Indexation under subsection 110-36(1) is not relevant to expenditure incurred after 11.45 am on 21 September 1999 (ACT legal time) or any expenditure relating to a CGT asset acquired after that time. This is the date that indexation was previously frozen and replaced with the 50 per cent CGT discount. [Schedule 1, item 14, explanatory notes to subsections 114-1(1) and (2) of the ITAA 1997]
Section 114-5 provides when indexation is relevant. Under subsection 114‑5(1), indexation is relevant if the cost base of a CGT asset is relevant to a CGT event. The amendments retain the existing approach under which specified entities may choose between indexing the cost base or using the CGT discount for CGT assets acquired prior to 11.45am (ACT legal time) on 21 September 1999 and sold before 1 July 2027. [Schedule 1, items 15 and 16, subsections 114-5(2) and (3) of the ITAA 1997]
The choice between indexation and CGT discount is removed for individuals and trusts that acquired a CGT asset between 20 September 1985 and 21 September 1999 and for which the realisation event occurs after 1 July 2027. This means that after 1 July 2027, individuals and trusts cannot choose to apply cost base indexation to gains referrable to the period prior to 1 July 2027 (the deferred gain, discussed further below) and must instead apply the CGT discount. This is because indexation is not available in relation to the deferred gain. Other entities, such as companies that acquired a CGT asset between 20 September 1985 and 21 September 1999 and could choose indexation under the law prior to 1 July 2027, will retain that ability to apply cost base indexation (with indexation continuing to only apply up until 30 September 1999 when it was frozen).
Consequential amendments are made to the cost base modification and roll-over provisions in Division 114 to reflect amendments to section 110-36 that provide the two situations where indexation applies.[Schedule 1, items 21 to 23, subsections 114-15(1) and (6) and section 114-20 of the ITAA 1997]
12-month ownership
The rule that indexation is only available for expenditure forming the cost base of a CGT asset if the asset has been owned for at least 12 months continues to apply. This 12‑month rule in subsection 114-10(1) is amended to apply it to the existing law as well as to the new arrangements.[Schedule 1, item 17, subsection 114-10(1) of the ITAA 1997]
There are a number of exceptions to the 12‑month ownership rule, which the Bill expands from 5 to 6. The new exception is for a sale and reacquisition taken to have happened under subsections 112-155(2), 112‑165(2) or 112‑175(2). Such a deemed sale and reacquisition are disregarded for the purposes of applying the 12‑month rule. Those provisions deem the sale and reacquisition of a CGT asset to create notional capital gains for the purpose of apportioning gains on assets that were acquired before commencement of these amendments and which are realised when a later CGT event happens (see section 977-5 of the ITAA 1997 for the definition of realisation event for a CGT asset).[Schedule 1, items 18 to 20, subsections 114-10(2) and (9) of the ITAA 1997]
This exception is necessary as the entire period in which a CGT asset is held should count towards the 12‑month ownership rule. It would be inappropriate for operation of the 12‑month ownership rule to be affected by a deemed sale and reacquisition that occurs purely for technical CGT reasons and is out of the control of the taxpayer. It is sufficient that an entity actually owned the asset for at least 12 months irrespective of whether it is before or after 1 July 2027.
12‑month rule
Eva acquires an asset under a contract dated 11 August 2025 and sells that asset on 2 January 2028. Although the period between 1 July 2027 and 2 January 2028 is less than 12 months, indexation is available as the rule takes into account Eva’s actual continuous period of ownership of the asset, disregarding the deemed sale and reacquisition in 2027, which exceeds 12 months.
Australian residency requirements for CGT events that happen from 1 July 2027
There are residency requirements that must be satisfied for indexation of the cost base of a CGT asset to be available for an individual in relation to CGT events that happen on or after 1 July 2027. Under the amendments, cost base indexation is not available to foreign residents or temporary residents.
Similar to the requirements for the previous 50 per cent CGT discount, access to indexation can be affected by residency. For cost base indexation to apply, the individual who held the CGT asset at the time of the CGT event must have been an Australian resident between 1 July 2027 or the day the CGT asset was acquired (whichever is later) and the day of the CGT event. This time period is referred to as the testing period. The individual cannot have been a foreign resident or a temporary resident at any time during that testing period (however, please see the section on Future Amendments below). [Schedule 1, item 24, subsections 114-25(1) and (2) of the ITAA 1997]
This requirement applies for working out a capital gain made from directly holding the asset. A similar result arises for any capital gain made indirectly as a beneficiary of a trust (see Subdivision 115‑C, in particular subsections 115‑225(4) and (5)).[Schedule 1, item 24, explanatory note to subsection 114‑25(1) of the ITAA 1997]
In some cases, such as where an asset is acquired in circumstances giving rise to certain roll-overs, section 115-30 provides that an individual may be treated as having acquired a CGT asset on the day it was acquired by another person (the past owner). Where this is the case, if the past owner held the CGT asset on any day within the testing period the individual is also treated as having the residency status of the past owner on that day. The existing special rules about the time of acquisition of CGT assets in section 115-30 applies to the new rules around foreign and temporary residents and indexation in subsections 114‑25(2) and (3) in a corresponding way to the way it applies in relation to the existing rules for foreign and temporary residents accessing the CGT discount in section 115‑105.[Schedule 1, item 24, subsections 114-25(3) and (4) of the ITAA 1997]
In practice, this means that an individual must have been an Australian resident for the entire time they owned the CGT asset to apply cost base indexation. If at any point they were a foreign or temporary resident, the individual cannot apply indexation to the cost base under these amendments.
