The Bill inserts new Subdivision 112-E to house these provisions relating to deemed sales and acquisitions that result in modification to the general rules for calculating the cost base.[Schedule 1, items 12 and 13, subsection 112-5(6A) and Subdivision 112-E of the ITAA 1997]
Consequences of a deemed disposal before realisation
Jasper acquired shares in an ASX listed company in 2019 for $50,000. His shares have performed well and he plans to keep holding them until at least 2035.
Immediately before 1 July 2027 Jasper's shares have a market value of $120,000. At this time, he is deemed to have disposed of the shares, and assuming Jasper later elects to use the market value method, this would involve an initial notional gain of $70,000 (before considering the CGT discount). Immediately after the deemed sale, Jasper is taken to have reacquired the shares at their market value.
Jasper does not have to report or pay tax on this initial notional gain in his 2026/27 income tax return. When Jasper eventually sells his shares, assuming Jasper does not elect to use an apportioning method, he will pay tax on his notional gain (which will be subject to the 50 per cent CGT discount) in addition to paying tax on any future capital gains on the shares arising after 1 July 2027 (after applying cost base indexation).
Modifying the cost base by an Australian resident individual or trust
Australian resident individuals and trusts - modifying the cost base
For the purposes of Parts 3-1 and 3-3 and Subdivision 960-M of the ITAA 1997 (capital gains and losses, general and special topics), individuals and trusts are deemed to dispose of CGT assets they hold immediately before 1 July 2027 and to reacquire those assets just after that disposal.[Schedule 1, item 13, subsections 112-155(2) and 112-165(2) of the ITAA 1997]
This approach applies to a CGT asset held by an Australian resident individual (including an individual partner in a partnership) or trust that held the asset before the end of 30 June 2027, and continues to hold it until a realisation event happens in relation to the asset in an income year that starts on or after 1 July 2027.[Schedule 1, item 13, paragraphs 112-155(1(a) to (c) and 112-165(1)(a) to (c) of the ITAA 1997]
This approach does not apply if, assuming the gain was a discount capital gain, section 115-105 dealing with capital gains for foreign or temporary resident would apply to the gain. In the case of a trust, the approach will not apply if section 115-110 would apply to all of the beneficiaries of the trust in relation to the gain. This is consistent with the residency requirements for applying the new CGT rules in section 114-25. It means the deemed disposal and re-acquisition cannot be used to restore or increase a foreign or temporary resident’s entitlement to the CGT discount. Note: there is an intention to further consider how these amendments apply to entities that are Australian residents for only part of the period in which they hold a CGT asset.[Schedule 1, item 13, paragraph 112-155(1)(d) and paragraph 112‑165(1)(d) of the ITAA 1997]
The approach also does not apply to a new residential dwelling that benefits from the new discount in section 115-102 or affordable housing covered by section 115‑125. In the case of a trust, this exclusion only applies if all of the gains would be made by beneficiaries that are entitled to the CGT discount for new residential dwellings or affordable housing in section 115‑125.[Schedule 1, item 13, paragraphs 112-155(1)(e) and 112-165(1)(e) and section 112-175 of the ITAA 1997]
The capital proceeds and the amount for which the asset was reacquired are both generally established using the market value of the asset immediately before 1 July 2027. However, a taxpayer may instead choose to calculate both amounts using an apportioning method that is determined by the Minister in a legislative instrument. There are rules in the ITAA 1997 that could substitute the market value for the capital proceeds in some situations. The rules in Subdivisions 112-A, 112-B, 112-C and 112-D and sections 116-25 to 116-60 do not apply where a choice has been made to use an apportioning method.[Schedule 1, item 13, subsections 112-155(3)and (5) and subsections 112‑165(3) and (5) of the ITAA 1997]
The making of this choice is governed by the rules for choices in relation to CGT in section 103-25. However, the later CGT event (the realisation event), not the CGT event arising from the deemed sale, is the relevant CGT event for this choice for the purposes of paragraph 103-25(1)(a). This means that the choice must be made by the time a taxpayer lodges their income tax return for the year in which the realisation event occurs.[Schedule 1, item 13, subsections 112-155(4) and 112-165(4) of the ITAA 1997]
The Minister is empowered to make a legislative instrument to determine a method of apportioning consideration from realisation events happening on or after 1 July 2027 for deemed disposal and reacquisition of a CGT asset under these amendments. In determining a method for apportioning, the method must take into account the deemed acquisition of the CGT asset on 1 July 2027 and any expenditure including indexation in an element of the cost base or the reduced cost base. The method must enable the capital proceeds of the deemed sale just before 1 July 2027, and the cost base (and reduced cost base) of the CGT asset when it is deemed to be reacquired on 1 July 2027, to be worked out. The method may take into account other matters the Minister considers relevant and may enable other things to be worked out. This approach provides flexibility and enables the Minister to determine other methods which are appropriate to determine the value of the asset but may be simpler than calculating market value. Making such a determination in a legislative instrument ensures it is subject to appropriate Parliamentary scrutiny, disallowance and sunsetting. [Schedule 1, item 13, section 112-185 of the ITAA 1997]
The purpose of the deemed disposal and reacquisition is to allow any gains or losses referable to the period before 1 July 2027 to be dealt with under the old rules, and to fix the cost base of the asset at the beginning of the new regime for the purposes of indexation.
Any capital gain or loss (an initial deferred gain or initial deferred loss) from the deemed disposal is disregarded. [Schedule 1, item 13, subsections 112-160(1) and (2) and 112-170(1) and (2) of the ITAA 1997]
Instead, when the CGT asset is later subject to a realisation event, the taxpayer is then taken to have a capital gain or loss equal to the initial deferred gain or loss. In working out this gain or loss, the rules in section 102‑20 around market value substitution are disregarded, given the specific rules for determining the capital proceeds that already apply. Also, the gain will be a discount capital gain if the initial deferred gain was a discount capital gain. [Schedule 1, item 13, subsections 112-160(3) and (4) and 112-170(3) and (4) of the ITAA 1997]
Additionally, in determining if the small business concessions in Division 152 may apply to the CGT event resulting from the deemed sale, that CGT event is taken to have happened on the day of the realisation event. Further, the deemed sale is likewise disregarded when determining the period the asset has been held for the purposes of applying the small business concessions to the realisation event. This ensures that the deemed sale does not distort the operation of the small business concessions, by effectively allowing it to be disregarded and the full period of ownership taken into account in applying the active asset test. [Schedule 1, item 13, paragraphs 112‑160(3)(d) and 112‑170(3)(d) of the ITAA 1997]
The deemed disposal and reacquisition are taken to occur for the purposes of Part 3-1, Part 3-3 and Subdivision 960-M of the ITAA 1997. The amendments include, for the avoidance of doubt, an express provision to confirm that they have no wider effect, including in the context of other provisions relating to gains by trusts, such as Subdivision EA of Division 7A of the ITAA 1936. [Schedule 1, item 13, subsection 112-165(6) of the ITAA 1997]
A separate capital gain or loss may be made as a result of the realisation event, when the CGT asset is actually disposed of in the future. For the purposes of working out whether the individual or trust makes a capital gain or capital loss referable to the period between 1 July 2027 and the realisation event, and whether concessions are available, they are taken to have acquired the CGT asset for its market value (or equivalent) on 1 July 2027.[Schedule 1, item 13, subsections 112-160(5) and (6) and 112‑170(5) and (6) of the ITAA 1997]
Additionally, for the purposes of the small business concessions, the deemed sale and acquisition are effectively disregarded and the eligibility of the taxpayer for the concessions is calculated at the time of the realisation event, looking at the whole period that the taxpayer has owned the asset for both any deferred notional gain and any gain for the later CGT event when the asset is realised.[Schedule 1, item 13, paragraphs 112-160(3)(d) and 112-170(3)(d) of the ITAA 1997]
In summary, the old law is applied to calculate a notional gain from a deemed CGT event on 1 July 2027, and the new law is applied to calculate any gains which accrue on or after 1 July 2027. Both amounts go towards calculating the individual’s net capital gain for the income year of the realisation event (when a CGT event occurs to the asset in future, after 1 July 2027).
