First introduced in the 1980s, capital gains tax (CGT) was brought back into the headlines in 2026 with potential changes to CGT rules being widely discussed in the wake of a Senate inquiry that examined how the tax has been applied.
Earlier in the year, much of the discussion centred on CGT’s effect on the housing market and what might happen in the 2026-27 federal budget, which the government subsequently used to announce that CGT will indeed be changing from July 2027.
Since then, reaction to the measures proposed in the budget have kept the conversation about CGT going.
Most recently, the government has also announced that the way that the newly proposed rules would apply to start ups, small businesses and trusts will also be changing.
To understand why it all matters, it helps to know what CGT is, why Australia introduced it, and how the discount became such a central part of the tax debate.
What is capital gains tax?
CGT is the tax you may pay on the profit you make when you sell or otherwise dispose of an asset.
Even though it is often called a separate tax, CGT is part of Australia’s income tax system, with your net capital gain generally taxed at the same marginal rate as your other income.
CGT is most often mentioned because of the way it applies to property, but it can apply to a wide range of investments, including shares, managed funds and crypto assets.
Under CGT rules, a few key exemptions and rules are applied:
- Your main residence (your home) is generally exempt, if you meet the conditions.
- A “CGT event” is the point when the tax rules switch on, for example when you sell an asset.
Why did Australia introduce CGT in the first place?
Before CGT began in 1985, Australia had no general tax on capital gains. Treasury’s history of Australia’s tax system notes a key concern of the time was that without CGT, there were incentives to convert what would normally be considered “income” into capital gains in order to minimise tax.
Here’s a hypothetical example of how that worked:
- A worker negotiated a $15,000 bonus.
- Instead of paying it as cash salary, the employer provided the worker with shares or rights worth $15,000.
- If the shares rose in value and the worker later sold them, the profit showed up as a capital gain rather than wages, meaning less tax would be payable.
CGT was introduced partly to reduce the incentive to re-label “income” as “capital”, and to broaden the income tax base. (As a side note, “non-cash” employee benefits like shares, company cars and low-interest loans were also the reason Fringe Benefits Tax was introduced in 1986).
Announcing a plan for changes to CGT in the 2026-27 budget, the government cited similar motivation, saying the changes it was proposing would better align the taxes paid on income made through capital gains with the taxes paid on wages.
A brief history of CGT and how it has changed
CGT started in 1985 and applied to realised gains on assets acquired after the start date.
From 1985 to 1999, the system had two main features:
- Indexation, which adjusted the cost base for inflation so that only “real” gains were taxed.
- Averaging, which aimed to reduce the tax spike from a gain that built up over many years but was taxed in only one year.
In 1999, the system changed from indexation and averaging to a CGT discount.
Under this system, rather than calculating and making allowances for inflation, a simple 50 per cent CGT discount has been applied for eligible individuals and trust beneficiaries. The change was designed to simplify the system, reduce tax bias towards holding assets and make Australia's tax system more internationally competitive.
The measures announced in the 2026-27 budget would move the system back toward an inflation-based CGT application if passed in legislation.
What was announced in the 2026-27 budget?
The government announced it planned to replace the current 50 per cent CGT discount with a discount based on the actual rate of inflation and introduce a minimum 30 per cent tax on gains from 1 July 2027.
Does this mean the 50 per cent CGT discount disappears overnight?
No.
If passed through Parliament, the changes will apply only to capital gains made after 1 July 2027, and investors in new home builds will be able to choose between the 50 per cent CGT discount and the new inflation-based arrangements.
What does an inflation-based discount mean?
An inflation-based discount is closer in concept to the original CGT indexation system than the 50 per cent discount system. Like the original system, it aims to tax the “real” gain. In plain English, that means recognising that some of the increase in an asset's price may reflect inflation, not a true increase in purchasing power.
Here is a simplified illustration:
- You buy shares for $10,000 and sell them years later for $18,000.
- The simple dollar gain is $8,000.
- If inflation over that period was 20 per cent, an inflation adjustment might lift your cost base to $12,000.
- The gain after that inflation adjustment would therefore be $6,000 instead of $8,000, and so in an inflation-adjusted system, you’d pay tax on the lesser amount.
It’s important to remember though the actual outcome under the measures announced in the budget will depend on the final legislation, the type of asset, the timing of the gain and a taxpayer's circumstances.
How CGT shows up in shares and other investments
CGT becomes relevant when you start building wealth outside your normal pay packet, for example through shares, ETFs or managed funds.
