CGT discount vs indexation: the legislated change
The 50% CGT discount, available to individuals and trusts on assets held for more than 12 months, has been a cornerstone of Australia's property investment tax framework since 1999. The changes legislated in 2026 replace this discount with an indexation method from 1 July 2027.
How the current 50% discount works
Under the current system:
- If you sell an asset held for more than 12 months, only 50% of the capital gain is included in your taxable income
- The other 50% is discounted completely
- This effectively halves the CGT rate compared to your marginal rate
What indexation means
Indexation adjusts your cost base for inflation. Instead of discounting the gain by 50%, you increase the cost base by the CPI (Consumer Price Index) increase over the holding period. Only the "real" (above-inflation) gain is taxed — but it is taxed in full.
Example under indexation:
- Original cost base: $600,000
- CPI increase over 15 years: 40%
- Indexed cost base: $840,000
- Sale price: $900,000
- Taxable gain: $60,000 (not $300,000 as under the discount method)
Who benefits from indexation vs the 50% discount?
- Long-term holders in high-inflation periods: indexation is better — the cost base grows substantially
- Short to medium-term holders (10-15 years) with strong growth: the 50% discount was often better
- Trust beneficiaries: trusts can pass through the CGT discount to individual beneficiaries — the detailed new rules for trusts sit within the Treasury Exposure Draft on the Tranche 2 calculation mechanics (not yet final)
Impact on depreciation decisions
Under indexation, the cost base — including the amounts that reduce it (Division 43 deductions) — becomes even more important. With a higher indexed cost base, the relative impact of depreciation reductions on the final CGT is different. A quantity surveyor cost base report becomes more important than ever.
Is the change legislated?
Yes. This change is legislated as part of the 2026 reform package, commencing 1 July 2027. The detailed transitional arrangements are set out in the Treasury Exposure Draft on the Tranche 2 calculation mechanics — not yet final.