Modifying the cost base by an Australian individual
Otis, an Australian resident, purchases shares in January 2020 for $100,000 and sells them on 1 March 2029 for $160,000.
The shares are deemed to be disposed of on 30 June 2027 and reacquired on 1 July 2027. Assuming Otis later elects to use the market value method, the deemed capital proceeds for the deemed disposal at that date are worked out to be $120,000.
The deemed disposal has resulted in a notional gain of $20,000. This notional gain is the amount of Otis’ net capital gain for the 2026-27 income year, relating to that CGT asset, calculated according to the old law. The taxing point is deferred until the shares are sold in the future.
Otis sells the shares on 1 March 2029 for $160,000. This is the realisation event. The increase in value between 1 July 2027 and 1 March 2029 is $40,000. That is a capital gain, calculated under the new law when the cost base of the shares is subject to indexation and may incur a minimum tax on the capital gain.
Both the deferred gain from the deemed disposal just before 1 July 2027, and the separate capital gain for the sale (the realisation event) on 1 March 2029, are included in working out Otis’ net capital gain for the 2029-30 income year.
Modifying the cost base by a trust
The Trustee of the XYZ trust acquires shares in ABC Ltd for $100,000 in 2022, and sells them for $300,000 in 2032. All of the beneficiaries of the XYZ trust are Australian resident individuals or companies.
The shares are deemed to be sold just before 1 July 2027 and repurchased immediately. Later, following the realisation event in 2032, the Trustee works out (using the apportioning method) capital proceeds at the time of the deemed sale of $180,000.
At the time of the realisation event, the Trustee recognises two capital gains:
The initial notional gain of $80,000 (which is a discount capital gain that the trust can apply its discount percentage to in working out its net capital gain) that has been deferred until the time of the realisation event (now the ‘trust’s deferred gain’).
The separate capital gain from the realisation event. Assuming indexation on an initial cost base of $180,000, the cost base at the time of the realisation event is $200,000, and this separate indexed capital gain is $100,000.
Before year end, the Trustee resolves to make VP Pty Ltd (a private company) and Ishaan (a resident individual) each specifically entitled to 50 per cent of those capital gains.
The beneficiaries work out their capital gains tax liabilities as follows:
Ishaan
Ishaan first works out his attributable gains under 115-225 as:
$80,000 x 50 per cent (discount applied by the trustee) x 50 per cent (his share, expressed as a percentage) = $20,000; and
$100,000 x 50 per cent (his share, expressed as a percentage) = $50,000.
He does not re index the cost base for the separate capital gain from the realisation even, as indexation has already been applied at the trust level.
Ishaan then includes those capital gains in working out if he has made a net capital gain for the income year.
VP Pty Ltd
VP Pty Ltd is not entitled to indexation or the CGT discount. Under subsections 115‑225(4)-(5), it must recalculate its attributable gain for the separate capital gain, as if it had been calculated without indexation.
VP Pty Ltd first works out its attributable gains under section 115‑225 as:
$80,000 x 50 per cent (discount applied by the trustee) x 50 per cent (its share, expressed as a percentage) = $20,000; and
$120,000 (being $300,000 - $180,000) x 50 per cent (its share, expressed as a percentage) = $60,000.
