Property, CGT & Negative Gearing
CGT Indexation Method
A method of calculating a capital gain by adjusting an asset's cost base for inflation (using the Consumer Price Index), so that only the "real" gain - the part above and beyond inflation - is taxed. From 1 July 2027, this method replaces the 50% CGT discount for individuals, trusts and partnerships as the default way capital gains are calculated, alongside a new 30% minimum tax rate on the resulting real gain.
A brief history
The indexation mechanism itself isn't new - it's a return to how CGT worked before 1999. When CGT was first introduced in 1985, the cost base of an asset held 12 months or more was indexed to CPI, so inflation-driven gains weren't taxed as if they were real wealth creation. That system (paired with a five-year averaging rule for lumpy gains) ran until 1999, when the Ralph Review recommended replacing it with the simpler flat 50% discount - see the CGT Discount Method entry for that history.
Importantly, the 30% minimum tax rate is not part of this revival - it's a genuinely new feature that didn't exist under the pre-1999 indexation system. The old system was indexation alone, taxed at ordinary marginal rates. The five-year averaging rule that used to spread lumpy gains across multiple years for tax-bracket purposes has also not been brought back. The 2026 reform pairs the historical indexation mechanism with this new minimum tax, so it isn't accurate to describe the whole package as "the same as before 1999" - only the cost-base indexation piece is a revival; the minimum tax is a new addition layered on top, and averaging stays gone.
In the 2026-27 Federal Budget (12 May 2026), the Government proposed this combined approach, explicitly citing a return to "the original intent of the CGT arrangements" - taxing only real gains rather than nominal ones. The reform passed both houses of Parliament on 25 June 2026 and received royal assent on 26 June 2026 as the Treasury Laws Amendment (Tax Reform No. 1) Act 2026, alongside the Income Tax Rates Amendment (Tax Reform No. 1) Act 2026. It takes effect from 1 July 2027.
Why it was brought back
The stated rationale is fairness and integrity of the tax base: under the flat 50% discount, someone who sold an asset that had merely kept pace with inflation still got taxed on half the nominal gain, even though there was no real increase in wealth. Indexation removes that distortion. The new 30% minimum tax addresses a separate concern: it's intended to reduce the incentive to defer selling an asset into a low-income year (like retirement) purely to minimise tax on a large gain, so a very low marginal rate can no longer be used to pay next to nothing on a large capital gain.
What it really is
Indexation isn't a flat percentage like the old discount - it's a genuine inflation adjustment applied to your cost base before working out the gain:
- Indexed cost base = cost base × (CPI at disposal ÷ CPI at acquisition)
- Taxable capital gain = proceeds - indexed cost base
A few mechanical details worth knowing:
- Indexation is applied per cost base element, and each element gets indexed based on the CPI movement between the quarter it was incurred and the quarter of disposal - so a renovation done five years after purchase is indexed over a shorter period than the original purchase price.
- One cost base element (the "third element" - ongoing costs of ownership like rates, land tax, repairs and insurance) is not indexed, since these are usually already deductible if the asset produces income.
- Indexation can only ever reduce a gain - it can't create or increase a capital loss.
- Unlike gains, capital losses aren't indexed at all, which recreates an asymmetry that also existed in the pre-1999 system.
When it's calculated
Same principle as the discount method: it's applied at tax time, in the financial year the CGT event happens (based on the sale contract date, not settlement), and reported in that year's tax return. The difference is the calculation itself is more involved, since it requires the relevant CPI indexation factors for each cost base element rather than a single flat percentage.
The transition for assets held across 1 July 2027
This is the detail that matters most for anyone with an asset bought before the changeover and sold after it. The gain is split at the boundary:
- The gain accrued up to 1 July 2027 is still assessed under the old 50% discount method, based on the asset's value at that date.
- The gain accrued from 1 July 2027 onward is assessed under indexation, using the 1 July 2027 value as the new starting cost base.
Canwi calculates this for you automatically, based on the asset's projected value at 1 July 2027 within your plan - so you don't need to source a formal valuation or work through the apportionment formula yourself. Super funds and companies are unaffected by any of this - the change applies specifically to individuals, trusts and partnerships. There are also carve-outs: buyers of qualifying new residential builds can elect to keep using the old 50% discount instead, and Age Pension and other income-support recipients are exempt from the 30% minimum tax.
Related terms
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