The Federal Budget announcement concerning the CGT discount reflected the leaked proposals and seeks to revert the calculation of gains back to the Keating era using a CPI indexation methodology.  The changes indicated did however, carry additional implications concerning previously exempt or ring-fenced assets and the rate of tax applicable to gains made.

In a significant shift in approach, from 1 July 2027 capital gains will be subject to a 30% minimum tax rate.  This means that if taxpayers have no other income and make a capital gain, then they will still pay 30% tax on the gain.  It is understood that the fixed 30% tax rate is to stop taxpayers delaying the realisation of gains until they have lower levels of income.

If the government is seeking to align capital gains with income then it would seem logical that a graduated banding should apply, however, that is not the case (so far).  The 30% tax rate is considered in the Budget briefing papers (concerning trusts) to be better aligned to the tax rate paid by workers.  If this is correct, does this mean that the Government is of the view that a 30% tax rate is the minimum for workers?  If so, they appear to have not stated this in the Budget papers.

Transitional Measures

The changes to CGT discount depend on when assets were acquired and when they are sold as follows:

• Assets acquired pre 12 May 2026 and sold pre 1 July 2027 – no changes;
• Assets acquired pre 1 July 2027 and sold post 1 July 2027 (“Cross Over Assets”) – grandfathered CGT discount until 30 June 2027 with gains accruing after 1 July 2027 being subject to the new rules; and
• Assets acquired after 1 July 2027 will be wholly under the new rules.

Cross Over Assets

Where taxpayers acquired an asset before 1 July 2027 and sell the asset after 1 July 2027, they have the option to value the asset at 30 June 2027 to determine the gain that will be subject to the CGT discount and the gain subject to the new rules.

If taxpayers do not value the assets, then they can use a specified apportionment formula that estimates the value on 1 July 2027 based on the assets growth rate over the holding period.  Whilst the exact methodology is not currently available, this would appear to be a spreading of the gain over the holding period.

Adoption of the spread method may or may not be preferential depending on the holding period and the value of the asset as at 1 July 2027.  For example, assets with a high embedded gain as at 1 July 2027 would appear to be better placed with a valuation where the gain after 1 July 2027 was lower.

If the Cross Over Assets are held in discretionary trusts, consideration should be given to whether this remains the optimal structure, however, this will depend on the evolution of the legislation to tax discretionary trusts.

Pre CGT Assets

Pre CGT assets have been outside of the CGT net following the introduction of CGT in 1985, however, the proposals change this.  Pre-CGT assets will be treated like Cross Over Assets in that a valuation can be obtained or the gain split across the holding period to determine the exempt component of the gain.

Valuations of all Cross Over Assets should be obtained on a contemporaneous basis so that taxpayers can utilise these for comparative purposes when the asset is ultimately disposed of.   Having a supportable valuation in relation to cross over assets and Pre CGT assets will become an important issue.

If you have any questions in relation to the above, the Federal Budget or your affairs generally please don’t hesitate to contact your ESV Engagement Partner.