CGT amendments: A blast from the past and a new minimum tax

The Treasury Laws Amendment (Tax Reform No. 1) Bill 2026 was introduced into Parliament barely three weeks after the Budget announced the most significant overhaul of Australia's capital gains tax regime in a generation.

The 50% CGT discount — a fixture of the system since 1999 — is to be replaced with cost base indexation, though without the averaging and spreading mechanisms that formed part of the pre-1999 architecture.

A new 30% minimum tax on capital gains will also apply, and pre-1985 assets will be brought within the capital gains tax net for the first time. These changes take effect from 1 July 2027. However, the legislation as introduced leaves a number of design questions to delegated instruments and does not address all interactions with the existing system.

Below, we consider what the Bill does, what it does not do, and what taxpayers need to be thinking about now.

The current state of the legislation: a work in progress

The Bill is best understood as a work in progress.

It makes significant and complex changes to the Tax Act, though it does not yet include all of the machinery necessary for the new regime to operate.

Additional concessions flagged in the Budget for the tech and start-up sectors are not included at this stage.

A number of substantive decisions have been delegated to the Treasurer rather than set out in primary legislation. Public consultation has only just commenced.

Further amendments to the regime can therefore be anticipated. Taxpayers will need to wait for subsequent developments to understand how their obligations will change in practice.

One saving grace: unlike other recent tax amendments, the CGT changes do not operate before the 1 July 2027 start date.

The Bill reintroduces cost base indexation, previously removed in 1999 in favour of the flat 50% discount following the recommendations of the Ralph Report. However, it does not reintroduce the full pre-1999 architecture. Gain averaging and the availability of indexation for companies — both features of the earlier system — are not included.

The Bill also imposes a minimum 30% CGT on capital gains, using the concept of a "minimum tax gap amount".

Overview of changes to the CGT discount

The existing 50% discount is being confined to CGT assets acquired before 1 July 2027, subject to exceptions for new residential dwellings and affordable housing. For relevant assets acquired before that date but disposed of on or after it, the resulting CGT gain or loss will split into two components:

First, the "deferred" gain or loss referable to the period before 1 July 2027, calculated under the old discount rules. Second, the gain or loss accrued between 1 July 2027 and the eventual realisation event, calculated by applying indexation and the 30% minimum tax.

The mechanism is a deemed disposal just before 1 July 2027, followed by an immediate deemed re-acquisition at market value. Critically, this extends to pre-CGT assets as well — assets that have never been within the capital gains tax net are being brought in for the first time.

Significance of valuations and the apportionment alternative

Taxpayers can determine market value at the transition time themselves, or use an apportionment method yet to be determined by the Treasurer. That method will presumably be announced prior to 1 July 2027 — otherwise taxpayers will be understandably reluctant to rely on it.

Regardless, the transition to the new regime will trigger a mass valuation exercise as at 1 July 2027. Those valuations will be critical to the determination of future tax outcomes. This is a matter of very considerable significance for private groups, family enterprises, trustees, and closely held structures.

The exercise will not be limited to easily valued assets like listed shares. It will encompass real property, operating businesses, minority interests, private company shares, and trust-held interests. For many taxpayers — particularly those with long-held family assets or private group structures — there may never previously have been any need to obtain formal arm's length valuations of relevant interests.

There can be no doubt that valuers will be very busy in 2027.

And the stakes are high. The validity of those valuations is likely to come under scrutiny by the Commissioner of Taxation long into the future, as pre-1 July 2027 assets are eventually subject to CGT events.

No restoration of pre-1999 indexation and averaging architecture

Despite invoking the pre-1999 indexation framework, the Bill does not include the complete suite of taxing mechanisms that previously applied.

Notably absent are the averaging provisions, which formed an important part of the earlier law. Those provisions enabled taxpayers to spread the tax burden of capital gains over five income years, reducing the "threshold spike" that arises where a taxpayer in a lower tax bracket realises a substantial capital gain and is pushed into a materially higher effective tax rate for that year. The Bill therefore does not reproduce this balancing feature of the earlier regime, notwithstanding that the proposed reforms invoke a framework that in other respects resembles a return to pre-1999 concepts.

Indexation will also not apply to companies — a departure from the pre-1999 position, presumably because the current CGT discount is not available to companies.

30% minimum tax

Unlike the pre-1999 system, the Bill imposes a 30% minimum capital gains tax. That feature is particularly significant when read together with the absence of averaging relief and the omission of capital gains spreading.

The minimum tax is calculated using a "top up" method that identifies the portion of the taxpayer's income tax liability referable to capital gains, and works out whether there is a "minimum tax gap amount". The method statement in new section 119-10 compares the tax that would otherwise be payable on the capital gain against the 30% minimum, and imposes the difference as additional tax where the minimum is not met.

This represents a departure from an approach based solely on the application of marginal tax rates to taxable income. The minimum rate functions as a supplementary mechanism within the overall system, ensuring that the tax applied to a capital gain does not fall below a specified level regardless of the taxpayer's other circumstances.

What the Bill does not do

An important aspect of the Bill is the extent to which it leaves a number of issues unresolved at the point of enactment.

The legislation does not seek to provide a fully comprehensive framework addressing all interactions within the capital gains tax system.

It proceeds on the basis that certain issues, including potential anomalies, may be identified in practice and addressed through further consultation or subsequent refinement. This approach highlights that the regime is being introduced at a stage where some aspects of its operation remain under development. While that may be a practical response to the complexity of the subject matter, it results in a framework where the full operation of the provisions is not entirely settled within the legislation itself.

Exemptions and exclusions

This feature is particularly evident in the approach to exemptions and exclusions. The Bill does not set out a comprehensive legislative framework for determining which assets, interests or categories of taxpayer fall outside the scope of the minimum rate.

It provides for a degree of flexibility through regulation-making powers and the capacity for the Treasurer to determine exclusions.

This approach appears to assume that certain classes of assets or arrangements may require tailored treatment once the operation of the regime is better understood.

It leaves open the possibility that start-up investments and venture capital arrangements may be the subject of specific exclusion or modification through the exercise of the regulation-making power.

Those areas have traditionally been supported through targeted tax settings, including concessional treatment designed to encourage early-stage investment and risk capital. To the extent that the minimum tax regime interacts with those arrangements, there is a question as to whether the existing policy settings can be preserved without express legislative provision. The current reliance on delegated powers suggests that these matters may be dealt with subsequently, rather than being embedded in the primary legislation.

The Bill also anticipates that apportionment issues will arise, particularly where gains may only partly fall within the intended scope of the regime. Rather than resolving those issues directly, the legislation provides scope for them to be addressed through delegated mechanisms.

Taken together, these features indicate that the boundaries of the regime are not entirely fixed at enactment. They remain capable of development through future regulatory and executive action, including in areas of established policy such as venture capital and start-up investment.

Change of asset status and grandfathering

A number of issues arise from changes in the status of assets across time, particularly in the context of the grandfathering rules.

A principal example arises in relation to options and similar contingent interests. Under the existing capital gains tax framework, an option is treated as a separate asset from the underlying asset which may be acquired on its exercise. The acquisition date of the underlying asset is generally taken to be the date on which the option is exercised, rather than the date on which the option itself was acquired.

When this approach is applied within the proposed regime, it gives rise to a particular outcome: an option acquired prior to 1 July 2027 represents an economic interest established before the commencement of the new regime; however, where that option is exercised after 1 July 2027, the underlying asset is treated as having been acquired at that later time. The effect is that the underlying asset may fall entirely within the new regime, notwithstanding that the economic exposure giving rise to the gain was established prior to commencement.

