Capital Gains Tax Reform: What Property Investors Should Understand

Capital Gains Tax Reform Changes the After-Tax Picture

Capital Gains Tax is part of the income tax system. It can apply when a person sells a CGT asset, such as an investment property, and makes a gain after allowing for the property’s cost base and other relevant capital gains tax rules. The capital gains tax reform is important because it may change how certain capital gains are calculated and taxed. For property investors, this may affect how they compare selling, holding, refinancing or buying another residential property.

Capital Gains Are Only One Part of the Result

A capital gain is generally the difference between what an investor receives from selling an asset and what it cost them, after allowing for relevant costs. For residential property, this may include the purchase price and other costs that form part of the cost base. The final tax paid can depend on ownership structure, income, capital losses, exemptions, gains arising, gains accruing after the reform date and the rules in place at the time of sale. It is safer to treat each property separately, because the same tax outcome may not apply to every investment property.

The Reform May Affect Future Planning

For many investors, the concern is whether future residential capital gains will be treated differently under Australia’s tax system. A change in the tax system may affect how much is left after selling, which may then affect the next deposit, loan or investment decision. This does not mean every investor needs to make an immediate decision. Some investors may choose to first understand the tax reform, review the loan structure and speak with a registered tax adviser before making major changes. One general approach can be to understand the capital gains tax reform, review the loan structure and speak with a registered tax adviser before making major changes.

The CGT Discount Is Being Replaced for Many Future Gains

Under the Government’s tax reform package, the current 50 per cent CGT discount for individuals, trusts and partnerships will be replaced, for gains that accrue after 1 July 2027, with cost base indexation and a minimum 30 per cent tax rate on capital gains. In practical terms, this means that some future taxable capital gains – particularly on assets held across the reform date – may be worked out differently from 1 July 2027. The 50 per cent capital gains tax discount has been a familiar part of Australia’s tax system for many property investors, so moving to indexation and a minimum tax floor means some past assumptions may not apply to post‑reform gains.

These changes are part of the Government’s “Tax reform – Boosting home ownership – Reforming negative gearing and capital gains tax” package, and investors can refer to the ATO’s summary for more detail.

Cost Base Indexation May Adjust for Inflation

Cost base indexation may adjust the cost base of an asset for inflation where the capital gains tax rules apply. This may reduce the taxable gain where part of the increase in value is treated as inflation-related, rather than only as the investor’s return. This is different from applying a flat CGT discount. Instead of reducing eligible net capital gains by 50 per cent, the calculation may focus more closely on the cost base, holding period and gains arising after the reform begins.

The Minimum Tax Rate May Change Some Outcomes

A minimum tax rate means certain capital gains may be taxed at no less than a set tax rate where the rules apply. This may matter for investors whose marginal tax rate would otherwise produce a lower outcome. This does not mean every investor will necessarily pay more tax. Some may pay more, some may pay less tax than expected, and some may see little change depending on their income, losses, ownership structure and timing.

Negative Gearing Changes Also Matter for Residential Property Investors

Capital gains tax reform sits beside negative gearing changes for residential property investments. The broader package includes reforming negative gearing and measures to limit negative gearing for some residential property investment arrangements. Negative gearing is where the costs of holding an investment property, such as interest and other deductible expenses, are higher than the residential property income received. The treatment of those losses can affect assessable income, taxable income and annual cash flow.

Limiting Negative Gearing May Affect Cash Flow

If negative gearing reforms limit how losses can be used against other income, some investors may need to fund more of the property shortfall from regular income. This may be relevant where rent does not cover loan repayments, rates, insurance, repairs and other costs. Where losses cannot be used straight away, some may be carried forward or connected with future residential capital gains. This is sometimes discussed as deferred residential capital gains treatment, and it makes record keeping more important.

Loan Approval Still Depends on Lender Assessment

A tax deduction or tax benefit does not guarantee affordability. A lender still assesses income, expenses, existing debts, credit history, property type, loan purpose and responsible lending requirements. This means negative gearing, capital gains tax CGT, minimum tax and residential property income may need to be considered beside the loan itself. A property that appears workable before tax may not suit every borrower once repayments and holding costs are included.

