The abolition of the general capital gains tax (CGT) discount marks one of the most significant changes to Australia’s tax system in over a quarter of a century since the discount was introduced in 1999. The Treasury Laws Amendment (Tax Reform No 1) Act 2026, which was enacted on 26 June, replaces that long-standing concession with a cost-base indexation model. However, the transition mechanism adopted by parliament is considerably more complex than a simple return to the pre-1999 indexation rules.

Had the objective simply been to transition to a different methodology, the legislation could have wholly grandfathered assets acquired before 1 July 2027, regardless of the date of their disposal, and applied the new regime only to assets purchased thereafter. Instead, for every one legal disposal and economic gain, the taxpayer must now calculate two separate capital gains where the asset is held on 30 June 2027 and disposed of after that date.

That is, the gain accrued up to 30 June 2027 continues to qualify for the existing 50 per cent discount, while any gain accruing from 1 July 2027 onwards is calculated under the new indexed cost-base rules.

This raises the question of how to apportion one gain between two time periods. To answer it, the legislation permits two approaches: taxpayers may obtain a market valuation as at 1 July 2027 or apply a statutory time-based apportionment formula. The formula itself did not make its way into the enacted legislation, leaving one of the most important practical aspects of the transition unresolved and subject to future legislation with no clear timeframe.

For assets traded on active public markets, such as listed shares, establishing a 1 July 2027 value may not present major difficulties. The position is very different for goodwill, intellectual property, units in private trusts and unlisted shares. There may be little practical alternative but to commission independent valuations that satisfy ATO requirements. Those costs may need to be incurred years before any intention to sell exists.

The complexity does not end once the two partial gains have been calculated.

The legislation introduces a new seven-step process for determining a taxpayer’s net capital gain. A capital gain is no longer just a capital gain – it must be accurately allocated to one of four categories.

The rules governing the use of capital losses have likewise become significantly more complicated and prescriptive. Losses must be applied against gains in a strict order depending on the categories of the losses and the gains.

The interaction between those ordering rules and the discount mechanism creates an outcome whereby capital losses accruing after 1 July 2027, which themselves relate to assets that no longer qualify for the discount, must first reduce the discount (pre-1 July 2027) gains. In practical terms, this diminishes the effective tax value of those post-transition losses by half.

Another layer of complexity is added by the introduction of a minimum 30 per cent tax on capital gains, which necessitates the application of yet another seven-step calculation.

The ongoing administrative burden should not be underestimated. Many taxpayers will now need to retain 1 July 2027 valuations, separate calculations for pre and post-transition gains, indexed cost- base schedules, categorisation of gains and losses, loss utilisation workings and minimum tax calculations. Assets held for decades may carry substantially more extensive documentation than has been necessary up until now.

Notably, the new regime does not apply to SMSFs, which will continue to operate under the existing CGT framework applicable to complying funds. While trustees will undoubtedly welcome avoiding the additional obligations imposed on other entity types, the divergence means advisers and their clients will increasingly be dealing with two materially different CGT systems operating side-by-side often within the same family group structure. Of course, SMSF trustees do not completely escape these changes – collateral damage from the political manoeuvring has resulted in SMSFs being banned from using limited recourse borrowing arrangements to purchase residential property other than business real property from 10 August 2026.

With a 30 per cent minimum tax on discretionary trusts looming large on the near horizon, advisers to family groups will have a very busy time reshaping investment strategies and structures in the next couple of years.