Budget changes entire property investing landscape

However, the government not only announced capital gains tax (CGT) reforms; it also introduced changes to negative gearing and income and expenses for annual tax returns.

“That is why this budget is very technical, very important, and it is far, far more elaborate with the changes,” Kawar said.

The government said it will remove the 50 per cent discount on capital gains and return to the pre-1999 model, which indexed gains for inflation.

From 1 July 2027, the 50 per cent CGT discount will be replaced by cost base indexation for assets held for more than 12 months, with a 30 per cent minimum tax on net capital gains. These changes will apply to all CGT assets, including pre-1985 CGT assets held by individuals, trusts, and partnerships.

Three CGT buckets

Kawar divided the new CGT rules into three categories, or buckets. The first bucket would be properties bought before the budget date of 12 May 2026. The second bucket is newly built properties purchased after this date, while the third bucket is existing properties purchased after the budget.

Investors in the first bucket who obtain a certified valuation can access a 50 per cent discount on gains up to 30 June 2027. After this date, gains use the indexation method instead, where the cost base grows with inflation rather than a flat discount.

Investors without a certified valuation can opt for the ATO’s default method, which splits the gain by time rather than by when the value grew.

As such, Kawar underscored the importance of obtaining an independent valuation if the investor does not want to rely on the ATO’s default method.

“They calculate the CGT between the final selling price and your purchase cost, and they apportion based on your tenure of the property,” he said.

“This might not be the right method because your property doesn’t grow in a linear way. If you have a valuation, you have a choice of two methods, and then you can pick which one is best for you.”

He warned that the calculations for properties purchased before the budget date will become more complex.

“The whole logic on that one is changing. In the past… we used to have a simple cost, and then the selling price, and the difference between the two was the calculation of the capital gains,” Kawar said.

“The accountant used to put a 50 per cent CGT discount, and that would have been a capital gain. Now the whole calculation is becoming far, far more complex.”

Investors who bought a new build after the budget (the second bucket) can benefit from the 50 per cent discount on the whole gain or, alternatively, indexation of their costs, depending on which yields the better result based on their calculations.

However, investors in the third bucket who bought an existing home after the budget are left only with the option of indexation of their costs, as they cannot access any discounts. They must apply indexation to each cost separately, as they occurred at different times and grow by different amounts.

Understand the new rules

The new rules deserve significant attention from accountants because regardless of which bucket a client falls into, they must apply the rules appropriately for each property and client for as long as each property is held, Kawar said.

For example, for those who bought new homes after the budget, Kawar said the results would depend on the calculation, timing, inflation, and yearly cost.

He underscored that it is difficult to know which method or approach would yield the best outcome for clients who bought a new build until the accountant applies real numbers to real calculations and compares the two calculation methodologies.

“Until you do the two calculations (indexation vs 50 per cent CGT discount), how would you know which one is best for you?” he said.

“If you miss it and use only one calculation, your clients might pay tens of thousands of dollars in extra taxes. The problem with that one is they will not be happy if they realise that they could have saved [all that] money.”

Tech to automate complex tasks

Kawar created an all-in-one property accounting platform, The Property Accountant, for accountants and tax practitioners. The platform automatically determines which bucket each property falls into based on when it was bought and what kind of property it is, and applies it across every client file.

The system generates a unique email for the client, which they can provide to their property manager. The property manager can automatically send rental summaries.

The platform tracks costs and automatically applies the right inflation adjustment. Accountants can automatically calculate CGT, income, and expenses for negative gearing. It also provides real-time data for ongoing property valuations.

To listen to the full podcast episode featuring Siddharth Kawar, click here.