CGT change, new CGT calculation

The announced CGT changes replace the current 50% capital gains tax discount with an inflation-based discount and add a minimum 30% tax on gains from 1 July 2027. That means many investors will pay more tax on capital gains, especially on gains above inflation. 1 2 3

What CGT changes

• The government will replace the 50% CGT discount with a discount based on inflation. 1 2 3
• It will also introduce a minimum 30% tax on gains. 1 2 3
• The changes apply only to gains arising after 1 July 2027. 1 2 3
• New builds get a special option: investors can choose either the old 50% discount or the new rules. 1 2

Why people say “82% more tax”

• That figure is an interpretation of how much tax can rise when the CGT discount is reduced or replaced, not a universal increase for everyone. 5
• A source from the Centre for Independent Studies says reducing the discount from 50% to 25% would mean 50% more capital gains tax paid on a given transaction, while moving from 50% to 0% would double CGT payable. 5
• The Budget announcement itself does not say “82% more tax”; it says the reform shifts taxation toward real gains after inflation and sets a minimum 30% tax. 1

Practical effect

• Under the new system, investors would generally pay tax only on the part of the gain above inflation, rather than getting a flat 50% discount. 1 2 3
• For many assets, that will increase tax compared with the current rules, because the government is taxing gains more like real profit rather than nominal profit. 1 2 3

What are the CGT Changes?

Starting 1 July 2027, the government is changing the rules for capital gains tax. Here’s what you need to know:

1. Current System: If you sell an asset (like a house or shares) and make a profit, you currently pay tax on half (50%) of the profit. This is called the 50% discount.
2. New System: Under the new rules, the 50% discount will be replaced with a discount based on inflation. This means you’ll only pay tax on the profit above inflation. Additionally, there will be a minimum tax of 30% on gains.

How Does This Affect You?

Let’s look at an example to see how much extra tax someone might pay under the new rules.

Example Calculation

• Assume you bought a property for $300,000.
• You sell it for $600,000.
• Your profit (capital gain) is: $$\text{Selling Price} – \text{Purchase Price} = 600,000 – 300,000 = 300,000$$Selling Price−Purchase Price=600,000−300,000=300,000

Current Tax Calculation (50% Discount)

• Taxable Gain: \text{50% Discount} = 50\% \times 300,000 = 150,000
• Assuming a tax rate of 30%: $$\text{Tax Owed} = 30\% \times 150,000 = 45,000$$Tax Owed=30%×150,000=45,000

New Tax Calculation (Inflation-Based Discount)

Let’s say the inflation rate over the years was 20% (just for example). This means the gain above inflation is calculated as follows:

1. Inflation Adjustment:$$\text{Adjusted Gain} = 300,000 – (20\% \times 300,000) = 300,000 – 60,000 = 240,000$$Adjusted Gain=300,000−(20%×300,000)=300,000−60,000=240,000
2. Taxable Gain Under New Rules:
   Since the new rules don’t give a flat discount, you pay tax on the whole adjusted gain of $240,000 because you’re above the minimum tax threshold.
3. Minimum Tax of 30%:$$\text{New Tax Owed} = 30\% \times 240,000 = 72,000$$New Tax Owed=30%×240,000=72,000

Comparison of Taxes

• Current Tax Owed: $45,000
• New Tax Owed: $72,000

Extra Tax Paid Under New Rules

$$\text{Extra Tax} = 72,000 – 45,000 = 27,000$$Extra Tax=72,000−45,000=27,000

Conclusion

In this example, under the new CGT rules, you would pay $27,000 more in tax compared to the current system. This illustrates how the changes can significantly affect your tax burden, especially for larger capital gains.