Wealthy older Australians will face far heftier tax bills when they sell assets like property or shares under Labor’s once-in-a-generation overhaul to the capital gains tax.
As tax experts warn the transition to the new system poses a headache-inducing compliance burden, Treasurer Jim Chalmers has punted much of the implementation into the ‘TBC’ column with the details to be worked out by the Australian Taxation Office (ATO).
From July 1, 2027, the current 50 per cent capital gains tax discount will be replaced with inflation-adjusted indexation.
In a nutshell, it means it means investors with lower gains relative to inflation will pay less tax, while those with large gains well above inflation will pay more.
Since the changes are not retrospective, that means someone who owned the asset before July 1, 2027 but sells it some time in the future will pay capital gains tax calculated under the old and new regimes for the two periods.
Additionally, a new minimum 30 per cent tax rate will apply on capital gains from July 1, 2028, ending the incentive for asset-rich but cash-poor Aussies to time the sale of assets for when they have little or no income to maximise their tax advantage.
“Introducing a minimum 30 per cent rate will ensure everyone pays a fair share when they make a capital gain,” the government says.
“Income support recipients, including pensioners, will be exempt from the minimum rate.”
Investors in new home builds will also retain the option to use the 50 per cent discount when they sell.
“This is about better aligning the taxes paid on these types of income with the taxes paid on wages,” Mr Chalmers said in his budget speech.
“These changes will level the playing field for workers and first home buyers, and support investment in productive assets, including new housing supply.”
The government expects the combined reforms to negative gearing and capital gains tax to raise an additional $3.6 billion over the next five years.
What is capital gains tax?
Capital gains tax is the tax you pay on profits from disposing of assets, including investments such as property and shares.
The current Australian discount is a 50 per cent reduction in the capital gain amount for property investors and trusts holding assets for over 12 months.
It doesn’t apply to the family home — or in ATO speak, the principal place of residence (PPOR) — which is CGT-free.
Capital gains tax in Australia was introduced in 1985 as a major tax reform to treat investment gains as taxable income.
Taxpayers pay capital gains tax at their top marginal tax rate, which for high-income earners is 47 per cent, minus the discount.
Under the original system used by the Hawke-Keating government, the discount on the amount of CGT paid was tied to increase in the consumer price index (CPI) over the period the asset was held, so that only the real increase in the asset’s value was taxed, excluding inflation.
In 1999, the Howard-Costello government replaced inflation indexation with a blanket 50 per cent discount, meaning the maximum capital gains tax rate was 23.5 per cent.
Labor notes that since the introduction of the 50 per cent discount, house prices have increased by more than 400 per cent, almost twice as fast as average full-time earnings, and the home ownership rate among 25- to 34-year-olds declined by 7 percentage points between 2001 and 2021.
“This reflects a broad range of forces,” the government says.
“Supply has not kept pace with rising demand, but tax settings have also played a role.
“Since the discount was introduced, the share of Australians owning shares outside of super has also declined almost 20 percentage points.
“These reforms are also expected to improve the efficiency of investment decisions, as they are more likely to be made for economic reasons rather than tax outcomes.
“Around 83 per cent of the benefit of the current CGT discount goes to those in the top 10 per cent of taxpayers by income.”
Treasury figures underline the huge hit to the budget as a result of generous tax concessions for property investors.
For example, over 1.1 million individual tax filers realised a net capital gain in 2022-23.
From that group, around 830,000 people used the capital gains tax discount, including around 420,000 men and 410,000 women.
How will this work?
The 50 per cent capital gains tax discount will apply to the difference between the asset’s cost base and its value at July 1, 2027.
The asset’s value at July 1, 2027, will then be the new cost base to calculate the indexation discount for the period until it is sold.
Taxpayers will have to determine the value of the asset as of July 1, 2027 as part of their tax return in the year they sell.
For things like shares that will be relatively simple, but for less-liquid assets like properties they can either seek a valuation, or use a specified apportionment formula that will estimate the value based on its growth rate over the holding period.
The ATO will provide tools to estimate this value for taxpayers.
Take the government’s example of Jane, who purchases an investment property on July 1, 2022 for $800,000 and sells it on July 1, 2032 for $1.6 million, earning a 7.2 per cent annual return.
Using the ATO’s tools, Jane determines that the property was worth $1,131,371 on July 1, 2027.
In the pre-2027 period, the property increased in value by $331,371, leaving her with a taxable capital gain of $165,685 when the 50 per cent discount is applied.
From July 1, 2027 until she sold, the property’s value increased by $468,629, which is reduced to a taxable gain of $319,958 using the indexation method.
