When you sell an investment property or another asset, capital gains tax is usually calculated by comparing what you received on sale with the asset’s cost base. In some cases, that cost base may be adjusted for inflation through indexation.
Indexation matters because it helps separate a real capital gain from a gain caused partly by inflation. Instead of taxing the full increase in an asset’s value, indexation can increase the cost base and reduce the capital gain assessed for tax.
For Australian property investors, this concept has become more important again. The 2026/27 Federal Budget changes are now law under the Treasury Laws Amendment (Tax Reform No. 1) Act 2026. For resident individuals and trusts, inflation-adjusted indexation replaces the 50% capital gains tax discount for gains from 1 July 2027. From the 2027-28 income year, negative gearing is also limited to new builds for residential property bought from 7.30 pm (ACT time) on Budget night, 12 May 2026. The Budget material states that the reforms apply prospectively, with special treatment for new builds.
What is indexation?
Indexation is a tax calculation method that adjusts an eligible asset’s cost base for inflation. When an asset is sold, this can reduce the capital gain by increasing the amount treated as the cost base.
| Term | Meaning |
|---|---|
| Capital proceeds | The amount received when the asset is sold |
| Cost base | The amount used to calculate the capital gain or loss |
| Indexation | An inflation adjustment to eligible cost base amounts |
| Indexed cost base | The cost base after indexation has been applied |
| Capital gain | Capital proceeds minus the relevant cost base |
For example, if a property was purchased many years ago, part of its increase in value may simply reflect inflation. Indexation recognises this by increasing the cost base before the capital gain is calculated.
The ATO explains that if an asset was acquired before 21 September 1999, the cost base may be indexed for inflation to reduce capital gains.
What does the Consumer Price Index have to do with indexation?
The Consumer Price Index, or CPI, is a measure of inflation. It tracks changes in the price of a basket of goods and services over time. For CGT purposes, CPI is used to work out the indexation factor that adjusts eligible cost base amounts for inflation.
| CPI concept | What it means | Why it matters for capital gains tax |
|---|---|---|
| Consumer Price Index | A measure of inflation over time | CPI is used to work out how much eligible cost base amounts may be adjusted for inflation |
| Indexation factor | The number used to adjust an eligible cost base | The factor helps calculate the indexed cost base for eligible assets |
| Eligible cost base amounts | The parts of the cost base that can be indexed | Not every cost base element is indexed, so the correct cost base breakdown matters |
| September 1999 quarter | The current-law cut-off point for CGT indexation | Under current rules, indexation is only applied up to the September 1999 quarter |
| Indexed cost base | The cost base after CPI indexation is applied | A higher indexed cost base can reduce the capital gain |
| Capital gain after indexation | Sale proceeds minus the indexed cost base | This may reduce the gain used to calculate CGT |
For property investors, this matters because a property bought years ago may have increased in price partly because of inflation. CPI-based indexation helps recognise that inflation component before the capital gain is calculated.
How does indexation affect capital gains tax?
Indexation affects capital gains tax by increasing the cost base of an eligible asset for inflation. A higher cost base can reduce the capital gain calculated when the asset is sold.
The basic CGT formula is:
Capital proceeds − cost base = capital gain or capital loss
Where indexation applies, the calculation may become:
Capital proceeds − indexed cost base = capital gain
Simple CGT comparison
| Calculation item | Without indexation | With indexation |
|---|---|---|
| Sale proceeds | $800,000 | $800,000 |
| Original cost base | $300,000 | Not used as final cost base |
| Indexed cost base | Not applied | $420,000 |
| Calculated capital gain | $500,000 | $380,000 |
In this simplified example, indexation increases the cost base from $300,000 to $420,000. This reduces the calculated capital gain from $500,000 to $380,000.
Where a market value is needed as part of the CGT calculation, a capital gains tax property valuation can provide evidence of the property’s value at the relevant date.
Indexation can be especially relevant when:
- the asset has been owned for a long time
- the asset was acquired before the relevant September 1999 cut-off
- inflation has been significant during the ownership period
- the asset has increased substantially in nominal value
- the taxpayer needs to compare indexation with another CGT calculation method
When can the indexation method be used?
The indexation method is not available for every asset. Under the current CGT rules, it is mainly relevant for assets acquired before 11:45 am ACT time on 21 September 1999.
The ATO explains that indexation allows you to increase each eligible cost base element, except the third element, by applying an indexation factor based on CPI. Under the current rules, indexation is frozen at the September 1999 quarter.
However, indexation becomes more important again under the 2026/27 Federal Budget changes, which are now law. From 1 July 2027, inflation-adjusted indexation replaces the 50% CGT discount for capital gains made by resident individuals and trusts. This means investors may need to understand two different indexation contexts:
- current indexation rules, which mainly apply to eligible older assets acquired before 21 September 1999
- new indexation rules, which apply to gains from 1 July 2027.
