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.