However, future amendments may be considered in relation to how entities that are resident for only part of the period they hold a CGT asset (themselves, or because their ownership period was interrupted by someone else holding the asset who in turn was not an Australian resident during that period) may access indexation.
Australian resident
Michelle is an Australian resident. On 1 January 2028 she purchases ASX listed shares. On 1 July 2029, Michelle sells the shares and makes a capital gain.
Michelle’s indexation testing period commences on 1 January 2028 and ends 1 July 2029. Michelle was an Australian resident for the entire testing period (and held the shares for longer than 12 months). Michelle can apply indexation to the cost base of her shares to calculate the capital gain to include in working out a net capital gain for the year of income.
Temporary resident
Maria moves to Australia on 1 July 2026 and is a temporary resident. On 1 July 2027 Maria purchased ASX listed shares. Maria sells the shares on 1 January 2029.
Maria’s indexation testing period commences on 1 July 2027 and ends on 1 July 2029. As Maria was a temporary resident during the testing period, she cannot apply indexation to the elements of the cost base of the property in working out whether she makes a capital gain.
Foreign resident
Paul is a resident of France. On 1 January 2028 he receives all necessary approvals and enters into a contract to purchase vacant land in Sydney. On 1 July 2029 Paul enters into a contract to sell the land.
Paul’s indexation testing period commences on 1 January 2028 and ends on 1 July 2029. As Paul was a foreign resident during the testing period, he cannot apply indexation to the gain.
New residential dwellings and affordable housing
Individuals and trusts that hold new residential dwellings or affordable housing after 1 July 2027 will have a choice between applying relevant CGT discounts or cost base indexation in respect of the period after 1 July 2027 and the minimum tax. The chosen treatment will apply to the whole holding period, even if the asset is purchased before and sold after 1 July 2027. This reflects the intent of these reforms to maintain incentives for new residential dwelling and affordable housing supply.
New section 114-30 provides that cost base indexation will not be available in relation to a CGT event happening for a new residential dwelling or affordable housing if the taxpayer has chosen to instead apply the relevant CGT discount under new sections 115-102 or 115-125.[Schedule 1, item 24, section 114-30 of the ITAA 1997]
Investor disposing of property used for affordable housing
Richard, an Australian resident, purchases a dwelling on 1 July 2027. The dwelling is used to provide affordable housing from 1 December 2027 until 2 December 2030. Richard sells the property on 1 February 2031.
In working out his residential capital gain, Richard can choose to apply either the CGT discount or indexation. If Richard chooses to apply the CGT discount, he can apply an additional 10 per cent CGT discount under section 115-125.
In relation to beneficiaries of a trust, the choice between indexation and CGT discount is made by the trustee of the trust. It cannot be altered by the beneficiary. [Schedule 1, item 24, explanatory note 2 to subsection 114‑30(2) of the ITAA 1997]
Indexation formula
Where an amount which forms part of an element of the cost base (except the third element) is required to be indexed, Subdivision 960-M of the ITAA 1997 provides how to index those amounts and how to calculate the indexation factor.
The indexation factor is calculated using the formula in subsection 960-275.
Following the amendments, subsections 960-275(2) and (3) continue to provide the indexation factors for indexation of the cost base of a CGT asset, under section 110-36(1). These are the rules for indexation that apply in relation to assets acquired between 20 September 1985 and 21 September 1999, which generally continue to apply in the same way as provided for under the law prior to 1 July 2027 (see above for further information).[Schedule 1, items 49 and 50, subsections 960-275(2) and (3) of the ITAA 1997]
New subsections are added to provide for indexation under section 110‑36(1A), for an Australian resident individual or trust to index the cost base of capital gains for CGT events which happen from 1 July 2027.[Schedule 1, item 48, subsections 960-275(1B) and (1C) of the ITAA 1997]
New subsection 960-275(1B) provides the indexation factor for expenditure in an element of the cost base incurred on or after 1 July 2027 (except the first element of the cost base for a share in a company or a unit in a unit trust). This indexation factor is the outcome of the index number for the quarter in which the CGT event happens, divided by the index number for the quarter is which the expenditure is incurred. That expenditure can include giving property, per section 103-5.[Schedule 1, item 48, subsection 960-275(1B) of the ITAA 1997]
This calculation includes expenditure deemed to have occurred from reacquisition on 1 July 2027 (under paragraphs 112‑155(2)(b), 112‑165(2)(b) or 112‑175(2)(b)). This means the earliest quarter covered by the denominator (the index number for the quarter is which the expenditure is incurred) is the quarter starting on 1 July 2027 (not the quarter ending on 30 June 2027).[Schedule 1, item 48, subsection 960‑275(1B) of the ITAA 1997]
The ATO has historically published guidance materials and tools to support taxpayers in calculating the indexation factor to adjust relevant amounts of the cost base.
