Low Returns and Inflation: Why Some Property Investors Will Pay LESS CGT Under the New Rules

The dominant media narrative around the 2026-27 Budget CGT reform is that investors will pay more tax. For high-growth properties, that's true. But there is a quieter, counterintuitive story that gets much less airtime: a large group of Australian property investors will actually pay less CGT under the new system than they did under the 50% discount. Treasury's own Ben example shows $24,858 of tax savings on a $500,000 property held for ten years at 2.5% annual growth. Units across Australia which have averaged just 4.1% annual capital growth over the past 20 years fall squarely into this winning category.

Understanding why low-return investors benefit explains the underlying logic of the reform and helps investors decide whether to hold, sell or reposition their portfolio ahead of 1 July 2027.

The counterintuitive result

Most investors instinctively believe the 50% CGT discount was generous and that replacing it with anything else means more tax. This intuition is wrong for one reason: the 50% discount treats nominal gains uniformly, regardless of whether they reflect real economic gain or merely inflation. CPI indexation removes inflation from the calculation, so investors with below-inflation real returns end up with little or no taxable gain at all.

Mathematically: under the 50% discount you are taxed on half of the nominal gain. Under indexation you are taxed on the full real gain. When real gain is small (because nominal growth is close to inflation), indexation wins. The crossover is roughly: indexation beats the discount when nominal growth is less than 5-6% per year, depending on holding period.

Why indexation rewards low returns

Imagine you bought an investment unit for $400,000 in 2027 that grew to $510,000 over ten years annualised growth of 2.5%, exactly matching inflation.

• Old 50% discount: Nominal gain $110,000. Discounted: $55,000. At a 39% marginal rate, tax = $21,450.
• New indexed regime: Indexed cost base $400,000 × (1.025)¹⁰ ≈ $512,000. Real gain = -$2,000. Tax = $0 (no gain to tax).

The investor saved $21,450 of tax purely because their nominal gain was entirely inflationary. There was no real economic gain and under the new rules, no real economic gain means no tax. This is exactly how indexation regimes are supposed to work.

The Ben example (Treasury)

Treasury's own worked example illustrates the principle. Ben owns a $500,000 asset growing at 2.5% per year for ten years.

This is not a small saving. It reflects the simple economic truth that Ben did not become any richer in real terms his asset just kept pace with inflation. Why should he be taxed on a fictional gain?

Units: the quiet winners

Treasury published effective tax rates by asset class. Australian units (apartments) have averaged 4.1% annual capital growth over the past 20 years well below the 6.1% for houses. Under the new rules, this translates to:

Unit investors at either marginal rate pay less under the new rules. This is one of the most underappreciated outcomes of the reform: investors holding apartments generally the cheaper, more accessible end of the investment market benefit relative to those holding houses in high-growth corridors. From a housing-policy perspective, this reduces the tax advantage of speculation-driven house investment relative to higher-density apartment investment.

Regional and low-growth markets

Many Australian regional markets have experienced sub-5% annual growth over long periods. Examples include parts of regional Queensland (outside the south-east), large stretches of NSW's central west and far north, regional Tasmania and many WA mining-town markets that have not recovered post-boom. Investors in these markets have often felt frustrated by tax outcomes that ignored their flat returns. The new regime treats them more fairly:

• Flat or below-inflation growth means little or no real gain.
• Indexation removes the inflation component from the tax base.
• The 30% minimum tax does not bite because gains are small.

What the OECD said about the old 50% discount

The OECD has repeatedly criticised Australia's 50% CGT discount as inequitable and inefficient. Its core argument: a uniform discount based on nominal gains over-rewards high-growth assets and under-rewards (relatively penalises) low-growth assets. The 2027 reform is consistent with the OECD's preferred approach index the cost base, tax the real gain at marginal rates, and apply a floor only to prevent abuse.

From a fairness perspective, the reform addresses a real distortion: under the 50% discount, an investor with a 2% real return paid the same effective rate as an investor with a 15% real return, despite generating very different economic gains. The new system aligns tax more closely with economic reality.

What this means for your portfolio

Three practical implications:

1. If you own low-growth units or regional property, you are likely a winner from the reform. Do not panic-sell ahead of 1 July 2027 you may pay more tax under the old rules than under the new ones.
2. Check the 1 July 2027 valuation carefully. For low-growth assets, the ATO apportionment formula is usually fine. Save the cost of a formal valuation.
3. Consider rebalancing toward income. Under the new regime, rental yield (taxed at marginal rates with deductions) becomes more attractive relative to capital growth (taxed under indexation but no longer with a generous discount). Yield-focused investments such as those in the highest-yielding suburbs nationally may produce better after-tax outcomes.

This article provides general information about the 2026-27 Federal Budget CGT reform measures announced for commencement on 1 July 2027 and is not financial, tax or legal advice. Tax outcomes depend on individual circumstances. Always consult a registered tax agent, financial adviser or the Australian Taxation Office before acting. Treasury factsheets and the official Budget Papers remain the authoritative source.