Stage 1 of the Federal Government’s tax changes flagged in the Federal Budget was released on Thursday 28 May, with legislation tabled in Parliament. Stage 1 covers Capital Gains Tax (“CGT”) and negative gearing only – the trust taxation measures are understood to be some way off.

CGT

Recent Federal Budget proposals have triggered a significant rewrite of parts of the CGT legislation, adding considerable complexity for taxpayers. The measures are currently before the Senate Committee, with a report due by 22 June 2026 (however, our Prime Minister has indicated there is unlikely to be any significant changes). In the meantime, taxpayers will need to identify up to four different types of capital gains:

• “deferred non residential capital gains”;
• “deferred residential capital gains”;
• “non residential capital gains”; and
• “residential capital gains”.

The four categories matter because capital losses must be applied against them in order – meaning losses are applied against discountable gains before indexed gains.

The grandfathering of the pre Budget night positions of taxpayers has resulted in a set of rules which give rise to “deferred non residential capital gains” and “deferred residential capital gains”.  The deferred gains are the recognition of the inherent gains in pre Budget night assets that are eligible for the CGT discount.

The deferred gains are determined through a deemed disposal of the assets on 30 June 2027 and re-acquisition on 1 July 2027 for market value.

The deemed disposals result in what is termed “initial notional gains” (or losses).  These notional gains only become a taxable capital gain or capital loss (“deferred gains / losses”) when the asset is actually disposed of (referred to as a realisation event).

In simple terms, the economic gain brought to account on a realisation event will effectively consist of two gains as follows:

• The deferred gain (which is discountable);
• The capital gain on the realisation event (indexed gain)

Importantly, when the deemed disposal and re-acquisition occurs, the market value utilised for the deemed disposal proceeds effectively and becomes the re-acquisition cost base.  It is this re-acquisition cost base that is then subject to indexation moving forwards.

In the below links, we have provided some worked examples based on examples included within Explanatory Memorandum (EM) in relation to the following areas:

• How the indexation formula is to operate
• The modification of the cost base and impact for individuals and trusts when assets are disposed of
• Calculation of net capital gains

Lastly – it should be noted that the proposed legislation does include a number of unwanted surprises.  The surprises relate to how certain items are defined for the purposes of interpreting the proposed rules (for example the definition of a “new residential dwelling”).

Whilst most if not all legislation has definitions enshrined into the law, the proposed legislation contains a provision which enables the “Minister” (ie the Treasurer) to issue legislative instruments to define the fundamental terms.  This mechanism, whilst flexible, provides a heightened level of uncertainty for taxpayers as the Minister may change the rules by issuing new instruments without having to change the law and have it passed by Parliament.  As such, investors now have an uncertain playing field as the rules may change at the drop of a hat.

As always please reach out to your Engagement Partner to discuss how these changes will affect your individual circumstances.