Mitch Finnen
June 26, 2026
A short history of capital gains tax in Australia
It helps to begin with how we arrived here. The passage below is drawn from a 2006 paper by the Australian Treasury. It is a useful reminder that the tax base has always moved with the times.
Tax revenues tended to fall in the middle of the twentieth century and by 1963 - 1964, the tax take was around 18% of the GDP. It then increased significantly between 1973 and 1975, largely as a result of increased funding for social programs.
For the 2026–27 year, the tax take has risen to 23.8% of GDP, and the latest budget measures are projected to lift revenue by a further 5.4%. At the core of these changes is a move away from the flat 50% discount on capital gains tax (CGT) for assets held longer than a year, and back towards an indexation system. An indexation system protects the value of gain from inflation by increasing the cost base of the asset by the value of CPI each year. For low growth assets that grow slowly, the indexation model may be favourable. For higher growth assets, a normal economic cycle will lead to a higher tax bill. The Australian treatment of capital gains has shifted several times:
- Pre-1985 : Capital gains were generally untaxed. Over time, concern grew that ordinary income could be re-labelled as capital gain to escape tax. Assets acquired before 20 September 1985 remain outside the CGT regime and are not caught by the current changes.
- 1985 : An indexation method was introduced, intended to tax real capital growth while ensuring that inflation did not erode genuine returns. The regime also allowed gains to be averaged across several years, recognizing that capital investment is typically a multi-year endeavour.
- 1999 : The system moved to a 50% discount on capital gains. The aims were to simplify record-keeping, reduce the incentive to hold assets purely for tax reasons, and make Australia more internationally competitive, attracting productive people and encouraging enterprise. Indexation was not abolished outright; it was frozen, and holders of pre-1999 assets retained a choice between frozen indexation and the new discount.
- 2026–27 : A return to indexation, with two important caveats that reduce the appeal of investing. First, for individuals, trusts and partnerships, all capital gains will attract a minimum effective tax rate of 30%. Second, the averaging that softened the impact of a large one-off gain is no longer available.
What the 2026–27 changes mean
In practice, the changes are intended to bring the taxation of investment income closer to the taxation of labor income. That is a defensible aim. Striving for fairness across the tax system is, in a sense, fairness for all Australians.
It is worth being clear about what “returning to indexation” actually means for an investor. Under indexation, the cost base of an asset is lifted in line with inflation, so only the real gain (growth above inflation) is taxed, rather than the full nominal gain. Under the outgoing system, the full nominal gain was taxed but then halved by the 50% discount. The key difference now is that there is no discount, and a 30% minimum effective rate applies. Whether an investor is better or worse off therefore depends heavily on two variables: how long the asset is held, and how high inflation runs over that period. A short holding period in a low-inflation environment will see little relief from indexation, while the 30% floor still applies.
The Treasurer and the Prime Minister have emphasized the impact on housing in particular. Their stated goal is to flatten growth in residential property values, giving current and future generations a chance to participate in the housing market in the way that earlier ones did.
Two challenges to the prevailing narrative
I would offer two challenges to the Treasury narrative.
First, applying the CGT changes to all assets, rather than singling out residential housing, dilutes their effect on housing affordability. As drafted, a positively geared property faces exactly the same treatment as a financial instrument. Had property instead faced additional tax on sale relative to other assets, market forces would push more investors out of the property segment, which is closer to the stated policy goal.
Second, for a majority of people in Australia, capital investment is made from the after-tax proceeds of labor. The government already taxes income at its most common source: labor. What remains is then put to work in the market, often generating a gain when an asset is held and later sold. At that point, the government taxes the gain again. In short, you are taxed when you earn the income, and again when you deploy it productively. The 50% discount can be understood as an acknowledgement that the source of the investment had already been taxed once.
Where to from here?
Anyone who invests through a trust, individual or partnership structure is effectively guaranteed to see their minimum tax rate rise. Because tax rates directly affect real returns, any change of this kind is a prompt to review portfolio positioning. As a general theme, tax-advantaged structures will become more valuable within portfolios.
Venture capital and the ESVCLP environment
For investors in complying venture capital funds, specifically Early-Stage Venture Capital Limited Partnerships (ESVCLPs), there are two core benefits:
- Income and capital gains on the disposal of eligible venture capital investments are not subject to tax for limited partners (LPs).
- A non-refundable, carry-forward offset of up to 10% of the contribution a limited partner makes to an ESVCLP in an income year.
Together, these create a very tax-effective environment.
Pooled Development Funds
The Pooled Development Fund (PDF) program is an interesting chapter in Australia’s venture capital history, and one of the federal government’s earliest targeted attempts to close the “equity gap” for growing small-to-medium enterprises (SMEs). PDF shave largely been phased out as limited partnership structures have come to the fore, but they retain advantages for some investors. A PDF can invest in companies with net tangible assets of up to $50 million, setting turnover and other traditional metrics aside, which allows exposure to sizeable SMEs while retaining the tax benefits. PDFs also allow entry and exit via share sales.
A PDF structure offers two core benefits, which operate at different levels:
- At the fund level, income and capital gains are taxed at 15% (rather than the standard 25% or 30% company rates) on SME-related components, which make up most of the activity outside bank interest and other immaterial items.
- At the shareholder level, capital gains on the sale of shares in a registered PDF are treated as tax-exempt for the investor.
Rethinking portfolio structures
Where an investor is pursuing capital growth, a serious question now arises: at a 30% minimum rate for trusts and individuals, am I better off in a company? In some situations a company allows you to cap the rate at 30% until funds are distributed to shareholders, at which point top-up tax is paid (the shareholder tops the company tax up to their own marginal rate) and franking credits are applied to avoid being taxed twice on the same profits.
The self-managed super fund (SMSF) environment, with its 15% headline rate, has become more attractive still. Many investors will weigh whether to hold higher-growth assets inside superannuation and accept greater volatility in their retirement savings. It is worth confirming how the discount changes flowthrough to superannuation, as the concessional CGT treatment inside super interacts with these rules.
Shorter investment horizons
For investors accustomed to shorter holding periods (12–18 months), there will be very limited concessions on capital gains, as indexation offers little over short horizons. Investors will need to match their shorter-dated strategies to the right structure. Given the 30% rate inherent in companies, shorter-dated investment is likely to migrate there, while longer-dated, high-growth positions trend towards other structures.
Where this leaves investors
Every change in the tax environment produces a response across the market. Investors have plenty of options to improve the efficiency of their returns and keep more in their pocket. If you would like advice on tax-efficient returns, or an alternative to investment property, please don’t hesitate to get in touch.
