part of it remains after applying that method statement,it is treated as an amount relating to using or holding residential dwellings as residential accommodation for the next income year.

Example: Henrietta acquires an established residential dwelling in July 2028. For the 2028‑29 income year Henrietta has assessable income of $50,000 from renting out the residential dwelling as residential accommodation. For that year, Henrietta has (but for this subsection) $65,000 in deductions for the residential dwelling, including interest, insurance and strata costs. She can only deduct $50,000 and the remaining $15,000 is carried forward to the next income year.

For the 2029‑30 income year, Henrietta has (but for this subsection) $70,000 in deductions and $52,000 of assessable income from renting out the residential dwelling as residential accommodation. She can deduct $52,000 and $33,000 is carried forward to the next income year (comprising the $15,000 carried forward from the 2028‑29 income year and $18,000 from the 2029‑30 income year).

For the 2030‑31 income year, Henrietta has $20,000 in deductions and $72,000 of assessable income from renting out the residential dwelling as residential accommodation, having reduced her mortgage following an inheritance. She has net rental income from the residential dwelling of $52,000 for this income year and can fully offset the amount of $33,000 that has been carried forward from the previous income year.

Exceptions for non‑quarantined residential dwellings

(2) For the purposes of subsection (1), disregard amounts you could otherwise deduct, and amounts of assessable income, to the extent those amounts relate to the using or holding of the following:

(a) an *ownership interest in a *residential dwelling you last *acquired before 7.30 pm, by legal time in the Australian Capital Territory, on 12 May 2026;

(b) a residential dwelling that is a *new residential dwelling in relation to you;

(c) a residential dwelling for an activity or purpose determined by the Minister by legislative instrument for the purposes of this paragraph;

(d) a residential dwelling for a business or enterprise of a kind determined by the Minister by legislative instrument for the purposes of this paragraph.

Note: If you have a net gain from your non‑quarantined residential dwellings for an income year: see subsection (6).

(3) Despite subsection 118‑130(2), for the purposes of paragraph (2)(a) of this section, for a *residential dwelling that you *acquire under a contract, you have an *ownership interest in the residential dwelling from the time when you enter into the contract.

Exception for certain kinds of entities

(4) Subsection (1) does not apply to you if you are:

(a) a widely held unit trust as defined in section 272‑105 in Schedule 2F to the Income Tax Assessment Act 1936; or

(b) a *complying superannuation entity; or

(c) an entity in a class of entities determined by the Minister by legislative instrument for the purposes of this paragraph.

Exception for fringe benefits

(5) For the purposes of subsection (1), disregard amounts you could otherwise deduct, and amounts of assessable income, to the extent those amounts relate to *providing a *fringe benefit.

Modification in relation to certain gains

(6) Reduce the amount of an excess referred to in subsection (1) for an income year (before applying any of paragraphs (1)(a) to (c)) by the sum of the following:

(a) any amount by which your assessable income covered by subsection (2) for the income year exceeds your deductions covered by that subsection for the income year;

(b) any gain you *realised for income tax purposes for the income year from a *realisation event occurring in relation to a *residential dwelling that is a *revenue asset.

Modification in relation to beneficiaries of trusts

(7) If:

(a) you are a beneficiary of a trust estate; and

(b) an amount is taken to have been included in your assessable income for an income year under Division 6 of Part III of the Income Tax Assessment Act 1936 in relation to the *net income of the trust estate;

to the extent that the amount is referable (either directly or indirectly through one or more interposed partnerships or trust estates) to using or holding *residential dwellings as residential accommodation, the amount is taken to be included in your assessable income from using or holding residential dwellings as residential accommodation for that year.

Modification if you become bankrupt

(8) The modification in subsection (9) has effect if:

(a) in an income year (the current year) you become bankrupt or are released from a debt by the operation of an Act relating to bankruptcy; or

(b) you became bankrupt before the current year and:

(i) the bankruptcy is annulled in the current year under section 74 of the Bankruptcy Act 1966 because your creditors have accepted a proposal for a composition or scheme of arrangement; and

(ii) under the composition or scheme of arrangement, you have been, will be or may be released from some or all of the debts from which you would have been released if you had instead been discharged from the bankruptcy.

(9) This Act applies to you as if any amount that:

(a) is an amount that you cannot deduct for the current year in accordance with paragraph (1)(a); and

(b) has not been applied in accordance with the method statement in section 102‑5;

were not an amount relating to using or holding *residential dwellings as residential accommodation that you can deduct for the current year or a later year.

26‑160 Meaning of residential dwelling and new residential dwelling

Meaning of residential dwelling

(1) A residential dwelling means a *dwelling other than any of the following:

(a) a caravan, mobile tiny home, or other mobile home;

(b) a hotel, motel, inn, hostel or boarding house;

(c) a dwelling providing accommodation to students in connection with a school or an education institution that is not a school;

(d) a boat or other marine vessel;

(e) a dwelling in a class of dwellings determined by the Minister by legislative instrument for the purposes of this paragraph.

(2) For the purposes of subsection (1), a residential dwelling is taken to include any of the following things to the extent that the thing is available for use by an occupant of the *dwelling:

(a) land adjacent to the dwelling;

(b) a garage, storeroom or other structure associated with the dwelling.

Meaning of new residential dwelling

(3) A *residential dwelling is a new residential dwelling in relation to you if the requirements determined under subsection (4) are met in relation to you and the residential dwelling.

(4) The Minister must, by legislative instrument, determine requirements for the purposes of subsection (3). Without limiting this subsection, the requirements may include requirements relating to one or more of the following:

(a) the kind of *residential dwelling;

(b) the kind of interest you hold in the residential dwelling and the circumstances in which you acquired your interest (such as whether you were the builder or a subsequent purchaser of the residential dwelling);

(c) circumstances relating to the creation of the residential dwelling (such as whether the residential dwelling was built on vacant land, was created through substantial renovations of an existing building, or was built to replace a demolished residential dwelling);

(d) whether the residential dwelling has a separate title, equitable title or similar legal interest that can be acquired by an entity;

(e) whether the residential dwelling genuinely adds to the supply of residential dwellings in Australia.

(5) To avoid doubt, the Minister may determine requirements under subsection (4) relating to matters or circumstances existing before the commencement of this section.

2 After subsection 110‑38(8)

Insert:

(8A) Expenditure does not form part of any element of the cost base to the extent that section 26‑155 prevents it being deducted.

Note: Section 26‑155 denies deductions for the excess of residential dwelling related expenditure over residential dwelling related income.

3 After subsection 110‑55(9J)

Insert:

(9JA) Expenditure does not form part of the reduced cost base to the extent that section 26‑155 prevents it being deducted.

Note: Section 26‑155 denies deductions for the excess of residential dwelling related expenditure over residential dwelling related income.

4 Subsection 995‑1(1)

Insert:

new residential dwelling: see subsection 26‑160(3).

residential dwelling: see subsections 26‑160(1) and (2).

5 Application of amendments

The amendments made by this Schedule apply in relation to the 2027‑28 income year and later income years.

Schedule 3,Working Australians tax offset

Part 1,Amendments

Division 1,Main amendments

Income Tax Assessment Act 1997

1 After Subdivision 61‑D

Insert:

Subdivision 61‑E,Working Australians tax offset

Guide to Subdivision 61‑E

61‑150 What this Subdivision is about

You may be entitled to a tax offset if you earn certain labour income.

Table of sections

Operative provisions

61‑155 Entitlement to the working Australians tax offset

61‑160 Amount of the working Australians tax offset

Operative provisions

61‑155 Entitlement to the working Australians tax offset

(1) You are entitled to a *tax offset for an income year if:

(a) you are an individual who is an Australian resident at any time during the income year; and

(b) in the income year, the amount worked out for you under subsection (2) (about your net labour income) exceeds the tax‑free threshold (within the meaning of the Income Tax Rates Act 1986).

Net labour income

(2) Work out the amount for an income year using the formula:

where:

labour amounts means the sum of the following amounts included in your assessable income for the income year:

(a) an amount of *assessable labour income;

(b) an amount you *derive from carrying on a *business as an individual (not including assessable income you derive from a business carried on by a partnership or trust);

(c) an amount of *personal services income;

(d) an amount included in your assessable income under section 83A‑25 (about discounts given in relation to an *ESS interest included in assessable income);

(e) an amount that is a payment from which an amount must be withheld (even if the amount is not withheld) under section 12‑60 in Schedule 1 to the Taxation Administration Act 1953 (about payments under labour hire and certain other arrangements).

labour deductions means the sum of the following amounts you can deduct in relation to the income year:

(a) an amount of a loss or outgoing that you incurred in gaining or producing an amount mentioned in paragraph (a) or (c) of the definition of labour amounts;

(b) an amount of a loss or outgoing that you necessarily incurred in carrying on a *business as an individual (not including a loss or outgoing necessarily incurred by a business carried on by a partnership or trust);

(c) an amount you can deduct under section 25‑130;

(d) an amount you can deduct under section 40‑25 (other than an amount equal to the decline in value of a *depreciating asset that you allocate to a low‑value pool under section 40‑425), to the extent that the deduction arises for a depreciating asset that you use to:

(i) derive an amount mentioned in paragraph (b) of the definition of labour amounts; or

(ii) gain or produce an amount mentioned in paragraph (c) of the definition of labour amounts;

(e) an amount of a deduction mentioned in paragraphs 25‑130(2)(d) to (g) (standard deduction for work‑related expenses);

(f) an amount you can deduct under Subdivision 328‑D, to the extent that the deduction arises for a depreciating asset that you use to derive an amount mentioned in paragraph (b) of the definition of labour amounts.

(3) If more than one paragraph in the definition of labour amounts or labour deductions covers an amount, include the amount only once.

61‑160 Amount of the working Australians tax offset

(1) The amount of your *tax offset for an income year is the lesser of:

(a) $250; and

(b) the amount calculated using the method determined by the Minister under subsection (2).

(2) The Minister may, by legislative instrument, determine a method for the purposes of paragraph (1)(b).

2 Subsection 63‑10(1) (before table item 5)

Insert:

3

*Tax offset under Subdivision 61‑E (working Australians tax offset)

You cannot get a refund of it, you cannot transfer it and you cannot carry it forward to a later income year

Division 2,Consequential amendments

Income Tax Assessment Act 1997

3 Section 13‑1 (after table item headed “invalid relative”)

Insert:

labour income

Subdivision 61‑E

Part 2,Application

4 Application

The amendments made by this Schedule apply in relation to assessments for the 2027‑28 income year and later income years.

Schedule 4,Standard deduction for work‑related expenses

Part 1,Amendment of the Income Tax Assessment Act 1997

Income Tax Assessment Act 1997

1 Section 12‑5 (table item headed “work expenses”)

Repeal the item, substitute:

work expenses

standard deduction for work‑related expenses

25‑130

see also substantiation

2 After subsection 25‑100(1)

Insert:

Transport expense

(1A) A transport expense is a loss or outgoing to do with transport (including the decline in value of a *depreciating asset used in connection with transport) but does not include:

(a) a loss or outgoing for accommodation or for food or drink; or

(b) expenditure incidental to transport.

3 At the end of Division 25 of Part 2‑5

Add:

25‑130 Standard deduction for work‑related expenses

(1) You can deduct the amount provided by subsection (2) for an income year if:

(a) you are an individual; and

(b) you are an Australian resident at any time during the income year; and

(c) you derive *assessable labour income in the income year.

(2) The amount is the lesser of:

(a) $1,000; and

(b) the total amount of your *assessable labour income for the income year;

reduced, but not below zero, by the sum of the following amounts (if any):

(c) subject to subsection (3), each of your deductions for the income year under section 8‑1 (general deductions), to the extent that the loss or outgoing that gives rise to the deduction is incurred in gaining or producing your assessable labour income;

(d) each of your deductions for the income year under Division 28 (car expenses), to the extent that the deduction arises in respect of gaining or producing your assessable labour income;

(e) each of your deductions for the income year under section 25‑100 (travel between workplaces), to the extent that either of the following is satisfied in relation to the deduction:

(i) while you were at the first place mentioned in paragraph 25‑100(2)(a), you were engaged in activities to gain or produce your assessable labour income;

(ii) while you were at the second place mentioned in paragraph 25‑100(2)(b), you were engaged in activities to gain or produce your assessable labour income;

(f) each of your deductions for the income year under any of the following provisions, to the extent that the deduction arises in respect of a *depreciating asset that is used for the purpose of gaining or producing your assessable labour income:

(i) section 25‑10 (repairs);

(ii) Subdivision 40‑B (deducting amounts for depreciating assets);

(iii) Subdivision 40‑D (balancing adjustments);

(g) each of your deductions under section 25‑125 (COVID‑19 tests) for the income year.

(3) For the purposes of paragraph (2)(c), disregard each of your deductions under section 8‑1 to the extent that the deduction is in respect of any of the following:

(a) an income protection insurance premium;

(b) a personal sickness insurance premium;

(c) an accident insurance premium;

(d) membership of a trade, business or professional association.

(4) Your assessable labour income, for an income year, is each amount included in your assessable income for the income year from which an amount must be withheld (even if the amount is not withheld) under any of the following provisions in Schedule 1 to the Taxation Administration Act 1953:

(a) section 12‑35 (payment to employee);

(b) section 12‑40 (payment to company director);

(c) section 12‑45 (payment to office holder);

(d) section 12‑47 (payment to religious practitioners);

(e) section 12‑50 (return to work payment);

(f) Subdivision 12‑C (payments for retirement or because of termination of employment);

(g) paragraph 12‑110(1)(ca) (parental leave pay).

4 Section 28‑180

Repeal the section.