This reflects a broader difficulty with the operation of the grandfathering rules, where outcomes are driven by the legal characterisation and timing of the asset ultimately realised, rather than by the continuity of the underlying economic interest. The issue is not limited to options as a discrete case. It illustrates a more general tension in the legislation between a framework based on acquisition date as the defining criterion and the reality that certain interests evolve over time or change form before realisation.

Where an asset is effectively transformed — through the exercise of rights, conversion, or restructuring — the resulting asset may be treated as newly acquired, with the consequence that any grandfathering protection is not preserved. This suggests that the treatment of changes in asset status is an area where further refinement may be required to ensure that the operation of the regime aligns more closely with the underlying economic position.

Interaction with deductions and the overall tax position

The operation of the minimum rate gives rise to questions as to how it interacts with deductions and the overall taxable income position of the taxpayer. In the existing system, deductions and losses generally reduce taxable income and therefore affect the total tax payable. Under a minimum tax construct, the relationship between those deductions and the tax payable on a specific gain may not be direct. As a result, the extent to which deductions are reflected in the taxation outcome for a capital gain may vary depending on the operation of the minimum rate provisions.

The difficulty is most acute where current year deductions exceed other income. In those circumstances, deductions may be applied against the capital gain for the purposes of determining taxable income, thereby reducing taxable income to nil. However, the minimum tax is calculated by reference to the capital gain itself, not the resulting taxable income. The effect is that the deductions are consumed — they reduce taxable income and cannot be carried forward — but provide no corresponding reduction in the minimum tax liability. The taxpayer loses the benefit of those deductions without any offset against the tax actually payable.

These considerations may be particularly relevant in the context of philanthropic giving. Where a taxpayer derives a capital gain and also makes deductible contributions, the existing system recognises those deductions in determining taxable income. Under a minimum rate framework, the interaction between those deductions and the tax payable on the gain may not operate in the same way.

To take a simple example: a taxpayer realises a $200 capital gain and makes a $200 deductible charitable donation in the same income year, with no other income. Under the existing system, the donation reduces taxable income to nil and no tax is payable — the full value of the philanthropic contribution is reflected in the tax outcome. Under the proposed regime, the deduction would again reduce taxable income to nil, but the 30% minimum tax would still apply to the $200 capital gain, producing a $60 tax liability. The charitable deduction is consumed but provides no reduction in the minimum tax. The taxpayer is left with a $60 tax bill on a gain that has been entirely given away.

This suggests that the treatment of such circumstances may warrant careful consideration to ensure that the intended policy outcomes in relation to philanthropic giving are preserved.

Small business concessions

The interaction of the minimum tax with the small business CGT concessions similarly raises questions of operation. These concessions are designed to modify the tax consequences of certain gains for qualifying taxpayers. The presence of a minimum tax may affect how those concessions operate in practice, depending on the structure of the provisions. This does not necessarily imply inconsistency, but it does indicate that the interaction between the two regimes would benefit from further clarification.

The combined effect

The combined effect of the absence of averaging and the introduction of a minimum rate is a notable feature of the regime. These elements interact in a way that may influence the effective tax outcome where gains are concentrated in a single income year. In particular, the absence of averaging means that the full amount of a gain is recognised at once, while the minimum rate establishes a floor for the tax applied to that gain.

The effective tax rate on a capital gain will depend on the taxpayer's broader income position and the size of the gain realised in a given year. Where gains are significant relative to other income, the absence of averaging may result in a higher proportion of the gain being subject to higher marginal tax rates. The introduction of a minimum rate adds a further dimension, as it may influence the extent to which the resulting tax liability aligns with the taxpayer's overall position.

Next steps

The Bill raises a range of questions concerning policy, practicalities and compliance, each of which will require further attention.

It has been referred to the Senate Economics Legislation Committee, which is due to report on 19 June 2026. That is a short timeframe — unlikely to be sufficient to address the many questions the Bill raises. The Senate inquiry process will be important, but further legislative development will plainly be required if the Government's reform agenda is to be implemented in a comprehensive and workable manner.