CGT Reform 2027: How CPI Indexation Replaces the 50% Discount for Property Investors

Introduction

The CGT reform announced in the 2026-27 Budget replaces a flat 50% discount — in place since 1999 — with a more economically targeted system: CPI indexation of the cost base, plus a 30% minimum effective tax rate. For residential investment property only.

The change reflects a long-standing Treasury view that the 50% discount is overly generous in low-inflation periods and disproportionately benefits high-income earners. CPI indexation provides real-terms protection (taxing only inflation-adjusted gain) while the 30% minimum rate ensures that the highest-income investors pay a meaningful effective rate.

For most investors, the practical effect is modest. The transitional rules preserve the 50% discount on gains accruing before 1 July 2027, and CPI indexation reduces the post-July 2027 taxable gain by the rate of inflation. The difference for typical holdings is often only a few thousand dollars over an extended holding period.

How the New CGT Method Works

For residential investment property sold on or after 1 July 2027, the CGT calculation has three steps:

1. Index the cost base. The portion of the cost base attributable to post-1 July 2027 holding is uplifted by cumulative CPI from 1 July 2027 (or acquisition, if later) to the disposal date.
2. Calculate the inflation-adjusted gain. Sale price minus indexed cost base equals the taxable capital gain.
3. Apply tax at the higher of marginal rate or 30%. The gain is added to assessable income and taxed at marginal rates — but a minimum effective rate of 30% applies to ensure high-income investors don't benefit from any low-rate features.

Transitional Rules: Existing Properties

For properties owned at any time before 1 July 2027, the gain is split into two periods:

• Pre-July 2027 gain. The portion of total gain attributable to the period from acquisition to 30 June 2027. This portion uses a transitional market valuation at 30 June 2027 and receives the 50% discount.
• Post-July 2027 gain. The portion of gain accruing from 1 July 2027 to disposal. CPI indexation applies and the 30% minimum tax rule applies.

The transitional market valuation can be either (a) a formal market valuation as at 30 June 2027 (provided to the ATO), or (b) the ATO's "safe harbour" valuation method based on indexed cost base. Most investors will use a formal valuation for properties held in 2027.

Michael Example: Sale 2 Years Post-Commencement

The budget papers worked through a representative example for Michael, an investor with a grandfathered property:

• Sale price (2 years post-commencement): $560,000
• Market value at 1 July 2027: $500,000
• Cumulative CPI over 2 years: ~2.5%
• Indexed cost base (post-July 2027 portion): $500,000 × 1.025 ≈ $512,500
• Pre-July 2027 component: assume nil for this simplified example (held for many years, but valuation at 30 June 2027 reflects all prior gain)
• Taxable gain (post-July 2027, indexed): $560,000 - $525,312 ≈ $34,688

The difference is approximately $2,200 — meaningful, but not transformative. For longer holding periods, higher inflation environments, or smaller post-July 2027 gain components, the difference is typically even smaller.

Old vs New: When the Difference Matters

The relative attractiveness of the old (50% discount) vs new (CPI + 30% min) method depends on three variables:

• Inflation rate. Higher inflation increases the CPI uplift, making the new method more favourable. In very low inflation, the 50% discount is clearly better.
• Holding period. Longer holdings benefit more from CPI compounding under the new method.
• Investor marginal rate. The 30% minimum effective rate hurts top-bracket investors most; mid-bracket investors are largely unaffected.

For sales soon after 1 July 2027, the old method tends to be slightly more favourable. For sales 5+ years post-commencement in a 2-3% inflation environment, the methods produce broadly similar results. The reform is calibrated to be a modest tightening rather than a step change.

Main Residence Still Fully Exempt

The main residence exemption is entirely unchanged. Selling your own home — provided it meets the main residence requirements — remains CGT-free. The reform applies exclusively to residential investment property.

The treatment of dwellings that have been both a main residence and an investment (the 6-year rule, partial-use exemptions) follows existing apportionment rules, with the CGT changes applied only to the investment portion and the post-July 2027 component.

30% Minimum Tax Exemption

The 30% minimum effective tax rate does not apply to taxpayers receiving:

• The Age Pension
• JobSeeker

These taxpayers are taxed at their marginal rate (which is typically below 30%) on the inflation-adjusted gain. The carve-out reflects equity considerations — pensioners realising a one-off gain on a long-held investment should not be pushed into a 30% effective rate.

Planning Considerations

Investors with residential investment property should consider three planning steps in light of the CGT reform:

1. Obtain a 30 June 2027 valuation. This locks in the transitional valuation for the pre-July 2027 50% discount portion.
2. Re-model sale scenarios. Run the numbers under both methods to understand the magnitude of the impact for your specific property.
3. Consider sale timing — but only marginally. The difference between selling immediately before vs after 1 July 2027 is typically smaller than monthly market movements. Don't let tax tail-wag the investment decision.

See sell before or after 1 July 2027 for a detailed decision framework.