5 At the end of subsection 40‑290(1)

Add:

Note: You may instead choose a fixed reduction for certain depreciating assets that have been used to produce your assessable labour income: see section 40‑291A.

6 At the end of subsection 40‑291(1)

Add:

Note: You may instead choose a fixed reduction for certain depreciating assets that have been used to produce your assessable labour income: see section 40‑291A.

7 After section 40‑291

Insert:

40‑291A Fixed reduction for certain assets used to produce assessable labour income

(1) Instead of a reduction under section 40‑290 or 40‑291, you may reduce, by a fixed amount, the amount (the balancing adjustment amount) included in your assessable income, or the amount you can deduct, under section 40‑285 for a *depreciating asset if:

(a) the depreciating asset has been used at any time for the purpose of gaining or producing your *assessable labour income; and

(b) you have deducted an amount under section 25‑130 for an income year (whether the income year in which the *balancing adjustment event that gave rise to the balancing adjustment amount occurred or another income year); and

(c) the *effective life of the depreciating asset overlaps, wholly or partly, with that income year.

(2) The amount of the reduction is 50% of the balancing adjustment amount.

8 At the end of section 40‑425

Add:

Exception: assessable labour income

(9) You cannot allocate a *depreciating asset to a low‑value pool if, at the time you:

(a) started to use it; or

(b) had it *installed ready for use;

you reasonably expected to use it mainly for the purpose of gaining or producing your *assessable labour income.

9 Subsection 104‑240(1) (paragraph (a) of the definition of sum of reductions)

Repeal the paragraph, substitute:

(a) if the *depreciating asset is covered by subsection 104‑235(1):

(i) if subparagraph (ii) does not apply,the reductions in your deductions for the asset under sections 40‑25 and 40‑27; or

(ii) if there is a reduction of the balancing adjustment amount under section 40‑291A in relation to the *balancing adjustment event,the amount of that reduction; or

10 Section 900‑10 (note)

Omit:

• Subdivision 900‑I has an exception about certain losses or outgoings related to award transport payments.

11 Sections 900‑35 to 900‑45

Repeal the sections.

12 Subdivision 900‑I

Repeal the Subdivision.

13 Subsection 995‑1(1)

Insert:

assessable labour income has the meaning given by subsection 25‑130(4).

14 Subsection 995‑1(1) (definitions of award transport payment and laundry expense)

Repeal the definitions.

15 Subsection 995‑1(1) (definition of transport expense)

Omit “900‑220”, substitute “25‑100”.

16 Subsection 995‑1(1) (definition of transport payment)

Repeal the definition.

17 Application provision

(1) The amendments made by this Part apply in relation to assessments for the 2026‑27 income year and later income years.

(2) To avoid doubt, the amendment made by item 8 does not apply in relation to depreciating assets that have been allocated to a low‑value pool for an income year that is the 2025‑26 income year or an earlier income year.

Part 2,Amendment of the Fringe Benefits Tax Assessment Act 1986

Fringe Benefits Tax Assessment Act 1986

18 After subsection 24(1)

Insert:

(1A) Subsection (1) does not apply in relation to the recipient of an expense payment fringe benefit in relation to a year of tax if:

(a) the benefit is provided to the recipient under a salary packaging arrangement; and

(b) the gross deduction would be a kind of deduction mentioned in any of paragraphs 25‑130(2)(c) to (g) of the Income Tax Assessment Act 1997.

19 Subsections 58X(2) to (5)

Repeal the subsections, substitute:

(2) Each of the following is an eligible work related item if it is primarily for use in the employee’s employment and it is not provided to the employee under a salary packaging arrangement:

(a) a portable electronic device;

(b) an item of computer software;

(c) an item of protective clothing;

(d) a briefcase;

(e) a tool of trade.

20 Application provision

The amendments made by this Part apply in relation to FBT years starting on or after 1 April 2027.

Official document - Explanatory memorandum

Source: https://parlinfo.aph.gov.au/parlInfo/download/legislation/ems/r7493_ems_a90ad43e-17d7-4cd3-859b-84ac4e6f3dea/upload_word/JC018386.docx;fileType=application%2Fvnd.openxmlformats-officedocument.wordprocessingml.document

2025-2026

THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA

HOUSE OF REPRESENTATIVES

Treasury Laws Amendment (Tax Reform No. 1) Bill 2026Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026

EXPLANATORY MEMORANDUM

(Circulated by authority of the Treasurer, the Hon Jim Chalmers MP)

Table of Contents

Glossary iii

General outline and financial impact 1

Chapter 1: CGT adjustments 9

Chapter 2: Limit negative gearing for residential property to new builds 67

Chapter 3: Working Australians tax offset 89

Chapter 4: Standard deduction for work-related expenses 95

Chapter 5: Statement of Compatibility with Human Rights 107

Glossary

This Explanatory Memorandum uses the following abbreviations and acronyms.

Abbreviation

Definition

ACT

Australian Capital Territory

AEST

Australian Eastern Standard Time

AMIT

Attribution managed investment trust

ATO

Australian Tax Office

Bill

Treasury Laws Amendment (Tax Reform No. 1) Bill 2026

CGT

Capital Gains Tax

FBT

fringe benefits tax

FBTAA

Fringe Benefits Tax Assessment Act 1986

ICCPR

International Covenant on Civil and Political Rights

ICESCR

International Covenant on Economic, Social and Cultural Rights

Imposition Bill

Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026

ITAA 1936

Income Tax Assessment Act 1936

ITAA 1997

Income Tax Assessment Act 1997

ITTP Act

Income Tax (Transitional Provisions) Act 1997

MIT

Managed investment trust

Rates Act

Income Tax Rates Act 1986

SAPTO

seniors and pensioners tax offset

TAA 1953

Taxation Administration Act 1953

WATO

working Australians tax offset

General outline and financial impact

Schedule 1 - CGT adjustments

Outline

Schedule 1 to the Bill and the Imposition Bill amend the income tax law to:

replace the 50 per cent CGT discount for individuals, trusts and partnerships with cost base indexation to ensure only real gains are subject to taxation;

introduce a 30 per cent minimum tax on capital gains, with an exemption for certain income support recipients, to ensure gains are subject to a tax rate closer to the tax rate individuals faced during their working life and commensurate with the tax rate paid by most workers; and

apply the new arrangements prospectively to all capital gains accruing on and after 1 July 2027, including gains accruing on pre-CGT assets, while retaining access to the CGT discount to maintain support for new and affordable housing, and maintaining existing CGT concessions for small business.

Date of effect

Schedule 1 to the Bill (excluding the provisions relating to the minimum tax) and the Imposition Bill commence on the first 1 January, 1 April, 1 July or 1 April to occur after the day the Bill receives Royal Assent.

The provision in Schedule 1 to the Bill relating to the minimum tax commence immediately after the commencement of the Imposition Bill. This ensures that these provisions do not commence if the tax to which they relate is not imposed.

