Draft capital gains tax legislation circulating in Canberra has dropped a line that’s been in the tax code since 1985: indexation for inflation. That omission, if it becomes law, means the same dollar gain will produce a higher tax bill than it would have under the old rules.
The mechanism is simple. When you sell an asset you’ve held for more than twelve months, you currently get the choice of two methods to calculate your taxable gain: apply the 50 per cent discount, or index the original purchase price to inflation before working out the gain. Most people take the discount because it’s simpler and usually better. But for assets held through high-inflation years, indexation can cut the taxable gain more.
How indexation worked and why it mattered
Indexation adjusts your cost base upward to account for CPI growth between purchase and sale. If you bought a property for $400,000 in 2010 and sold it for $700,000 in 2024, your nominal gain is $300,000. But if inflation lifted your indexed cost base to $520,000, your taxable gain drops to $180,000. No discount applies when you use indexation, you pay tax on the full indexed gain, but the shrunken gain often delivers a lower bill than the 50 per cent discount on the unindexed $300,000.
That matters most when inflation runs hot or you’ve held the asset for a long time. Between 2020 and 2024, CPI rose around 20 per cent. For a ten-year hold, indexation could reduce the taxable gain by 30 per cent or more, depending on the exact years.
What the draft does differently
The draft legislation removes indexation as an option. You keep the 50 per cent discount, but you lose the choice to index the cost base. That means every gain calculated from the original, unadjusted purchase price, even if half of that gain is just inflation.
For a $500,000 property bought in 2014 and sold in 2024 for $800,000, the nominal gain is $300,000. Under current law, you could index the cost base to roughly $580,000 (assuming 16 per cent CPI growth), leaving a $220,000 indexed gain taxed in full. At the top marginal rate (47 per cent including Medicare levy), that’s $103,400 in tax. Without indexation, you take the 50 per cent discount on the full $300,000, so $150,000 is taxable, and the bill is $70,500. In this case the discount wins. But flip the scenario: if CPI over the period was 25 per cent instead of 16, indexation would cut the gain to $200,000, and the tax to $94,000, better than the $70,500 discount by a smaller margin, but still a choice.
The point is not that indexation always wins. It’s that removing it takes away the better answer in certain scenarios, particularly for assets held through sustained inflation or bought with costs that qualify for indexing (renovations, holding costs added to the cost base over time).
Who loses and who doesn’t care
Most residential property investors won’t notice. The 50 per cent discount has been the default for two decades, and for typical hold periods (five to fifteen years) and modest inflation, it still beats indexation. The group that loses: investors who bought in low-price years, held through high inflation, or added significant capital improvements that get indexed separately under the old rules.
Share investors are less affected, equity gains tend to outpace inflation by enough that the discount remains the better option. But property, especially in flat or slow-growth markets where the gain is mostly inflation, could see tax bills rise by 10 to 20 per cent on the same economic outcome.
The catch
- Removes a method that’s been in the tax code since 1985, originally introduced to stop inflation from creating phantom gains
- Takes away the better option for assets held through high-inflation periods, even though the economic gain hasn’t changed
- Shifts more of the nominal gain into taxable income, particularly for long holds or assets with indexed cost-base additions (renovations, legal costs)
- If this is a drafting error, Treasury has not said so publicly; if it’s intentional, the revenue impact has not been modelled or disclosed
Whether this sticks or gets fixed
Two possibilities. First, it’s an oversight, indexation was left out because it’s rarely used, and Treasury will restore it when submissions point out the gap. Second, it’s deliberate: simplifying the code by cutting an option most people ignore, at the cost of a tax increase for a small cohort. The draft has not been released with an explanatory memorandum that addresses this directly.
If the omission stays, expect it to hit hardest in the next five years, as investors who bought in the 2010s and held through 2020–2024 inflation start selling. The difference between indexing a 2014 purchase and taking the discount could be $5,000 to $15,000 on a median property, depending on the city and the hold period.
What this means if you’re holding an investment property
If you’re planning to sell in the next twelve months and the legislation passes without indexation, your tax bill will be whatever the 50 per cent discount produces, there’s no alternative. If you’re holding longer term, the base case is that indexation disappears and you plan accordingly. The upside case: Treasury reinstates it after consultation, and nothing changes. The downside: it’s removed, inflation stays elevated, and your taxable gain grows faster than your economic gain.
For now, model your sale with the discount method only. If you’re on the edge of selling and indexation would have saved you a material amount, consider whether bringing the sale forward (before any new law takes effect) makes sense. That only works if the draft becomes law this calendar year and you’re ready to transact. Otherwise, the trade-off is selling sooner for a lower price versus holding longer and paying more tax on a higher nominal gain.
Watch Treasury’s consultation process and any commentary from the Property Council or the Tax Institute. If the omission is acknowledged as an error, it’ll be corrected in the final bill. If it’s not mentioned, assume it’s gone.
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General info, not financial advice.
