Senate to determine 50% CGT discount and negative gearing tax change

The fate of sweeping tax reforms that end the standard 50% capital gains tax (CGT) discount and restrict negative gearing on residential property will be determined by a Senate committee after the House of Representatives passed the enabling legislation.

The Senate Economics Legislation Committee’s report on the Bills - Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 and Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026 - is due 22 June 2026.

The Bills outline the intent of the reforms and the broad detail of who the changes apply to and how. The finer details of the reforms, like what a ‘new residential dwelling’ actually is, what type of market valuation is acceptable to value assets just prior to 1 July 2027, and exactly how to apportion gains that span 1 July 2027, will be left to the Treasurer to determine by legislative instrument.

We explain the key changes revealed by the legislation:

• The end of the standard 50% CGT discount
  • How the transitional rules work
  • Entrepreneurial business and the CGT discount
  • Do I need a valuation on existing assets at 1 July 2027?
• Negative gearing abolished and losses ring-fenced
• Increased complexity and compliance

The end of the standard 50% CGT discount

The general 50% CGT discount will be replaced by cost base indexation with a minimum 30% tax rate from 1 July 2027. Indexation ensures that CGT applies to actual gains net of inflation, and the 30% minimum tax targets low income but asset rich retirees – or, as the Treasurer puts it, those deferring gains until their "marginal tax rates are low.”

And, the tax regime captures the post 1 July 2027 gains accrued on pre-CGT assets (asset acquired prior to 20 September 1985) that are currently excluded.

Investors in new residential builds and affordable housing are carved-out and have the choice of applying the existing 50% CGT discount, or utilising cost base indexation with the 30% minimum tax rate.

Taxpayers on certain types of income support payments throughout the year - Age Pension, Disability Support Pension, JobSeeker, Parenting Payment, Youth Allowance and certain DVA payments, farm household allowance, living allowance under Abstudy, special rate disability pension – will not be subject to the minimum tax rate.

Who the CGT discount applies to will not change. The current 50% CGT discount is a tax concession restricted to Australian tax resident individuals including partners in a partnership, and trusts. A separate CGT discount is in place for superannuation funds and is not directly impacted by this reform.

How the transitional rules work

Capital gains tax is calculated in the year that you sell or dispose of an asset. If you hold assets at 30 June 2027 and beyond, transitional rules are in place.

Entrepreneurial businesses and the CGT discount

The enabling legislation does not address the disproportionate impact of the reforms on start-up businesses. Instead, the Treasurer has restated that, “the government is consulting with stakeholders on the treatment of capital gains of small and start‑up businesses where indexation is applied to a low or zero cost base.”

Consistently the Government has pointed to the generous small business CGT concessions that enable a small business investor to reduce their CGT liability to zero in some cases through four separate concessions. However, these concessions are limited to entities with an aggregated turnover of less than $2 million and with assets of less than $6 million. While over 95% of Australian businesses have a turnover of less than $2 million, this is a low bar for a productive, fast growth business.

And, the starting point for managing the gain on the sale of business assets is the 50% CGT discount which is applied first, before the small business concessions apply (except for the 15-year exemption). So, while the changes to the CGT discount do not directly impact the small business CGT concessions, they impact the starting amount the concessions apply to. In many cases, this will mean paying more tax on the proceeds of the sale of business assets.

Do I need a valuation on existing assets at 1 July 2027

An assessment of an asset’s market value just prior to 1 July 2027 will be required but we don’t know what this means until the Minister releases more details. For example, there might be different valuation requirements for different types of assets and different levels of formality required in how the valuation is undertaken.

In some cases, it might be advisable to obtain a formal valuation even if a formal valuation is not required simply to protect your gains in the future against an ATO dispute. For business assets and other substantial assets, the higher the value of the gains at 1 July 2027 the more likely a formal valuation for tax purposes will help to risk protect your position.

We’ll bring you more as soon as we see the detail.

Negative gearing abolished on residential property and losses ring-fenced

From 1 July 2027, losses on residential investment properties acquired after Budget night (7.30pm 12 May 2026) can’t be used to reduce your taxable income, only to reduce gains against other residential investment properties you might have – unless you have invested in a new residential property or affordable housing.

Existing residential investment properties will be grandfathered and can continue to be negatively geared. Residential properties acquired by a business or enterprise can also continue to negatively gear the investment.

From 1 July 2027, net rental losses on residential investment property become a “quarantined amount” rather than a deduction against assessable income. A quarantined amount can only be used against:

• Net assessable income from non-quarantined residential investment property (i.e., grandfathered properties, or new builds) you also own in that year, or in a future year, or
• Revenue or capital gains from any residential investment property (or another residential property you own) - including, any capital gain when you eventually sell.

Unused quarantined losses can carry forward indefinitely to future years. In the case of bankruptcy, the losses are extinguished and can’t be used.

Increased complexity and compliance

For investors, the record-keeping burden will step up noticeably because the rules now hinge on four dates -  date of acquisition of an asset, Budget night (7:30pm AEST 12 May 2026), 1 July 2027, and the date of the sale itself. Each asset needs to be slotted into the correct treatment based on when it was acquired and what type of asset it is to maximise the tax benefits you are entitled to (and to prevent any disputes with the ATO).

Cost base records become much more demanding. Under indexation, every element of expenditure except the costs of owning the asset (e.g., purchase price, stamp duty, legal fees, capital improvements) needs to be tagged to the quarter it was incurred so the CPI uplift can be applied to each item separately.

For assets straddling 1 July 2027, you will need to fix a value at that date or rely on the ATO's apportionment formula, then run parallel calculations (pre-1 July 2027 under the old discount rules, post-1 July 2027 under indexation plus the minimum tax) and combine them.

On the negative gearing side, quarantined rental losses must be tracked, carried forward indefinitely, and matched against the right category of future income. Investors in new builds or affordable housing need to retain evidence of eligibility and formally elect their preferred CGT treatment by the time the return is lodged for the year of sale.

Trustees also face a new reporting obligation and will be required to supply beneficiaries with the information they need to complete their income tax returns.

We’ll bring you more details as the final shape of the legislation is confirmed.

Need assistance?

It’s important not to react to the changes without knowing the true impact on your individual scenario. We can assist you in reviewing your current position - contact us.

For some, business owners a valuation might be worthwhile to lock in the 50% discount on gains up until 1 July 2027 if averaging is unlikely to produce a superior result.

Here’s who you can contact for assistance:

Linda Jing
Director, Tax Services

Greg Hayes
Director, Corporate Services

Mario Raciti
Director Business Services

Stephen Maze
Director Business Services

Mark Lennon
Director Business Services

References

• Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 

• Income Tax Rates Amendment (Tax Reform No. 1) Bill 2026

• Treasury Fact sheet: Negative Gearing and Capital Gains Tax Reform