The amendments made by Schedule 1 to the Bill and the Imposition Bill largely apply in relation to assessments for the income year that includes 1 July 2027 and later income years.

Proposal announced

Schedule 1 to the Bill and the Imposition Bill partially implement the Tax Reform - Boosting Home Ownership - reforming negative gearing and capital gains tax measure in the 2026-2027 Budget.

Financial impact

Combined, Schedule 1 and Schedule 2 to the Bill are estimated to result in a $3.6 billion improvement in the underlying cash balance over the forward estimates period:

All figures in this table represent amounts in $m.

2025-26

2026-27

2027-28

2028-29

2029-30

1,350.0

2,280.0

Impact Analysis

Consistent with the Government’s Impact Analysis requirements, the Treasury has certified the Select Committee on the Operation of the Capital Gains Discount, Budget Statement 4 of the Federal Budget 2026-27 and Treasury Supplementary Analysis as having undertaken a process and analysis equivalent to an Impact Analysis.

The Impact Analysis Equivalent found that negative gearing and the CGT discount favour leveraged investment in existing housing, putting upward pressure on prices and directing capital away from potentially more productive uses. Alongside structures like discretionary trusts, these settings enable higher-income earners or high-wealth individuals to achieve lower tax rates than ordinary workers.

The measures in this Bill will level the playing field for first home buyers, supporting improved rates of homeownership while also maintaining incentives for new housing supply. They will also make the tax system fairer and more sustainable, helping to fund tax cuts for workers and create room for further tax relief over time. Treasury will monitor the efficacy of these changes through metrics published in the Intergenerational Report, the State of the Housing Market Report and the Tax Expenditures and Insights Statement.

Due to the extensive nature of these materials they have not been attached to this Explanatory Memorandum. They can be found at: https://oia.pmc.gov.au/published-impact-analyses-and-reports/capital-gains-tax-and-negative-gearing.

Human rights implications

Schedule 1 to the Bill and the Imposition Bill engage certain human rights issues. See Statement of Compatibility with Human Rights , Chapter 5.

Compliance cost impact

Schedule 1 and Schedule 2 of the Bill are expected to result in some transitional and ongoing compliance costs for individuals and businesses. Guidance, calculators and tools will be made available to assist taxpayers in minimising their compliance costs. Treasury estimates the amendments made by Schedule 1 and Schedule 2 of the Bill will increase average regulatory costs by $88.4 million per year, over ten years.

Schedule 2 - Limit negative gearing for residential property to new builds

Outline

Schedule 2 to the Bill helps to level the playing field for first home buyers, whilst maintaining support for investment in new housing supply, by restricting negative gearing for residential dwellings to new builds. The Bill does this by amending the ITAA 1997 to require that a person’s net rental losses on a residential dwelling used or held as residential accommodation are a quarantined amount. Quarantined amounts are only available to deduct from net assessable income derived in relation to residential dwellings used or held as residential accommodation or to reduce revenue or capital gains from a residential dwelling. This applies to interests in residential dwellings acquired on or after 7.30pm by legal time in the ACT (which is 7.30pm AEST), on 12 May 2026, unless an exception to this requirement applies.

Schedule 2 to the Bill maintains incentives for investors to increase the supply of residential property by excluding newly built residential dwellings (new residential dwellings) from the requirement to quarantine amounts. This means that investors who acquire new residential dwellings can continue to deduct net rental losses from these properties against their other assessable income, such as salary and wages.

Schedule 2 to the Bill exempts investments made prior to 7.30pm (AEST) on 12 May 2026 from the requirement to quarantine amounts. This ensures the arrangements for taxpayers who made investment decisions under the settings in place prior to Budget night on 12 May 2026 do not change.

Date of effect

Schedule 2 to the Bill commences the day after Royal Assent.

Schedule 2 to the Bill applies to income years commencing on or after 1 July 2027.

Proposal announced

Schedule 2 to the Bill partially implements the 'Tax Reform - Boosting Home Ownership - reforming negative gearing and capital gains tax' measure in the 2026-27 Budget.

Financial impact

Combined, Schedule 1 and Schedule 2 to the Bill are estimated to result in an improvement in the cash balance over the forward estimates period of $3.6 billion:

All figures in this table represent amounts in $m.

2025-26

2026-27

2027-28

2028-29

2029-30

1,350.0

2,280.0

Impact Analysis

Consistent with the Government’s Impact Analysis requirements, the Treasury has certified the Select Committee on the Operation of the Capital Gains Discount, Budget Statement 4 of the Federal Budget 2026-27 and Treasury Supplementary Analysis as having undertaken a process and analysis equivalent to an Impact Analysis.

The Impact Analysis Equivalent found that negative gearing and the CGT discount favour leveraged investment in existing housing, putting upward pressure on prices and directing capital away from potentially more productive uses. Alongside structures like discretionary trusts, these settings enable higher-income earners or high-wealth individuals to achieve lower tax rates than ordinary workers.

The measures in this Bill will level the playing field for first home buyers, supporting improved rates of homeownership while also maintaining incentives for new housing supply. They will also make the tax system fairer and more sustainable, helping to fund tax cuts for workers and create room for further tax relief over time. Treasury will monitor the efficacy of these changes through metrics published in the Intergenerational Report, the State of the Housing Market Report and the Tax Expenditures and Insights Statement.

Due to the extensive nature of these materials they have not been attached to this Explanatory Memorandum. They can be found at : https://oia.pmc.gov.au/published-impact-analyses-and-reports/capital-gains-tax-and-negative-gearing.

Human rights implications

Schedule 2 to the Bill engages human rights. See Statement of Compatibility with Human Rights , Chapter 5.

Compliance cost impact

Schedule 1 and Schedule 2 of the Bill are expected to result in some transitional and ongoing compliance costs for individuals and businesses. Guidance, calculators and tools will be made available to assist taxpayers in minimising their compliance costs. Treasury estimates the amendments made by Schedule 1 and Schedule 2 of the Bill will increase average regulatory costs by $88.4 million per year, over ten years.

Schedule 3 - Working Australians tax offset

Outline

Schedule 3 to the Bill amends the income tax law to introduce the working Australians tax offset, a non-refundable tax offset that provides targeted tax relief to Australian resident individuals who earn labour income.

Date of effect

Schedule 3 to the Bill commences on the first 1 January, 1 April, 1 July or 1 October after the day the Bill receives Royal Assent.

Schedule 3 to the Bill applies to the 2027-28 income year and later income years.

Proposal announced

Schedule 3 to the Bill fully implements the 'Tax Reform - cutting taxes with a Working Australians Tax Offset' measure in the 2026-27 Budget.

Financial impact

Schedule 3 to the Bill is estimated to result in a $6.4 billion decrease in the underlying cash balance over the forward estimates.

All figures in this table represent amounts in $m.

2025-26

2026-27

2027-28

2028-29

2029-30

-3,020

-3,360

Human rights implications

Schedule 3 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights , Chapter 5.