Her total taxable capital gain is $485,643. If the 50 per cent discount had remained in place, her total taxable capital gain would have been $400,000.
Assuming she’s paying the top tax rate of 47 per cent, Jane pays a total tax on her gain of $228,252 — $40,252 more than the $188,000 she would have paid under the previous system.
Faster-growing assets will be taxed significantly more under the new scheme.
Take David, Ben and Kate — another case study in the budget — who all earn $100,000 per year.
In July 2027, they each purchase a home in a different city for $500,000, and sell it after 10 years. Over that decade, annual inflation was 2.5 per cent.
David earns an annual rate of return of 5 per cent. Under the new indexation scheme, he will have a taxable capital gain of $174,405, compared to $157,224 under the current 50 per cent discount. He pays an extra $8075 in tax due to the reforms.
Kate earns a higher 7.5 per cent annual return. Her taxable capital gain comes to $390,474 under indexation compared to $265,258 under the current regime. She will pay an extra $58,851 in tax.
Ben earns an annual return of just 2.5 per cent. As Ben does not earn a positive return on his investment after inflation, he will not have a taxable capital gain under cost base indexation. Under the 50 per cent discount his taxable capital gain would have been $70,021, meaning he will pay $24,858 less in tax due to the reforms.
What are the exemptions?
The main residence will continue to be exempt for CGT purposes. The four small business CGT concessions will also be unchanged.
Investors who buy new builds will be able to choose either the 50 per cent CGT discount or indexation and the minimum tax when they sell the property.
These investors will also continue to have access to negative gearing.
The government defines new builds as residential properties which genuinely add to supply, including dwellings constructed on vacant land, or where existing properties are demolished and replaced with a greater number of dwellings.
Knock-down rebuilds or substantial renovations that do not increase supply will not be eligible.
A new build cannot have been previously sold, unless first owned by the builder and not occupied for more than 12 months.
Subsequent purchasers of the dwelling will not be able to access the 50 per cent CGT discount or negative gearing in relation to that property.
The existing 60 per cent CGT discount applying to qualifying affordable housing will be fully retained to preserve incentives to invest in those assets.
Given the unique characteristics of the tech and start-up sector the Government will consult on the interaction of the capital gains tax reforms and incentives for investment in early-stage and start-up businesses.
Labor has also sought to calm fears that the changes will wipe out Australia’s tech and start-up scene, with budget papers flagging the government will “consult on the interaction” of the reforms “and incentives for investment in early-stage and start-up businesses” given the sector’s “unique characteristics”.
What do the experts say?
Professor Andrew Conway, chief executive of the Institute of Public Accountants (IPA), warned the transitional arrangements “add another layer of complexity”.
“I think most people will be trying to work out what it actually means,” he said.
“These types of arrangements where you’ve got transitional rules make the complex rules even more complex. CGT rules as they currently stand have got all sorts of exceptions.”
Prof Conway said determining the updated cost base from July 1, 2027 could be a headache.
“For assets that don’t have a transparent value it’s going to be upon the taxpayer to establish,” he said. “Valuers will do that … but [the government] might have some methodology that alleviates that compliance burden. It will be a hell of a compliance cost to deal with this.”
Prof Conway said it was good news and bad news for accountants.
“Yes and no — we’re for more holistic, broader tax reform,” he said.
“All these things just complicate our lives, and they change behaviours. If people are going to have a worse outcome they’ll probably hang onto their assets longer. Sometimes they don’t always foresee the behavioural impact in their costings.”
Richard Holden, Professor of Economics at UNSW, said it was “not really reform”.
“It’s just going back to the pre-1999 indexation system which was really just a different way of implementing a discount or preferential treatment of capital income over labour income, which every advanced economy in the world does because you don’t want to double-tax capital income,” he said.
“To make a capital gain you have to make an investment, and to make an investment you have to have made an income and paid tax on it. Everyone gives some sort of special treatment, the question is how do you implement that? The Costello discount is one way, he did it for administrative simplicity.
“It’s not going to raise a lot of money I wouldn’t expect, if anything it would just be a timing difference. I don’t see that as real reform. It’s got all the hallmarks of classic Jim Chalmers which is say something like, ‘We’ve got rid of the discount on capital gains,’ but they didn’t.
“It’s much ado about nothing. It’s probably worse but it doesn’t really change anything economically.”
AMP chief economist Dr Shane Oliver said he was in favour of reducing the capital gains tax discount and limiting negative gearing, but had always advocated it as part of broader tax reform that significantly reduced income taxes.
“Now it’s sort of gone down on a more extreme path,” he said.