Different Ownership Structures Can Affect the Tax Result

Not every investor owns property in the same way. Some hold property in personal names, while others use trusts, companies, superannuation funds or other structures. The tax outcome may differ depending on the structure. Discretionary trust income, complying superannuation entities, life insurance companies and attribution managed investment trusts may involve rules that are different from a simple individual property investment.

Individual Investors Need to Review Taxable Income

For individual investors, capital gains can increase taxable income in the year of sale. This may affect the marginal tax rate that applies to other income and the overall amount of income tax payable. Broad claims about tax cuts, working Australians tax offset arrangements, income tax rates or fairer tax arrangements may not apply in the same way to every investor. These may affect parts of the tax system, but they do not remove the need for personal tax advice.

Complex Structures May Add Compliance Costs

Some ownership structures may offer flexibility, but they can also increase compliance costs. They may involve extra accounting work, trust rules, company tax issues or rules that apply to superannuation funds. A better tax system or more sustainable tax system is a policy goal, not a guarantee that every investor will benefit or pay less tax. Some investors may consider whether an ownership structure suits their broader goals, not only whether it may produce a tax outcome.

Existing Investments Should Be Reviewed Before Major Decisions

Existing investments may be affected differently from new purchases. The timing of purchase, gains accruing before or after 1 July 2027, and whether the property is new or established may all matter. For an investor, the practical question is not only “how much tax could apply?” It may also be whether the property still fits their borrowing capacity, budget, risk tolerance and long-term plans.

Selling Can Affect the Next Loan Decision

Selling an investment property may reduce debt or release equity, but gains tax can reduce the amount left after settlement. That remaining amount may affect the deposit available for another purchase or the amount of debt that needs to be repaid. A broker may be able to help explain the lending side of this decision. This may include loan-to-value ratio, repayment options, interest-only terms, offset accounts, discharge costs and how lenders may assess income and existing commitments.

Refinancing Can Help Review the Loan Structure

Refinancing does not usually trigger capital gains tax because the property has not been sold, but investors may wish to check their own position with a tax adviser. However, it can still change repayments, fees, loan features and cash flow. Some investors may compare fixed and variable rates, offset accounts, redraw facilities, principal and interest repayments or interest-only periods. These features might be useful in some cases, but they may need to be considered against lender criteria and the investor’s broader financial position.

Broader Tax Reform Can Affect Different Taxpayers in Different Ways

Capital gains tax reform is only one part of the wider tax reform discussion. Other areas, such as fringe benefits tax, eligible electric cars, instant tax deduction rules, tax consolidation, small business CGT concessions and rules for small businesses, may be more relevant to businesses than to a typical residential property investor. Some measures are aimed at productive investment, risk taking, reducing compliance costs or supporting certain activities, such as a development tax incentive. Other tax measures may be reviewed through formal processes such as a Senate Economics Legislation Committee inquiry or a Treasury laws amendment.

New Residential Property May Be Treated Differently

Some reform discussions separate established residential property from new residential property. This is because tax policy is sometimes designed to support housing supply or new construction in the housing market, although outcomes can vary. A new residential property is not automatically suitable for every investor. Price, location, rental demand, construction risk, valuation, loan repayments and lender assessment may still be relevant.

Capital Gains Tax Reform Should Be Reviewed with the Whole Investment Plan

Capital gains tax reform may affect how some property investors think about selling, refinancing or buying from 1 July 2027. The main issues are the change to the CGT discount, cost base indexation, the minimum tax rate and negative gearing changes for residential property investments. This article is general information only and does not take into account your objectives, financial situation or needs. It is not personal financial advice, tax advice, legal advice or credit advice. Property investors may wish to check official government information and speak with a registered tax adviser about their own tax position before making major property, tax or loan decisions.

Eurobodalla Finance can help with the lending side of the conversation. If you are reviewing an investment loan, considering a refinance or comparing loan options for another property, you can contact Eurobodalla Finance for guidance based on your circumstances, goals and lender requirements.