Compliance cost impact

This measure is expected to have a minor regulatory impact.

Schedule 4 - Standard deduction for work-related expenses

Outline

Schedule 4 to the Bill amends the ITAA 1997 to introduce a $1,000 standard deduction for work-related expenses for individuals who are Australian tax residents who derive assessable labour income, so that eligible taxpayers can rely on a simple deduction instead of claiming their work‑related expenses.

Schedule 4 also makes associated supporting amendments to substantiation, capital allowance (including low-value pools), and capital gains tax rules. It also makes amendments to the ‘otherwise deductible’ rule and an FBT exemption in the FBTAA. These amendments ensure the new standard deduction operates coherently with existing tax laws, including by seeking to prevent taxpayers obtaining a double benefit.

Date of effect

Schedule 4 to the Bill commences the first day of the quarter after Royal Assent.

The amendments to the income tax laws apply in relation to assessments for the 2026‑27 income year and later income years.

The amendments to the FBT laws apply in relation to FBT years starting on or after 1 April 2027.

Proposal announced

Schedule 4 to the Bill fully implements the Government's election commitment on tax reform for easier, faster, better tax returns announced on 13 April 2025. The commitment forms part of the tax reform package announced in the 2026-27 Budget.

Financial impact

Schedule 4 to the Bill is estimated to result in a $2.6 billion decrease in the underlying cash balance over 4 years from 2025-26.

All figures in this table represent amounts in $m.

2024-25

2025-26

2026-27

2027-28

2028-29

-1,240.1

-1,363.8

Human rights implications

Schedule 4 to the Bill does not raise any human rights issues. See Statement of Compatibility with Human Rights , Chapter 5.

Compliance cost impact

The amendments in Schedule 4 to the Bill are estimated to collectively save individuals $380 million in compliance costs each year.

CGT adjustments

Table of Contents:

Outline of chapter 9

Context of amendments 11

The 50 per cent CGT discount 11

Negative gearing compounds the effects of the CGT discount on housing 12

Commentary 13

The Government’s changes 13

Comparison of key features of new law and current law 14

Detailed explanation of new law 17

Overview of CGT amendments 17

Indexation of the cost base 20

Assessable income includes net capital gains 30

Minimum tax on capital gains 54

Pre-CGT Assets 60

Consequential amendments 63

Commencement, application, and transitional provisions 64

Commencement 64

Application 64

Transitional provisions 65

Future amendments 65

Outline of chapter

Schedule 1 to the Bill and the Imposition Bill amend the income tax law to make a range of changes to CGT to improve the efficiency and fairness of the tax system.

First, the amendments replace the 50 per cent CGT discount for individuals, trusts and partnerships with cost base indexation from 1 July 2027. This will realign the CGT regime with its original policy intent that only real gains are subject to taxation.

Second, the amendments impose a 30 per cent minimum tax on capital gains. This reduces the benefit to taxpayers of deferring realisation to years in which their marginal tax rates are low. It also ensures that capital gains face a tax rate that is closer to the tax rate most taxpayers face during their working life. Certain income support recipients will be exempt from the minimum tax to ensure that low‑income, low-wealth individuals are not adversely affected.

Third, the amendments ensure these new arrangements apply to all capital gains arising from 1 July 2027 onwards. This includes assets owned prior to but disposed of after 1 July 2027, in respect of gains arising after that time, and assets purchased and disposed of after this date. The amendments also provide transitional arrangements for all CGT assets - other than new builds and affordable housing, which benefit from specific concessions - to ensure that existing arrangements continue to apply to assets acquired and disposed of before 1 July 2027 and capital gains accrued prior to 1 July 2027.

Fourth, the amendments bring pre-CGT assets (legacy assets held before 1985) into the CGT base for gains accruing after 1 July 2027 to improve horizontal equity and build on the intergenerational equity objectives of this measure. Gains on pre-1985 assets accrued before 1 July 2027 continue to be exempt from CGT.

Fifth, the amendments provide transitional arrangements for other legacy CGT assets purchased between 1985-1999 for which the 50 per cent CGT discount or indexation under prior indexation rules could apply. Under these amendments, after 1 July 2027, individuals and trusts can only use the 50 per cent CGT discount in respect of gains accruing before this date. Eligible companies, foreign residents and temporary residents will remain eligible for the previous cost base indexation arrangements under the current rules (with cost base indexation available only up to 30 September 1999).

Sixth, the amendments allow individual investors in new residential dwellings to choose between a 50 per cent CGT discount and the new arrangements. This maintains incentives for investors to supply new housing.

Seventh, the amendments allow investors in affordable housing to choose between the current CGT discount of up to 60 per cent and the new arrangements. This maintains incentives for investors to supply affordable housing.

Finally, there will be no changes to the operation of the small business CGT concessions as a result of these amendments.

References to legislation in this Explanatory Memorandum are to the ITAA 1997 unless stated otherwise.

Context of amendments

Younger Australians are finding it harder than earlier generations to build wealth and buy a home, as house prices have risen much faster than incomes. At the same time, tax concessions on asset income are adding to housing demand, while also weakening the fairness and resilience of the tax system.

The 50 per cent CGT discount

Capital gains are the income earned from an increase in asset values over time - such as for shares or investment properties. Under current rules, capital gains income earned by individuals (including individual partners in a partnership) and trusts are discount capital gains when an asset is sold and attracts the 50 per cent CGT discount if the asset has been held for at least 12 months.

Before the 50 per cent CGT discount was introduced in 1999, capital gains were adjusted for inflation so that only the real component of gains were taxed. The 50 per cent CGT discount was introduced following the Review of Business Taxation, which argued that among other things, the introduction of a generally more generous tax treatment of capital gains would encourage investment in the Australian share market, spur investors to buy and sell assets more frequently, and increase tax revenues.

Over 25 years since the introduction of the CGT discount, the share of Australians receiving dividend income has fallen, while the share with investments in property has grown considerably. Further, the flat CGT discount is arbitrary and does not accurately compensate for inflation. Compared to cost base indexation, the flat discount overcompensates some investors while undercompensating others.

Over the past 20 years, property has typically been overcompensated for inflation, with the inflation share of capital appreciation averaging 38 per cent for properties held for ten years. At the same time, parts of the property market, such as investments in units especially in regional areas, have been undercompensated for inflation. Australian shares have typically seen inflation account for close to 50 per cent of nominal gains over this period. Over the past 15 years, more often than not, share investors holding for ten years would have been undercompensated for inflation on average.

This means the current CGT discount has the potential to significantly distort investment decisions, incentivising investment in existing houses.

The benefits of the CGT discount predominantly flow to Australians who earn among the highest incomes over the course of their lives. One-third of all capital gains are realised by individuals who earn incomes in the highest 1 per cent during their working lives, and more than half of all gains are realised by the highest 10 per cent.

