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:
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
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.
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.
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.
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).
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).