As we all know, the government legislated to abolish the 50% Capital Gains Tax (CGT) discount starting on 1 July 2027. This affects partnerships, individuals and trusts. A new cost base indexation replaces it along with a minimum 30% tax on any profits on the assets you sell.
What is cost base indexation
The tax department uses cost base indexation to reflect real capital gains. It takes into account the original price of the asset and includes the following elements:
1. Costs of acquiring the asset, for example:
a. Paying for a surveyor, accountant, lawyer, etc
b. Stamp duty
c. Transfer costs
d. Expenses associated with a mortgage.
2. Costs associated with owning an asset, for example:
a. Insurance costs
b. Land tax
c. Rates
d. Maintenance and repairs.
3. Costs to move, install or preserve your asset’s value.
4. Costs you pay to keep a CGT asset safe or to defend your ownership of the asset.
How the new rules work
Instead of a 50% discount on the profit you make when selling an asset, you will now pay a minimum of 30% CGT. But, the cost base indexation lifts the costs paid surrounding the asset to account for inflation. This means you only pay tax on the real profit after the costs of owning the asset become part of the equation.
Base indexation applies when you have the asset for a minimum of 12 months. The family home is exempt and superannuation funds keep the existing discount.
Effect on self-funded retirees
The minimum tax affects you when you sell assets in years you do not have a high income. And a lot of self-funded retirees have little income that is taxable once they retire. Part of the retirement plan may be to sell off property or shares during a time when their marginal tax rate is low. The government changes to CGT removes a lot of the value from this sort of plan. Even if you have a marginal tax rate of say 16% you will still be liable for 30% tax on capital gains. That nearly doubles the tax you would pay on the profit today.
Exemption for age pensioners
It is important to know that you are exempt from the new rules if you are an age pensioner or receive other government benefits. If you receive JobSeeker or the Age Pension, your tax on capital gains will remain at the marginal rate.
Where you plan to apply for the Age Pension, remember it is means tested. To qualify, you must meet the following:
1. Residency rules
2. Assets test
3. Age rules
4. Income test.
Before planning for the pension make sure you understand the threshold for the asset test. Also, carefully plan any sales of large assets to minimise CGT.
The new CGT rules are complex and the details in this article are not exhaustive.