Application of indexation formula to purchase in instalments
Marcus agrees to acquire an investment asset in July 2027 for 10 equal quarterly instalments of $10,000. He makes the first payment on 1 July 2027 and then pays a further $10,000 every three months, with the final instalment paid on 1 April 2030.
Under the indexation method, each instalment is treated as a separate amount of expenditure incurred at the time it is paid. Marcus cannot treat the $100,000 as a single cost as this is different to the real cost of the asset that was paid over time. Instead, each of the ten $10,000 payments forms part of the first element of the cost base at the point in time it is paid.
Assuming indexation is available up to the time of disposal, Marcus follows ATO guidance and tools to separately index each instalment with reference to CPI. Each $10,000 payment is multiplied by a factor calculated at the CPI for the quarter in which he sells the asset divided by the CPI for the quarter in which that particular instalment was paid.
Subsection 960-275(1C) provides a separate indexation factor for indexation of the first element of the cost base of a CGT asset (the cost to acquire it, per subsection 110-25(1)) that is a share in a company or a unit in a unit trust. This indexation factor applies to an amount that was paid to a company or trust on or after 1 July 2027. The indexation factor is the outcome of dividing the index number for the quarter in which the CGT event happens, by the index number for the quarter is which the amount is paid. The payment can include giving property, per section 103-5. Providing a separate calculation for this element, for CGT assets that are shares and units, is consistent with the approach to calculating the indexation factor under the existing law.[Schedule 1, item 48, subsection 960-275(1C) of the ITAA 1997]
Application of indexation formula to shares in a company
Peter acquires shares in a company on 10 April 2028. The shares are partly paid, and the company makes a call on the shares on 10 August 2030, due for payment in 6 months on 1 February 2031. Peter sells the shares to Narina on the 15 August 2030, before the payment call is due.
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 first quarter ending 30 September 2030).
The amount Narina later pays for the call on the shares is indexed in accordance with subsection 960-275(1C) from the quarter in which she made that later payment (the quarter ending 31 March 2031).
Assessable income includes net capital gains
The next section of the Explanatory Memorandum steps through how to calculate a net capital gain, focussing on amendments to provisions about calculating and modifying the cost base (which, as above, may be indexed). These amendments are necessary due to various amendments made to the tax law by the Bill, including the amendments to limit application of quarantined amounts (i.e. rental losses - see the Chapter relating to negative gearing amendments) which permit the application of those amounts only against specific categories of capital gains.
Division 102. Calculating your net capital gain
Division 102 determines how entities work out if they have made a net capital gain, which is included in their assessable income for an income year.
The amendments to Division 102 principally give effect and address consequences of the changes to the CGT treatment of individuals and trusts from 1 July 2027, including the re-introduction of indexation and the removal of the 50 per cent discount.
Within Division 102, subsection 102-5(1) sets out the method statement to work out if you have made a net capital gain that is to be included in your assessable income.
The amendments remove the existing method statement and provide a new method statement in subsection 102-5(1) for calculating net capital gains. [Schedule 1, item 5, subsection 102-5(1) of the ITAA 1997]
The main changes are creating asset-based categories of capital gains in order to separately identify residential and non-residential capital gains. This allows capital losses and quarantined amounts (i.e. rental losses - see the Chapter relating to negative gearing amendments) to be applied correctly across different categories of capital gains. This will ensure the appropriate outcomes across both the CGT and negative gearing amendments.
This new process of calculating net capital gains is set out in the diagram below.
How to calculate your net capital gain (simplified)
Step 1 - Reduce your current year capital gains against current year capital losses in the order of the new categories of capital gains
Under step 1 in the new method statement, an entity is required to classify their capital gains into four categories for an income year:
deferred non-residential capital gains;
deferred residential capital gains;
non-residential capital gains; and
residential capital gains.
Residential capital gains
‘Residential capital gains’:
excludes gains arising under Subdivision 112-E where there is a deferred gain arising from the deemed sale of a CGT asset on 30 June 2027; and
includes the gains arising from a CGT event happening in relation to the CGT asset that is a residential dwelling to the extent it has been used or held to provide residential accommodation.