Big Changes to Capital Gains Tax Are Coming. Here's What You Need to Know

Changes are coming to Australia's capital gains tax (CGT) rules. If you own an investment property, shares or a business, the changes could affect how much tax you pay when you eventually sell.

The government has introduced new rules that will replace the familiar 50% CGT discount with a system based on inflation. A minimum 30% tax rate will also apply to certain capital gains.

Most changes start on 1 July 2027, but that doesn't mean you need to sell your assets before then.

Here's what's changing, who will be affected, and what you should consider doing now.

1. The 50% CGT discount is being replaced

Under the current rules, individuals and trusts can generally reduce a capital gain by 50% when they sell an eligible asset they've owned for at least 12 months.

For example, if you sell an investment property and make a $200,000 capital gain, you may only need to include $100,000 in your taxable income.

From 1 July 2027, the rules will change.

Instead of the flat 50% discount, the cost of an eligible asset will be adjusted for inflation. This means you'll generally pay tax on the increase in value above inflation, rather than the full increase in its dollar value.

A new minimum tax rate of 30% will also apply to certain real capital gains.

For many investors, particularly those on higher incomes, this could mean paying more CGT than under the current system.

Importantly, the 30% minimum rate doesn't mean every capital gain will automatically be taxed at 30%. The final calculation will depend on your circumstances and any applicable exemptions.

2. What happens to assets you already own?

This is probably the most important part of the changes.

Capital gains that build up before 1 July 2027 will continue to receive the existing CGT treatment, even if you sell the asset years later.

For example, imagine you purchased an investment property for $500,000 several years ago.

By 30 June 2027, its value has increased to $800,000.

You then sell the property in 2030 for $950,000.

The increase in value is effectively split into two periods:

• The $300,000 gain built up before 1 July 2027 remains subject to the existing CGT discount rules, where eligible.

• The $150,000 gain after 1 July 2027 is subject to the new inflation-based rules and minimum tax arrangements.

This is a simplified example. The actual calculation will depend on the final apportionment rules, relevant ownership periods, costs and other circumstances.

The good news is that existing investors won't automatically lose the 50% CGT discount on gains they've already made.

3. What about your family home?

The main residence exemption is being retained.

If you sell a property that has been your main residence throughout the ownership period and you meet the exemption requirements, the capital gain will generally remain tax-free.

However, there can be complications if you've:

• Rented out your home for part of the ownership period.

• Used part of the property to operate a business.

• Moved out, kept the property, and rented it out.

• Owned more than one property that could qualify as your main residence.

In these cases, part of the gain may be taxable, and the new CGT rules could become relevant.

It's worth checking your position before selling, particularly where a property has been used for both private and income-producing purposes.

4. Small business owners get some good news

The government has confirmed that the four existing small business CGT concessions will remain.

These concessions can allow eligible business owners to reduce, defer or completely eliminate CGT when selling business assets.

They include:

• 15-year exemption: Eligible owners may be able to disregard a capital gain entirely when selling a long-held business asset in connection with retirement.

• 50% active asset reduction: An additional 50% reduction on eligible capital gains from active business assets.

• Retirement exemption: Eligible business owners can disregard up to $500,000 of capital gains over their lifetime.

• Small business rollover: Allows eligible gains to be deferred, generally when replacing business assets or reinvesting.

There's also an important improvement.

From 1 July 2027, the turnover threshold for the small business 50% active asset reduction increases from $2 million to $10 million.

This could allow more business owners to access the concession when selling their business or other eligible active assets.

However, the increased threshold doesn't automatically extend to all four concessions. Other eligibility requirements, including asset and ownership tests, still need to be considered.

5. Key dates to keep in mind

30 June 2027

The final day before the new CGT arrangements apply to gains that build up after this date.

1 July 2027

The new inflation-based CGT rules and minimum 30% tax arrangements begin applying to relevant gains. The higher $10 million turnover threshold for the small business active asset reduction also takes effect.

1 July 2028

Separate changes introducing a minimum 30% tax on certain discretionary trust income are scheduled to begin. These changes may be relevant to investors and businesses using family trusts.

6. What should you do before July 2027?

While there's no need to rush into selling investments, there are a few practical steps worth considering.

Review your investment assets

If you own investment properties, shares or other assets with substantial unrealised gains, it's worth understanding how much of the gain has already built up and how the new rules could affect a future sale.

Keep good records

Make sure you have records of the original purchase price, stamp duty, legal fees, capital improvements and other relevant costs.

For investment properties and business assets, reliable records of their value around 30 June 2027 may also be useful.

Review any plans to sell a business

If you're considering retirement, selling a business or transferring ownership, the timing and structure of the transaction could make a significant difference.

The expanded small business concession may also create opportunities for businesses that previously exceeded the $2 million turnover threshold.

Get advice before making major changes

Selling an asset early just to avoid the new rules won't necessarily provide a better result.

Transaction costs, other taxes, your personal circumstances and the new transition arrangements all need to be considered.

The bottom line

The CGT changes are significant, but they won't affect everyone in the same way.

For existing investors, the protection of gains built up before 1 July 2027 is welcome news. For business owners, the expanded active asset concession could also provide additional tax savings.

The important thing is to understand how the changes apply to your assets before making any major decisions.

If you're considering selling an investment property, shares or a business in the next few years, Flinn Accounting can help you review your CGT position and plan ahead.