The current treatment of capital gains also creates opportunities for taxpayers to time the sale of assets for tax reasons. Unlike most income, capital gains are taxed on realisation, when the asset is sold, not when the gains accrue. As realised capital gains are taxed at an individual’s marginal tax rate, there are strong incentives for investors to hold onto assets and sell them in years when their marginal tax rates are lower than usual, such as after retirement. Choosing to sell assets when marginal rates are low can provide a large tax benefit, compounding the benefits of the CGT discount.

Negative gearing compounds the effects of the CGT discount on housing

An investment is negatively geared when it runs at a current net loss and these losses are used to reduce the investor’s annual taxable income from unrelated sources, such as wages and salaries. Property investments account for over 98 per cent of the net losses from negatively geared investments, largely reflecting the ready availability of finance for property. Interest costs from financing loans used to buy the property typically drive these losses.

This practice reflects the general principle of taxing net increases in income after deducting related expenses. However, international practice is that net rental losses are often not deductible from unrelated income, such as salary and wages. Australia is in a minority of OECD countries that allow unlimited deduction of rental losses against other income. Further, there are broader international trends toward separating how wages and asset income are taxed. There are strong equity and efficiency arguments for drawing a stronger link between rental losses and the earnings which they can be deducted against.

Low effective tax rates on property investments caused by the interaction between the 50 per cent CGT discount and negative gearing create strong incentives for investors to take on highly leveraged housing investments. This leads to higher house prices - as investors bid up the price on a scarce resource to receive the concession. It also distorts investment away from higher income-generating assets with lower capital returns, such as higher density housing, and investments in shares that are less easily funded with leverage.

Further, the tax benefits from negative gearing are concentrated among high income earners. Higher income individuals are more likely to invest in property, report larger rental losses, and have more negatively geared property interests.

Over time, rental property investments are also becoming more out of reach as property prices continue to rise faster than wages, making it more challenging for first home buyers to enter the market.

Commentary

Reflecting these issues the OECD have recommended cutting or eliminating the CGT discount and phasing out negative gearing.

The Select Committee on the Operation of the CGT Discount also found that the benefits of the CGT discount are unequally distributed, have the potential to encourage tax planning and can distort the allocation of investment across the economy, including skewing home ownership away from owner-occupiers.

The Government’s changes

In the 2026-27 Budget, the Government announced reforms to negative gearing and capital gains tax to help improve the fairness of the tax system, support home ownership and help fund new tax cuts for workers.

These amendments reintroduce cost base indexation to achieve a more neutral and fair treatment of capital gains compared with the fixed 50 per cent CGT discount which applied to nominal capital gains. This change is expected to reduce the overall level of concession provided to some capital gains, especially established detached housing in capital cities.

These amendments also introduce a minimum tax rate on real capital gains income earned from 1 July 2027 to reduce the benefits of timing the realisation of capital gains to minimise tax paid. This ensures that affected taxpayers are subject to a tax rate that is closer to the marginal rate they faced during their working life. If applied in 2022-23, over 95 per cent of net capital gains income would have been earned by people who are either not affected by the minimum tax or who had a marginal tax rate of more than 30 per cent during their working lives.

These amendments will improve the fairness of the tax system and help address housing affordability pressures facing first homebuyers, allowing more younger Australians and future generations to own their own home. These amendments are expected to reduce investor demand for existing properties, while eligible new builds will be exempt from the changes, ensuring the benefits of negative gearing are directed to investment that support growth in Australia’s housing stock.

Together, these reforms will help to level the playing field for first homebuyers, while maintaining support for investment in new housing supply.

Comparison of key features of new law and current law

Comparison of new law and current law

New law

Current law

Cost base indexation for Australian resident individuals and trusts

For CGT events that occur on or after 1 July 2027:

cost base indexation can be used for gains that accrue from 1 July 2027, provided the asset is held for at least 12 months;

the CGT discount will continue to be available for discount capital gains accrued prior to 1 July 2027; and

for CGT assets acquired before 21 September 1999, choice between cost base indexation and CGT discount is removed.

For CGT events that occur before 1 July 2027, there is no change in the application of cost base indexation or CGT discount.

Cost base indexation for other entities

There is no change in the availability of cost base indexation for other entities.

Cost base indexation

Cost base indexation is only available for assets that are acquired between 20 September 1985 and 21 September 1999 and held for at least 12 months. Indexation only takes into account inflation up to 30 September 1999, at which time indexation was frozen.

Certain entities (including Australian resident individuals and trusts) can choose to apply the 50 per cent CGT discount for their discount capital gains instead of cost base indexation.

Minimum tax on capital gains

A 30 per cent minimum rate of tax applies to capital gains of Australian resident individuals from 1 July 2027.

Recipients of certain income support payments will be exempt.

An exemption applies to capital gains on CGT assets that are new residential dwellings and affordable housing if taxpayers choose to access the CGT discounts available for these assets (instead of indexing the cost base).

Minimum tax on capital gains

Not applicable.

Pre-CGT assets

Capital gains and losses accrued before 1 July 2027 are still disregarded for CGT.

From 1 July 2027, all assets cease to be pre-CGT assets and any gains accruing after that day are subject to CGT.

Pre-CGT assets

Capital gains and losses arising from pre-CGT assets are disregarded.

New residential dwellings and affordable housing

The additional CGT discount for affordable housing (up to 60 per cent) continues to apply.

A CGT discount of 50 per cent is available for individuals for new residential dwellings.

An individual or trust who makes a capital gain from a CGT event relating to a new residential dwelling or affordable housing can choose between the CGT discount or the new arrangements (cost base indexation plus the minimum 30 per cent tax).

New residential dwelling and affordable housing

No distinction is made between new and existing residential dwellings for CGT. New residential dwellings may be eligible for the CGT discount.

Certain entities (including individuals and trusts) are eligible to apply an additional CGT discount (up to 60 per cent) on capital gains from affordable housing.

Small business concessions

No change.

Small business concessions

Eligible small businesses have access to four broad-based small business CGT concessions in Division 152.

Calculating net capital gain

The net capital gain method statement is amended to seven steps. This accommodates four new categories of capital gains that are established to differentiate whether the capital gain relates to a residential or non-residential CGT asset, and to a period that ended or began on 1 July 2027.

The key changes to the method statement include:

Step 1: reduce each category of capital gains by current year capital losses in order.

Step 2: apply carried forward net capital losses against any remaining category of capital gains in order.

New step 3: apply any ‘quarantined amount’ relating to using or holding residential dwellings as residential accommodation to reduce deferred residential capital gains.

New step 4: apply any ‘quarantined amount’ relating to using or holding residential dwellings as residential accommodation to reduce residential capital gains.

Step 5 (previously Step 3): reduce any remaining discount capital gains by the relevant discount percentage.

Step 6 (previously step 4): no change to small business concessions.

Step 7 (previously step 5): no change.