Common circumstances where CGT becomes relevant include:
- Selling shares or an investment property can trigger a CGT event.
- A managed fund can distribute a capital gain to you, even if you did not sell anything yourself.
The tax you end up having to pay can depend on how long you held the asset, your marginal tax rate, and whether you have capital losses you can use to offset gains.
What’s changing for small businesses, start-ups and trusts?
The impact of proposed CGT changes on both businesses and trusts has been the subject of extensive public discussion and debate after the budget. In response to this, the government provided a public update on June 18, announcing it was proposing some adjustments to the way CGT rules would be implemented.
In the budget, the government said it would keep the four existing small business CGT concessions which allow small businesses to reduce or defer CGT when they sell “active business assets” - such as, for example, a forklift - that are genuinely used in running the business, rather than mainly held as a passive investment.
In its most recent update the government restated its intention for the four small business CGT concessions to remain and additionally announced it would increase the turnover threshold for the 50 per cent active asset CGT reduction from $2 million to $10 million to make it available to more businesses.
It has also released a consultation paper on a proposed new ‘Innovative Business CGT Concession’ that would give a 50% CGT discount to founders and employee share scheme participants of innovative start-up businesses, which often incentivise employees to join by offering them share rights in lieu of high salaries that would be difficult to support while the business gets up and running.
As an additional measure, the government said that income from all types of testamentary trusts - which are trusts set up under a will to manage assets for beneficiaries after someone dies - will be exempt from the minimum 30% tax.
How CGT can affect the housing market for buyers, renters and investors
CGT matters in the housing market because it changes the after-tax return property investors can expect. That can influence investor decisions to buy, hold or sell investment property.
For investors, a CGT discount can make long-term capital growth more attractive. Because CGT is typically paid when a gain is realised, it can also affect the timing of when investors choose to sell.
For homebuyers, investor demand can add competition for homes in some areas.
Some argue that the CGT discount has encouraged so much property investment that it is now more difficult for people buying homes to live in to compete.
This is another key reason the government has been looking at changes to the CGT rules and is one of the reasons it has also announced major changes to the rules around negative gearing.
But CGT is by no means the only factor shaping Australia’s housing market. For example, CommBank economists have repeatedly pointed to tight supply and construction constraints as a key part of the housing story.
For renters, the link to CGT is indirect. If investor participation in the housing market changes, the number of available rental homes can shift up or down, which can influence rental costs. But rents are also still driven by broader supply and demand, including how quickly new housing is built.
Why CGT has been back in the news in 2026
There are four main reasons CGT has back in the news throughout the year so far.
First, the Senate established a Select Committee on the Operation of the Capital Gains Tax Discount on 4 November 2025. Its terms of reference included housing, productivity, the distributional effects of the discount, the use of the discount by trusts and whether the discount has a role in Australia's future tax mix. The committee's final report was tabled on 17 March 2026.
Second, the Parliamentary Budget Office released analysis that had been requested by the committee. The analysis examined estimated government revenue foregone due to the CGT discount for individuals and trusts and looked at how the value of the discount is distributed by income groups and asset classes, including property, shares and trusts.
Third, the 2026-27 federal budget announced a policy response: replacing the 50 per cent CGT discount with an inflation-based discount, adding a minimum 30 per cent tax on gains, and giving investors in new builds a choice between the existing discount and the new arrangements.
Finally, in response to feedback from the business community, the government announced on 18 June that the way that CGT would apply to small businesses, start-ups and trusts would also be changing.
The key takeaways
- CGT is part of income tax and generally applies when you dispose of an asset, such as shares, crypto assets or an investment property.
- Australia's CGT system was introduced in 1985. From 1985 to 1999, it used indexation to focus on real gains. In 1999, that system was replaced by the CGT discount.
- The 2026-27 federal budget has announced that the 50 per cent CGT discount will be replaced with an inflation-based discount from 1 July 2027, alongside a minimum 30 per cent tax on gains.
- The changes will only apply to gains arising after 1 July 2027, and that investors in new property builds will be able to choose between the existing discount and the new arrangements when they sell the property.
- CGT is often debated through the lens of housing, but it applies to many asset classes.
Things you should know: This article is general information only and is not tax advice. Tax rules can be complex and change over time. The Budget measures described above are announced reforms and should be treated as proposed changes until legislation and official guidance confirm the final rules. Consider the ATO's guidance and independent advice from a registered tax agent if you are making decisions based on your circumstances.
