Cost base indexation and the 30% minimum tax

From 1 July 2027, cost base indexation and a 30% minimum tax replace the 50% capital gains discount for individuals and trusts. A rental held across that date is treated as sold just before 1 July 2027 and bought back on that day. So the gain up to then keeps the discount. After that, indexation raises the new cost base with prices. The minimum tax adds tax where the tax on the later gain is less than 30% of it.

The Mitchells are an example household we use to explain. Daniel Mitchell holds the Armadale house in Western Australia in his own name, and he and Emma plan to stop work on 1 July 2033.

What changes on 1 July 2027?

Say a person has held a property for more than twelve months and signs the sale contract before 1 July 2027. Then half the gain is taxed. The contract date sets the CGT event, and so the financial year the gain is taxed in. From 1 July 2027, indexation of the cost base and a 30% minimum tax replace the discount for individuals and trusts. A new dwelling can keep the 50% discount. A complying super fund keeps its one-third discount, and a company has no discount.

A contract signed before 1 July 2027 keeps the discount on the whole gain, taxed in the year of the contract. A contract signed on or after that day splits the gain at 1 July 2027. The steps from a price to the cash left are in selling an investment property before retirement.

What is the gain up to 1 July 2027?

Daniel bought the Armadale house on 21 June 2019 for $329,000, plus $14,500 of purchase costs. That is $343,500 before Division 43 Division 43 The yearly deduction for the cost of the building, called capital works. . His cost base Cost base What the property cost for tax: the acquisition cost and the purchase and improvement costs, less the Division 43 claimed to date. takes off the Division 43 he claimed: $9,000 through 2020-21, then $4,500 for each year from 2021-22 to 2026-27. That leaves an adjusted cost base of $307,500.

PropRetire's engine values the house just before 1 July 2027 at $691,968. It grows the recorded value of $665,000 by the house's growth rate of 5.5% a year. That is a projection, not a valuation. For a tax return, an owner uses the market value just before 1 July 2027, or a method the Minister sets. Treasury has published only a draft of that method.

Half of Daniel's $384,468 is taxed, as it keeps the discount. It is taxed in the year of the real sale, not in 2026-27. No page in PropRetire shows this deemed sale. The figures are the engine's own working for it.

How does indexation work after 1 July 2027?

In the engine, the house's cost base from 1 July 2027 starts at the $691,968 it was treated as bought back for. Indexation raises that cost base with inflation until the contract date, in place of the discount. Only the cost from 1 July 2027 is indexed. For a sale from that date, PropRetire reads each property's projected annual CPI, the rise in prices that indexation uses. It also reads each owner's tax settings, which record whether the owner is eligible for CGT indexation.

The gain after 1 July 2027 is the sale price less the selling costs and the indexed cost base. None of it is halved. How the estimate reads each record is in the guide to property tax and CGT estimates.

When does the 30% minimum tax add tax?

The minimum tax looks at what is left of the year's capital gains after capital losses and concessions. It leaves out the part of a gain held over from before 1 July 2027, and a new dwelling's gain that keeps the 50% discount. If the basic tax on that gain, before offsets, is less than 30% of it, extra tax makes up the difference.

Only a person who is an Australian resident at some time in the income year pays it. A trust's gain reaches it through each beneficiary the gain goes to. A complying super fund and a company do not pay it. So for Daniel, the minimum tax would look only at the gain after 1 July 2027, never at the $384,468.

What does a sale on 1 July 2033 leave in cash?

The Stress test runs a property sale on the contract and settlement dates you choose. Here it sells the Armadale house with a contract on 1 July 2033 and settlement on 31 July 2033. The price is the house's value grown at 5.5% a year, and the selling costs are 2.5% of it. Income, rent and costs grow 3% a year, as in the Mitchells' saved retirement plan. The page runs only with at least one change, so this run raises living expenses by 1%. That changes no tax.

The tax on the gain settles with the rest of Daniel's tax after 30 June. The Stress test shows each owner's cash after the sales and that settlement, not the tax on one sale alone.

Read next: Selling an investment property before retirement

General information only. Not financial, tax, legal or credit advice.