Current rules vs rules from 1 July 2027
| Issue | Current indexation rules | From 1 July 2027 |
|---|---|---|
| Main relevance | Older eligible assets | Future capital gains |
| Key date | 11:45 am ACT time on 21 September 1999 | 1 July 2027 |
| How it works | Indexes eligible cost base amounts up to September 1999 | Replaces the 50% CGT discount with inflation-adjusted indexation |
| Common asset examples | Long-held property, shares, units and business assets | Future sales of investment assets, including property |
| Relationship with CGT discount | Generally an alternative to the discount method | Replaces the 50% discount for many gains from 1 July 2027 |
| Status | Current law | Law |
Why the acquisition date matters
| Asset acquisition timing | Likely indexation position |
|---|---|
| Acquired before 20 September 1985 | Generally a pre-CGT asset, so CGT may not apply |
| Acquired between 20 September 1985 and 11:45 am on 21 September 1999 | Current indexation rules may be available if other conditions are met |
| Acquired after 11:45 am on 21 September 1999 | Current indexation generally does not apply |
| Acquired before 1 July 2027 and sold later | Transitional rules apply |
| Acquired after 1 July 2027 | The new CGT indexation rules apply |
Indexation vs the CGT discount
Indexation and the CGT discount are two different ways to reduce a capital gain.
Indexation adjusts the cost base for inflation. The CGT discount reduces the capital gain by a percentage.
| Method | What it does | Simple explanation |
|---|---|---|
| Indexation method | Increases the cost base for inflation | Reduces the gain by recognising inflation |
| CGT discount method | Reduces the capital gain by a percentage | Reduces the gain after it has been calculated |
| Other method | Uses the basic gain calculation | Sale proceeds minus cost base |
For eligible assets where both methods may be available, taxpayers generally need to compare the results. The ATO notes that the indexation method is one of the ways to calculate a capital gain for CGT assets bought before 11:45 am AEST on 21 September 1999.
Which method is better?
There is no single answer. The better method depends on the numbers.
Indexation may produce a better result where:
- the asset was bought before the 1999 cut-off
- inflation had a significant impact before September 1999
- the indexed cost base meaningfully reduces the gain
- available capital losses make the discount method less favourable
The discount method may produce a better result where:
- the percentage reduction gives a larger tax benefit
- indexation produces only a small cost base increase
- the asset was acquired after the indexation cut-off
- the taxpayer is not eligible to use indexation
How the 2026/27 Federal Budget changes could make indexation more important
The 2026/27 Federal Budget made major changes to the way capital gains are taxed in Australia, and they are now law. For property investors, the most important change is the move away from the 50% CGT discount and toward inflation-adjusted indexation for future capital gains.
The Budget material states that the CGT reforms will apply only to gains arising after 1 July 2027, and that investors in new builds will be able to choose either the 50% CGT discount or the new arrangements.
For investors holding affected property across the transition date, a property valuation for 1 July 2027 will help establish the property’s market value at the point where the new CGT treatment begins.
Key 2026/27 Budget changes for property investors
| Budget change | What it means |
|---|---|
| 50% CGT discount to be replaced | Future gains may be taxed using an inflation-adjusted method instead of the current discount method |
| Minimum 30% tax on gains | Capital gains may be subject to a minimum tax rate from 1 July 2027 |
| CGT reforms apply prospectively | The new rules apply only to gains arising after 1 July 2027 |
| New builds receive special treatment | Investors in new builds may choose the 50% CGT discount or the new indexation-based arrangements |
| Negative gearing limited to new builds | From the 2027-28 income year (starting 1 July 2027), negative gearing is limited to new builds for residential property bought from 7.30 pm (ACT time) on Budget night, 12 May 2026 |
| Existing arrangements preserved for properties held before Budget night | Existing property investors may be treated differently from future purchasers |
Why this matters for the property market
The changes could affect how investors compare established properties with new builds.
For many years, investors have often assessed property based on:
- rental yield
- expected capital growth
- negative gearing benefits
- the 50% CGT discount after holding the asset for at least 12 months
- long-term tax outcomes on sale
The new law changes that equation. If negative gearing is limited to new builds and new builds retain the option to use the 50% CGT discount, tax settings may become more favourable for investors who add to housing supply rather than buy established dwellings.
Why indexation matters for property investors
Indexation matters for property investors because property is often held for many years. Over a long ownership period, a large part of the increase in value may come from inflation rather than real growth.
| Factor | Why it matters |
|---|---|
| Purchase date | Determines which CGT rules may apply |
| Sale date | Determines when the CGT event happens |
| Holding period | Longer periods can increase the effect of inflation |
| Original purchase price | Forms part of the cost base |
| Buying and selling costs | May be included in the cost base |
| Capital improvements | Can increase the cost base if properly recorded |
| Rental history | May affect whether CGT applies and how the gain is apportioned |
| Ownership structure | Individuals, trusts, companies and super funds can have different outcomes |
Property investors need accurate cost base records
Property investors should keep records for items such as:
- contract of sale
- purchase settlement statement
- stamp duty records
- legal and conveyancing fees
- selling agent fees
- advertising costs on sale
- capital improvement invoices
- valuation reports
- ownership history
- rental use history
- main residence use history
These records matter because even small cost base errors can change the final capital gain.
