The biggest CGT change in years
The 2026-27 Federal Budget proposes a significant change to the way capital gains tax is calculated for individuals, trusts and partnerships. From 1 July 2027, the current 50% CGT discount for assets held for more than 12 months will be replaced with cost base indexation, together with a 30% minimum tax on net capital gains. The changes are proposed to apply to all CGT assets held by individuals, trusts and partnerships, including property, shares and even pre-1985 assets, although transitional rules are intended to protect gains that have accrued before 1 July 2027.
For small business owners, the headline is not simply “CGT is going up”. The actual outcome will depend on what asset is being sold, how long it has been held, how much of the gain is inflationary, and whether any small business CGT concessions apply. Some taxpayers may pay more tax under the new system, particularly where an asset has grown well above inflation. Others may pay less where the gain is largely due to inflation rather than real growth. The Budget materials specifically note that individuals may pay more or less tax depending on investment returns.
What does cost base indexation mean?
Under the current rules, many individuals and trusts can reduce a capital gain by 50% if the asset has been held for at least 12 months. Under the proposed rules, instead of simply halving the gain, the cost base of the asset would be adjusted for inflation. Tax would then apply to the real gain, subject to the 30% minimum tax.
This means that the new rules may be more favourable for lower-growth assets, but less favourable for high-growth assets. For example, a long-held investment property that has increased only broadly in line with inflation may have a lower taxable gain under indexation. By contrast, a business, parcel of shares or property that has significantly outperformed inflation may produce a larger taxable capital gain than it would have under the current 50% discount.
How the timing rules work
The proposed start date is 1 July 2027. Assets sold before then should remain under the current CGT discount rules, assuming the existing eligibility requirements are met. For assets already owned before 1 July 2027 but sold after that date, the Budget proposes transitional arrangements so the new rules apply only to gains arising on or after 1 July 2027. Gains arising before that date can still access the existing 50% discount where available. Pre-1985 capital gains arising before 1 July 2027 will remain exempt.
This makes valuations and record keeping extremely important. If you own commercial premises, a residential investment property, shares, units in a trust, or a business interest, it may become necessary to identify the value of the asset at or around 1 July 2027. Without reliable records, it may be harder to split the pre-change and post-change gain.
Property investors: CGT and negative gearing now need to be read together
For property owners, the CGT changes sit alongside proposed negative gearing changes. From 1 July 2027, losses from affected established residential investment properties will no longer be deductible against other income, such as salary, wages or business income. Instead, those losses will only be deductible against income from residential properties, including rental income and capital gains from residential property.
This means that where a rental property makes a loss, the loss may not be immediately useful in reducing the owner’s tax on non-property income. However, the loss is not necessarily lost. If the investor has excess rental losses, those losses can be carried forward and used against future residential property income. This may include offsetting a capital gain when the property is eventually sold. The Budget materials include an example where an investor uses remaining carried-forward losses to reduce the real estate capital gain in the year the property is sold.
The wording is important. It is safer to say the losses can be used against residential property income, including capital gains, rather than saying they can only be used against the capital gain on “that dwelling”. The Budget example uses the same property, but the broader wording refers to residential property income generally. The final legislation will need to confirm exactly how this works.
The negative gearing changes are proposed to apply to established residential properties acquired from 7:30pm AEST on 12 May 2026. Properties held before that time, including where a contract had been entered into but settlement had not yet occurred, are proposed to be grandfathered so they can continue to be negatively geared until sold.
Eligible new builds are treated differently. Investors who buy eligible new residential properties will continue to be able to negatively gear those properties, meaning rental losses can still be offset against other taxable income, including salary and wages. Those investors will also be able to choose between the existing 50% CGT discount and the new indexation/minimum tax method when they sell the property.
The main residence exemption is proposed to continue. The Budget materials also confirm that the four small business CGT concessions remain unchanged, and that the existing 60% CGT discount for qualifying affordable housing will be fully retained.
The small business CGT concessions have not changed
This is the key point for business owners: the four small business CGT concessions are confirmed as unchanged. The Budget fact sheet states that the four small business CGT concessions will remain unchanged, and a separate small business fact sheet confirms the Government will maintain existing CGT concessions for small businesses, allowing eligible owners to halve or completely disregard CGT on the sale of eligible assets.
The four concessions are the 15-year exemption, the 50% active asset reduction, the retirement exemption and the small business rollover.
That means a business owner selling an active business asset may still be able to reduce, defer or disregard a capital gain, provided the eligibility rules are met. This could apply to goodwill, business premises used in the business, shares in a qualifying company, or units in a qualifying trust. However, the rules are technical, and eligibility should be tested early.
What should small business owners do now?
The practical action is not to rush a sale, but to model the outcome. Business owners should review assets likely to be sold after 1 July 2027, confirm whether small business CGT concessions may apply, and consider whether a valuation will be needed at the transition date.
For property owners, the key questions are: was the property acquired before or after Budget night, is it a new build or established dwelling, and is it held personally, through a trust, company, partnership or SMSF? The answer may significantly change the tax result.
The CGT rules are changing, but the impact will not be the same for everyone. Small business owners with active business assets may still have powerful concessions available. The risk is assuming the headline applies equally to every structure and every sale.
Note: The changes discussed in this article are proposed Budget measures only. At the time of publishing, they still need to pass through Parliament before becoming law.