“I always thought any changes you make should be offset by income tax reduction, so it looks like proper tax reform as opposed to a tax hike. Now it’s been dressed up as a tax hike on older generations or higher-income earners, but the problem is the tax system is already pretty skewed. The top 5 per cent pay a third of the tax going to Canberra, the top 10 per cent pay nearly 50 per cent.
“That’s the basic problem in Australia, we have average income tax rates that are way too high across the board.”
Jacki Neumann, head of capital markets at Sharesies, said the removal of the 50 per cent discount “changes the equation for growth investors in particular”.
“While a move toward an indexation framework aims for a more equitable environment, it creates a threshold where the tax benefits of indexation diminish once an asset’s growth significantly outpaces inflation,” she said.
“This shift invites a recalibration of risk, where investors will need to weigh their appetite for high-growth assets against the more predictable returns of income-generating investments.”
Will it help housing affordability?
Dr Oliver said capital gains tax and negative gearing were “part of the problem” with housing “but only a small part”.
“The tax system is only 5 per cent, maybe 10 per cent at most, the main [problem] is supply,” he said.
“Therefore I thought it was right for governments to focus on the supply side but it looks like they haven’t had much success, two years into the Housing Accord running 70,000-80,000 dwellings below target two years in a row. I think maybe they’ve given up [and have chosen to] be seen to be doing something as opposed to doing something.
“The comments by the Treasurer about sending a message to younger voters, that’s about it — it’s about the optics.”
He noted that millennials were “actually getting quite old”, now ranging from 30 to 45, and were “getting into a phase where they would start to take advantage of it”.
“It’s true that gen Z don’t use a lot of negative gearing or CGT [discounts], that’s because they’re younger,” he said.
“Now we’re saying, sorry it won’t be there for you when you’re older either. Younger generations won’t have that benefit.”
Dr Oliver warned the policy was also “likely to have some unintended consequences”.
“It could be that first homebuyers get squeezed out of new properties to a degree because there’s so many investors trying to get in,” he said.
“Jamming a lot of people into new properties will push up the value of new properties. People who were rorting negative gearing by having 10 properties, they can now just do it by having 10 new properties.
“Short term you could see investors stay away from existing property, therefore property values for existing properties will have to fall for a period until investors can see a higher expected return again.
“It could look in a year or two like it worked, then you find it hasn’t, it’s actually just distorted the housing market in the absence of any measures to boost net supply. It’s the interaction of immigration levels and supply — they’ve got to bring down immigration levels or boost supply or both.”
Daniel Wild, deputy executive director of the Institute of Public Affairs (IPA), argued the changes to negative gearing and capital gains tax “will make no noticeable difference to housing affordability, as the single biggest driver of dramatic house hikes is mass migration which the government has committed to continuing”.
“Changing investment rules halfway through the game is a dangerous idea which will discourage investment into our nation at the exact time as our economy desperately needs more investment,” he said.
Analysis by former Reserve Bank economist Christian Gillitzer for The Australian Financial Review found investors could face tax rates of between 33 per cent and 47 per cent.
Mr Gillitzer said the indexation scheme could bite people making big returns from fast-growing businesses.
“If you invest in something that is quite risky, like start-ups and venture capital, that has a potential high return, then the new indexation method is going to take away a lot of the gains,” he told the newspaper.
The top CGT rates in other comparable economies are 23.8 per cent in the US, 24 per cent in the UK, 26.4 per cent in Germany, 27 per cent in Canada, 33 per cent in Ireland, 34 per cent in France, 36 per cent in the Netherlands and 42 per cent in Denmark.
Investment figure and finance commentator Christopher Joye said the “single biggest winner” of tonight’s budget would be the family home.
Mr Joye wrote on X that CGT and negative gearing changes would steer people away from buying rentals and instead plough their cash into the tax-free home.
“The single biggest winner from the budget: the tax-free owner-occupied home, which is where people will put their money,” he wrote.
“After the budget doubles the capital gains tax on productive businesses/assets from circa 23.5 per cent to 46-47 per cent, investors will understandably pull money from businesses, shares, commercial property and rental housing and plough it into their tax-free owner-occupied home.
“It’s a great way to push up the prices of these houses.”
Mr Joye went on to predict the changes would also drive up the price of rent, and reduce capital available for businesses across the country.
“It hammers the capital gain upside on any asset: shares, commercial property, the small or medium sized business you built, venture capital and private equity. It will give Australia the most unattractive capital gains tax in the WORLD,” he wrote, adding that the rumoured changes would “would blow the entire Aussie economy up”.