Simple example of indexation when selling an asset
The example below is simplified. It shows the concept only and does not replace a full CGT calculation.
| Item | Without indexation | With indexation |
|---|---|---|
| Sale proceeds | $800,000 | $800,000 |
| Original cost base | $300,000 | $300,000 |
| Indexation adjustment | Not applied | $120,000 |
| Indexed cost base | Not applied | $420,000 |
| Capital gain | $500,000 | $380,000 |
Without indexation, the capital gain is:
$800,000 − $300,000 = $500,000
With indexation, the cost base increases to $420,000. The capital gain becomes:
$800,000 − $420,000 = $380,000
This means indexation reduces the calculated capital gain by $120,000.
Featured snippet answer:
Indexation reduces a capital gain by increasing the eligible cost base for inflation. For example, if an asset sells for $800,000 and its indexed cost base is $420,000, the capital gain is $380,000 instead of $500,000.
Common indexation mistakes to avoid
| Mistake | Why it matters |
|---|---|
| Assuming indexation applies to every asset | Current indexation rules are mainly limited to older eligible assets |
| Confusing indexation with the CGT discount | Indexation adjusts the cost base, while the discount reduces the gain |
| Trying to use indexation and the CGT discount together | These methods are generally alternatives, not combined methods |
| Ignoring the acquisition date | The date the asset was acquired can determine whether indexation is available |
| Relying on rough estimates | Incorrect cost base records can materially change the capital gain |
| Forgetting partial property use | Main residence use, rental use and mixed-use periods may affect the calculation |
| Assuming the Budget changes apply to all gains immediately | The CGT changes apply only to gains from 1 July 2027 |
When should property investors get a valuation or tax advice?
Property investors should consider professional advice before selling an asset where the CGT outcome is uncertain, the ownership history is complex, or the Budget changes, now law, may affect the calculation.
| Situation | Why it matters |
|---|---|
| Former home becomes an investment property | Market value may be needed when the property first produces income |
| Property is partly rented | Private and income-producing use may need to be apportioned |
| Property is inherited | Special cost base rules may apply |
| Related-party transfer occurs | Market value substitution rules may apply |
| Purchase records are missing | A valuation may help support the CGT calculation |
| Property was held before 1 July 2027 and sold later | A valuation may help separate pre-reform and post-reform gains if required under the final rules |
| Significant improvements were made | Improvement costs may need to be included in the cost base |
Tax advice may be important where:
- the asset was acquired before September 1999
- the property changed from a main residence to an investment property
- the property was inherited
- the property is owned by a trust, company or SMSF
- the investor needs to compare indexation with the CGT discount
- the sale may occur after 1 July 2027
- the investor is comparing an established dwelling with a new build
Frequently asked questions
What does indexation mean when selling an asset?
Indexation means adjusting the cost base of an eligible asset for inflation before calculating the capital gain.
Does indexation reduce capital gains tax?
Indexation can reduce the capital gain used to calculate capital gains tax by increasing the eligible cost base. A higher cost base usually means a lower capital gain.
Can property investors still use indexation?
Some property investors may still be able to use indexation under the current rules if the asset was acquired before 11:45 am ACT time on 21 September 1999 and the relevant eligibility conditions are met.
Is indexation the same as the CGT discount?
No. Indexation adjusts the cost base for inflation. The CGT discount reduces the calculated capital gain by a percentage.
Can you use indexation and the CGT discount together?
Generally, no. Where both methods are available, taxpayers usually need to compare the outcomes and choose the method that produces the better result.
Will the 2026/27 Federal Budget bring back indexation?
Yes, from 1 July 2027. The Treasury Laws Amendment (Tax Reform No. 1) Act 2026 replaces the 50% CGT discount with inflation-adjusted indexation for gains made from that date by resident individuals and trusts.
Does indexation apply to assets other than property?
Yes. Indexation can also be relevant to shares, units, business assets, trust-held assets, company-held assets and superannuation fund assets, depending on the rules and eligibility.
Final summary
Indexation is a method for adjusting the cost base of an eligible asset for inflation. When an asset is sold, this can reduce the capital gain used to calculate capital gains tax.
For property investors, indexation matters because long-held properties may have increased in value partly because of inflation. Under current rules, indexation is mainly relevant for assets acquired before 11:45 am ACT time on 21 September 1999. However, the 2026/27 Federal Budget changes, now law, make indexation more important again for gains from 1 July 2027.
The key points are:
- indexation adjusts the cost base for inflation
- a higher cost base can reduce the capital gain
- indexation is different from the CGT discount
- indexation and the CGT discount are generally alternative methods
- the asset acquisition date is critical
- property investors need accurate cost base records
- valuations may be important where property history is complex
- the Budget changes make indexation central to future CGT planning
For investors buying, holding or selling property, indexation is no longer just a historical tax concept. It is an important part of understanding real gains, future tax outcomes and the after-tax return from investment assets.