Division 102 applies to Ishaan and VP Pty Ltd as follows:
Ishaan is treated as having:
a capital gain of $40,000 (under paragraph 115-215(3)(b)) (the $20,000 attributable gain is doubled in his hands, to remove the discount applied at the trust level). Ishaan can apply a discount percentage of 50 percent to this capital gain if it remains at the step 5 of the method statement (i.e. where the discount is applied); and
a capital gain of $50,000, to which no discount percentage reduction can be applied, but which has been calculated with an indexed cost base.
VP Pty Ltd is treated as having:
a capital gain of $40,000 (under paragraph 115-215(3)(b)) (the $20,000 attributable gain is doubled in its hands, to remove the discount applied at the trust level) VP Pty Ltd cannot apply a discount; and
a capital gain of $60,000, for which similarly no discount is available for.
The Trustee must provide VP Pty Ltd and Ishaan with a notification meeting the requirements of section 115-235, which will set out the amount of the gains each beneficiary is treated as having, and in this case, which capital gains are discount capital gains.
Division 115 Discount capital gains
Overview
Schedule 1 to the Bill amends Division 115 to remove the 50 per cent discount for capital gains for individuals and trusts in relation to CGT events happening on or after 1 July 2027.
The amendments do not change the availability of the CGT discount for capital gains arising from a CGT event happening before 1 July 2027.
A CGT discount of 50 per cent remains available for CGT events happening on or after 1 July 2027 relating to new residential dwellings, and any other CGT assets determined by the Minister by legislative instrument. A CGT discount of up to 60 per cent remains available for CGT events happening on or after 1 July 2027 in relation to investment in affordable housing.
Removal of the CGT discount for trusts and individuals except for new residential dwellings and affordable housing CGT assets from 1 July 2027
Discount capital gain is defined by section 115-5. In brief, it means a capital gain made by certain entities after 21 September 1999, that does not have an indexed cost base and relates to a CGT asset the entity has owned for at least 12 months. The amendments do not change this.
The amendments remove the 50 per cent CGT discount for individuals and trusts for capital gains arising on or after 1 July 2027. As part of this change, the amendments reduce the default discount percentage for a discount capital gain to 0 per cent. This ensures that the CGT discount is not available unless a taxpayer meets the requirements for a particular CGT discount in section 115‑100, such as the new 50 per cent discount that maintains support for new residential dwellings, the discount of up to 60 per cent available for investment in affordable housing and the 33.3 per cent discount for superannuation entities. [Schedule 1, items 4, 28 and 29, paragraphs 102-3(2)(a) and (c) and 115‑100(a) and (f) of the ITAA 1997]
The amendments insert section 115-102 and amend section 115-125 to specify when capital gains relate to new residential dwellings and affordable housing, for the purpose of access to CGT discounts and the choice not to be subject to cost base indexation or the minimum 30 per cent tax on capital gains. [Schedule 1, items 30 and 36, sections 115-102 and 115-125 of the ITAA 1997]
New residential dwellings
The meaning of ‘new residential dwelling’ is discussed in Chapter 2 of this Explanatory Memorandum dealing with amendments relating to negative gearing. Essentially, the requirements for a dwelling to be a new residential are to be set by the Minister by legislative instrument.
Individuals that make capital gains from assets that are new residential dwellings can choose to apply the CGT discount method under section 115‑102. Where this occurs, if the assets are held directly by the individuals or in some circumstances, covered in the discussion of Division 112 above, by trusts, the asset may be excluded from the deemed sale and deemed reacquisition provisions under Subdivision 112-E. [Schedule 1, items 13 and 30, paragraphs 112-155(1)(e), 112-165(1)(e) and subsection 115-102(5) of the ITAA 1997]
Where an individual makes a gain through an interposed entity that is a trust or a MIT (which includes an AMIT), section 115-102 also applies. Specifically, the section applies where:
An individual was an Australian resident for the time they held the CGT asset;
The individual is a beneficiary who is treated under Division 102 as having made a discount capital gain of a trust (including a MIT) because of section 115-215;