The proposal has three components.

Component 1 – Phase out the capital gains tax discount

• This component would progressively phase out the 50 per cent capital gains tax discount for trusts and individuals for capital gains realised on or after 1 July 2019, and replace it with cost-base indexation (the indexation method).
  • The capital gains tax discount would be phased out by 10 percentage points each year for five years to 1 July 2023. During the transition period, individuals and trusts could elect to apply the relevant capital gains tax discount or the indexation method.
  • In calculating the capital gains for assets under the indexation method, individuals and trusts would be able to index the cost base of assets held for at least 12 months so that tax is only applied to real capital gains. The cost base would be indexed by the consumer price index (CPI).

Component 2 – End negative gearing for prospective investment properties

• This component would remove negative gearing arrangements (which allow deductions for investment losses to be made against non-investment income) for all non-business investment properties purchased by individuals, funds, trusts and companies on or after 1 July 2019, with assets purchased prior to this date grandfathered.
  • Deductions would be restricted to the same class of asset in which the losses were incurred.
  • Those affected would not be able to carry forward within-year losses to offset future rental gains, nor to offset the ultimate capital gain when the asset is sold.

Component 3 – Phase out negative gearing for existing investment properties

• This component would phase out negative gearing deductions for individuals, funds, trusts and companies with more than one investment property purchased before 1 July 2019, according to the phase-out profile at Attachment A.

All components would have effect from 1 July 2019.