Cost base indexation is designed to tax real gains rather than inflationary gains. Under the current discount model, many individuals and trusts can apply a 50% CGT discount where the asset has been held for more than 12 months. Under the legislated reforms, from 1 July 2027 this 50% CGT discount is replaced with cost base indexation and a 30% minimum tax rate on capital gains.
Under Division 102 of ITAA 1997, the cost base has always been important, but under an indexation model it becomes the central variable in the entire calculation.
This means investors need stronger records because the cost base becomes central to the calculation. Important records include the purchase price, stamp duty, legal fees, settlement costs, capital improvements, renovations, extensions, construction cost estimates, depreciation schedules, capital works claimed, sale costs, and ownership periods.
Cost base indexation does not remove the need for depreciation records. In fact, Division 43 capital works deductions claimed during ownership can reduce the property cost base over time — and the accountant needs to know what was claimed to calculate the correct gain.
In our experience reviewing properties before sale across Australia, the most damaging situation is the investor who has lost renovation invoices, never obtained a depreciation schedule, or cannot reconstruct what was spent on improvements. Under an indexation model, each of these missing records translates directly into a higher assessed capital gain.
What to do next: