The New Capital Gains Tax System, Explained: Indexation vs the 50% Discount

Every conversation about the negative gearing reform eventually drifts into a second, separate reform that gets far less attention: the 50% capital gains tax discount is being replaced. Most people talk about this as if it's the same change. It isn't, and the mechanics are worth understanding on their own terms.

How the Old System Actually Worked

Since 1999, individuals and trusts selling an asset held for more than twelve months have been able to reduce their taxable capital gain by 50% before it's added to their assessable income. Sell a property for a $400,000 gain, and only $200,000 of that gain was taxed. The discount didn't care what inflation had done over the holding period — it was a flat 50% reduction regardless of whether you'd held the asset for thirteen months or thirty years.

What's Replacing It: Cost Base Indexation

From 1 July 2027, that flat discount is being replaced with cost base indexation, paired with a 30% minimum tax on net capital gains. Indexation works differently to a discount. Instead of simply halving the gain, it adjusts the original purchase price — the cost base — for inflation over the period you held the asset. The gain you're actually taxed on becomes the difference between the sale price and the inflation-adjusted purchase price, rather than the raw dollar difference.

The practical effect depends heavily on how long you've held the asset and how much inflation occurred over that period. Over a short holding period with low inflation, indexation may produce a similar or better outcome than the old discount. Over a long holding period, or one with high inflation, the two systems can produce meaningfully different results — and not always in the direction people assume.

Who Is Actually Affected

This reform applies to Australian resident individuals and trusts. It does not apply to companies, superannuation funds, or life insurance companies — those entities were explicitly excluded, and SMSFs in particular retain their existing concessional treatment. There's also no change to the main residence CGT exemption. If you're selling your home, none of this touches you. This is specifically about investment assets held by individuals and trusts.

Recipients of certain income support payments, including the Age Pension, are also exempt from the new minimum tax.

The Choice for New Builds

Owners of new residential dwellings and affordable housing aren't simply defaulted into the new system. They retain a choice — they can elect to keep the current 50% discount, or apply the new indexation framework, whichever produces the better outcome for their circumstances. That choice doesn't exist for established property investors, who move into the new system as a matter of course.

Why This Deserves Its Own Conversation, Not a Footnote

The negative gearing changes get the headlines because they affect cash flow every year you hold a property. This reform affects the number that matters most — what you actually keep when you sell. Treating it as a footnote to negative gearing is how investors end up making a purchase or sale decision based on half the picture. Before you assume you know what you'll be taxed on when you eventually sell, run the actual indexation calculation against your specific holding period. The two systems don't move in a straight line against each other, and the gap between them is exactly the kind of detail worth getting confirmed properly rather than estimated.