Calculating net capital gain

Net capital gain is calculated through a five-step process set out in section 102-5, which broadly provides:

Step 1: calculate current year capital gain and capital loss from each CGT event and apply capital losses against capital gains.

Step 2: apply each prior year net capital loss against any remaining capital gain.

Step 3: apply the CGT discount to each discount capital gain.

Step 4: apply any small business concessions.

Step 5: add up any remaining capital gain amounts. The sum is the net capital gain for the income year.

Capital gains are pooled and have no asset-based character.

The gains used in working out the net capital gain take into account the effects of cost base indexation, to the extent that it applied.

Trustee reporting requirements

If required by the Commissioner of Taxation, trustees must provide beneficiaries with a statement for an income year in the approved form. This statement will provide beneficiaries sufficient information in relation to their attributable capital gains to comply with their tax obligations. An administrative penalty is included for non-compliance.

Trustee reporting requirements

No existing equivalent reporting requirements.

Detailed explanation of new law

Overview of CGT amendments

From 1 July 2027, Schedule 1 amends the tax law to repeal the 50 per cent CGT discount and replace it with cost base indexation. The new indexation regime applies to capital gains made directly or indirectly (through an interposed entity) by Australian resident individuals (including individual partners in a partnership) and trusts.

The reforms also introduce a minimum tax of 30 per cent on capital gains of Australian resident individuals from 1 July 2027.

The changes do not apply to capital gains made directly or indirectly by:

foreign residents and temporary residents; or

companies, superannuation funds and life insurance companies.

These entities were not previously entitled to the CGT discount or have their own discrete CGT treatment; therefore, they will not receive the benefit of cost base indexation or be affected by the related minimum tax.

Cost base indexation will apply for all eligible CGT assets of individuals and trusts going forward, except those assets to which a CGT discount continues to apply. For example, CGT discount settings will continue to be available for investors to apply to certain assets if they choose, including the discount for investments in affordable housing in section 112-125 and for new residential dwellings to maintain incentives to invest in these property assets.

The Bill also brings all pre-CGT assets (which are assets acquired before 20 September 1985) into the CGT regime from 1 July 2027. While any capital gains accrued on these assets before 1 July 2027 will continue to be exempt from CGT (subject to existing rules such as CGT event K6), capital gains from these assets accruing on or after 1 July 2027 will be subject to the new arrangements.

This change for pre-CGT assets is not limited to entities that are subject to the new indexation regime and includes all entities (including companies). This means that an entity that has a pre-CGT asset and sells it in future will need to calculate the capital gain that accrues between 1 July 2027 and the realisation event (such as, the date of sale) under the new regime and apply the applicable CGT rules to that asset.

Structure of changes

Schedule 1 to the Bill makes extensive amendments to the ITAA 1997 to give effect to these changes.

Some of the key provisions that are amended include:

Division 102, which provides that a net capital gain is included in assessable income for an income year and sets the method to work out a net capital gain.

Division 110, which sets out how to work out the cost base and reduced cost base of a CGT asset, which are used in calculating whether you make a capital gain or loss from most CGT events. Indexation is relevant to calculating the cost base, as provided by section 110-36.

Division 112, which explains how to modify the cost base in certain situations.

Division 114, which provides how to index expenditure and when indexation is relevant or not relevant to expenditure in each element of the cost base. In particular, it provides for indexation of the cost base by multiplying each element of the cost base (except the third element) by the relevant indexation factor. The Division contains a number of other rules which affect how indexation works.

Division 115, which deals with discount capital gains and trusts’ net capital gains.

Subdivision 960-M, which provides the indexation rules. The indexation factor is calculated using formula in subsection 960-275.

Schedule 1 also introduces the new Division 119 to implement a new minimum tax on individuals for certain capital gains.

Overview of treatment of CGT assets and pre-CGT assets for Australian resident individuals and trusts

Situation

Treatment under the new law

1. CGT asset acquired and disposed of before 1 July 2027

Capital gains and losses are handled under the old law that applied prior to these amendments commencing. The new law does not apply.

2. Pre-CGT asset (acquired before 20 September 1985)

Gains on pre-CGT assets accrued before 1 July 2027 will continue to be exempt (noting rules under the tax law that could already tax these gains, such as CGT event K6 continue to apply). Gains made from CGT events that happen on or after 1 July 2027 are taxed on the portion of the gain that has accrued from 1 July 2027.

Note, this applies broadly to all entities, including companies.

3. CGT asset acquired between 1985 and 1999

There is a choice whether to index the cost base or apply the CGT discount in relation to a CGT asset that applies until 1 July 2027. From 1 July 2027, individuals (including partners in a partnership) and trusts are only able to apply the 50 per cent CGT discount on eligible CGT assets up until 1 July 2027. New settings apply to gains accrued after 1 July 2027 for these assets. Other entities, including companies, may retain the current treatment.

4. CGT asset acquired before 1 July 2027 and CGT event happens on or after 1 July 2027

The capital gain or loss is calculated in the income year in which the CGT asset is disposed of. It consists of two components reflecting the pre- and post-1 July 2027 periods as follows:

Any deferred capital gain or loss for the period between acquisition and 1 July 2027, calculated under the old law (with the exception of individuals and trusts no longer being able to choose between indexing the cost base and instead only able to apply the 50 per cent CGT discount and having the choice to use an apportionment method to work out the amount of the gain); and

Capital gain or loss for the period between 1 July 2027 and the realisation event, calculated under the new law (using an indexed cost base, with the gain being subject to the minimum 30 per cent tax rate rules).

5. CGT asset acquired and CGT event happens after 1 July 2027

The new law applies: for resident individuals, the capital gains may be subject to cost base indexation and a minimum 30 per cent tax.

Indexation of the cost base

The first key change made by Schedule 1 to the Bill is to amend the ITAA 1997 to provide for the indexation of capital gains of individuals and trusts from 1 July 2027 and remove the CGT discount for individuals and trusts from 1 July 2027. The amendments also specify how indexation is to be determined for these gains and include consequential changes to the provisions under which indexation was previously calculated.

Cost base indexation ensures that only the real (inflation-adjusted) increase in the value of the asset is taxed. This means that taxpayers will adjust the cost base of their asset for inflation before calculating their capital gain.

This section of the Explanatory Memorandum steps through changes to Divisions 110 (how to work out the cost base and reduced cost base of a CGT asset) and 114 (indexation of the cost base) and to Subdivision 960-M (how to index and indexation factors), which specify how indexation is applied when calculating the cost base of a CGT asset. The removal of the CGT discount for individuals and trusts, the introduction of a new CGT discount for new residential dwellings and related changes in how discounts apply under the new approach are discussed separately below.

Division 110. When to use indexation in calculating cost base

Division 110 of the ITAA 1997 sets out how to work out the cost base and reduced cost base of a CGT asset, which are used in calculating whether you make a capital gain or loss from most CGT events. Indexation may affect the calculation of the cost base, as provided by section 110-36.

The Bill amends section 110-36 to provide for a separate regime for calculating capital gains of Australian resident individuals and trusts for CGT events happening on or after 1 July 2027. The amended section distinguishes between the capital gains which are covered by the new arrangements and capital gains that fall under the existing indexation regime for assets acquired between 1985 and 1999 (which continues to operate in generally the same way for most entities).

The Bill does not alter the methodology for calculating capital losses, which has largely remained unamended since the introduction of CGT in 1985. Capital losses are calculated using the reduced cost base of a CGT asset, rather than the asset’s cost base that is used when calculating a gain. In contrast with cost base, reduced cost base excludes certain elements and is not indexed (and has never been indexed) for a range of important integrity reasons that remain as relevant in 2026 as they were in 1985.

New rules for Australian resident individuals and trusts for CGT events after 1 July 2027

An Australian resident individual, partner or trust working out their capital gain from a CGT event that happens on or after 1 July 2027 is to include an adjustment for indexation in calculating the cost base of the eligible CGT asset. Expenditure incurred in each element of the cost base is indexed except the third element (the costs of owning the CGT asset - see section 110‑25) subject to the other requirements of Division 114 (relating to indexation of the cost base). [Schedule 1, item 8, subsection 110-36(1A) of the ITAA 1997]

Under the new provisions for capital gains arising after 1 July 2027, cost base indexation:

applies to an individual, to an individual in respect of a capital gain that is attributable to a partnership of which they are a partner, and to a trust to the extent the capital gain is relevant to individual beneficiaries of the trust who are Australian residents;

does not apply to a foreign resident or temporary resident in accordance with section 114-25, discussed further below; and

for assets held on 30 June 2027 (including pre-CGT assets and CGT assets deemed to have been sold and reacquired just before 1 July 2027 under sections 112-155(2), 112‑165(2) and 112‑175(2)) , only applies for the period the asset is held after 1 July 2027 (see subsection 960‑275(1B), on how to calculate the indexation factor). The deeming process is discussed below under Division 112 (Modifying the cost base).

[Schedule 1, item 8, subsection 110‑36(1A) of the ITAA 1997]

Preservation of indexation rules for assets acquired between 20 September 1985 and 21 September 1999

The new provisions preserve the rules for indexation that applied prior to 1 July 2027 in relation to CGT assets acquired between 20 September 1985 and 21 September 1999. These rules generally continue to apply in the same way. However, a number of consequential changes are made to these rules to ensure that they do not overlap with the new rules applying to Australian resident individuals and trusts relating to indexation for CGT events occurring on or after 1 July 2027.[Schedule 1, item 8, subsection 110-36(1) of the ITAA 1997]

Consistent with the prior law, subsection 110-36(1) provides that the cost base of a CGT asset includes indexation of the elements of the cost base (except for the third element of the cost base, prescribed by section 110-25). Its application remains limited to working out the capital gain of an entity from a CGT event happening in relation to the CGT asset if the most recent acquisition of the CGT asset is at or before 11.45am (ACT legal time) on 21 September 1999 and the requirements of Division 114 (indexation of cost base) are met.

Subsection 110-36(1) is amended to also require that such indexation of the relevant elements of the cost base will only be included for an entity that is an individual or trust if the CGT event happens before 1 July 2027 (but not because of subsections 112-155(2) or 112-165(2), which deem the sale and reacquisition of certain CGT assets as discussed further below).[Schedule 1, item 8, subsection 110-36(1) of the ITAA 1997]

This means that for entities other than individuals and trusts, there are no changes to indexation arrangements for CGT assets acquired between 20 September 1985 and 21 September 1999. Assets acquired before 20 September 1985 are pre-CGT assets (see further below for discussion of the new tax treatment of pre-CGT assets).

In relation to individuals and trusts, existing indexation settings are retained for CGT assets acquired between 20 September 1985 and 21 September 1999 and for which the CGT event occurs before 1 July 2027 (excluding the new deeming mechanism discussed below). This means that individuals and trusts retain their existing choice between indexation and the CGT discount for these CGT assets.

However, for CGT events occurring on or after 1 July 2027, and CGT events occurring as a result of the deemed disposal of CGT assets immediately before 1 July 2027, individuals and trusts will no longer have a choice between indexation and the CGT discount and will instead only be able to apply the CGT discount to the discount capital gains up to 1 July 2027. This is reflected in amendments to subsections 110-36(2) and (3) (about the cost base including indexation only if a relevant entity chooses), which ensure those provisions only apply in relation to working out capital gains where the cost base includes indexation because of subsection (1). [Schedule 1, items 9 to 11, subsections 110-36(2) and (3) of the ITAA 1997]

This excludes individuals and trusts from the operation of those provisions in relation to CGT events occurring on or after 1 July 2027 and CGT events occurring as a result of the deemed disposal of CGT assets immediately before 1 July 2027, as for such events the cost base of a CGT asset for individuals and trusts includes indexation because of subsection 110‑36(1A) (and subsection 110-36(1) does not apply to them).

Division 114 Indexation rules

Division 114 of the ITAA 1997 provides when and how cost base indexation is relevant or not relevant to expenditure in each element of the cost base, and other rules that affect how cost base indexation works. The indexation formula is set in Subdivision 960-M, discussed separately in the section below.

When indexation applies

Under the replacement section 114-1, cost base indexation applies to expenditure incurred in each element of the cost base except the third element under section 110-25. This means the expenses incurred to acquire the asset, incidental costs, and expenses to increase or preserve its value and to defend the title or right to the asset; but indexation is not available for the costs of owning the asset, consistent with subsection 960-275(4). This approach applies to:

An individual or trust working out the cost base of a CGT asset after 1 July 2027 under subsection 110-36(1A); and [Schedule 1, item 14, section 114-1(1) of the ITAA 1997]

An entity working out the cost base of a CGT asset in other circumstances under subsection 110-36(1) - noting in this case, the CGT asset must be acquired at or before 11.45am (ACT legal time) on 21 September 1999 and only applies to expenditure incurred prior to that time. [Schedule 1, item 14, section 114-1(2) of the ITAA 1997]

This provides a consistent approach to cost base indexation for individuals and trusts operating under the new arrangements from 1 July 2027, as well as entities that acquired a CGT asset between 20 September 1985 and 21 September 1999 and sold the asset before 1 July 2027.

Other existing rules continue to apply in calculating indexation of the cost base. In particular:

Expenditure can include giving property per section 103-5.

Subdivision 960-M shows how to index amounts. For indexation under subsection 110-36(1A), see subsections 960-275(1B) and (1C). For indexation under subsection 110-36(1), do not take account of inflation after 30 September 1999, per subsections 960-275(2) and (3) - indexation can still be used, but only until 30 September 1999 as it is frozen at that time.

The cost base of a CGT asset must be worked out if a CGT event happens in relation to it or if there is a cost base modification.

Expenses under the third element of the cost base are not indexed, consistent with subsection 960-275(4).