Capital Gains Tax Changes: What a Reduced CGT Discount Could Mean for Investors

With ongoing focus on lacklustre productivity and the need to revamp the tax system in an attempt to boost productivity, Capital Gains Tax (CGT) has again come under the spotlight.

One of the most widely discussed proposals is a reduction to the longstanding 50% CGT discount. While no legislation has yet been announced, understanding how these changes could work — and what they may mean for you — is critical for investors, property owners and small business clients.

This article provides a practical deep dive into the possible CGT discount changes and highlights why proactive tax planning has never been more important.

A Quick Refresher: How CGT Works in Australia

Despite the name, CGT is not a separate tax. Instead, it is the tax applied to the profit made when you sell an asset such as an investment property, shares, or a business. The capital gain is added to your assessable income and taxed at your marginal tax rate.

Currently, individuals and trusts (but not companies) can reduce a capital gain by 50% if the asset has been held for more than 12 months. This CGT discount has been a cornerstone of Australia’s investment landscape for decades, particularly for long-term property investors and business owners.

Why Is the CGT Discount Being Reviewed?

Treasury has reportedly modelled several alternative discount rates, including 25% and 33%, with the latter aligning more closely with the effective tax treatment of self-managed superannuation funds.

While nothing is confirmed, a reduction in the CGT discount would significantly increase the tax payable on asset sales — particularly for assets held over long periods.

To understand the possible impact, let’s look at three commonly discussed legislative scenarios using the same example throughout.

Example
An investment property purchased in 1994 for $350,000 is now worth $2.5 million. Assume the taxpayers are paying the top marginal rate of tax.

Scenario 1: No Grandfathering

Under this approach, a new (lower) CGT discount would apply to the entire capital gain, regardless of when the asset was acquired.

• With the current 50% discount, the estimated tax payable is $505,250
• With a reduced 25% discount, tax payable increases to $757,875

Key takeaway: This is the most aggressive option and results in a substantial increase in tax liability for long-term investors.

Scenario 2: Grandfathering to the Date of Change

Here, gains accrued before the law change retain the 50% discount. Only gains after the change date are taxed under the new rules. This method has been used previously, including for changes affecting foreign residents’ ability to access the 50% CGT discount.

If the property increased by $100,000 in value after the rule change:

• The additional tax cost is around $35,250
• Total tax payable would be approximately $540,500 ($505,250 + $35,250)

Key takeaway: This approach softens the impact and is generally viewed as fairer for long-term asset holders, but would raise considerably less revenue in the short term.

Scenario 3: Transitional Period

Under a transitional model, the government sets a future deadline (for example, 30 June 2027) allowing assets sold before that date to access the existing 50% discount. Assets held beyond the deadline would have the entire gain taxed under the new discount rate.

• Sold before the deadline at $2.6 million: $528,750 tax payable
• Sold after the deadline: tax outcomes similar to the “No Grandfathering” scenario

Key takeaway: This creates a strong incentive to review asset sale timing well in advance.

What This Means for Investors and Small Business Owners

The government’s chosen path remains unknown, but the financial consequences could be significant.

For small business owners, the impact may be reduced through small business CGT concessions, including:

• The 15-year exemption
• The retirement exemption
• Rollover relief

However, these rules are complex and highly fact specific.

Plan Ahead, Don’t React

If CGT changes are announced, there may be limited time to act. Strategic planning before any announcement can help you:

• Model different sale scenarios
• Understand cash flow impacts
• Structure ownership more effectively
• Identify eligibility for CGT concessions

At WSC Group, we help clients navigate CGT strategy with clarity and confidence. If you’re considering selling an investment property, business, or other major asset, now is the time to seek advice — not after the rules change.

Need guidance on CGT planning?
Contact our accounting and tax advisory team today to ensure you’re prepared for whatever changes lie ahead.

Please note: Many of the comments in this article are general in nature and anyone intending to apply the information to practical circumstances should seek professional advice to independently verify their interpretation and the information's applicability to their particular circumstances.