How the 2026 Federal Budget CGT Changes Impact Executive Equity Plans

The 2026 Federal Budget proposes replacing the 50% CGT discount with an inflation adjustment from 1 July 2027, fundamentally changing how capital gains are taxed on investment assets and equity-based remuneration. We examine what these proposed changes could mean for executive equity plans — including which structures may become less effective and which could deliver stronger outcomes.

GRG Remuneration Insight 186

22 May 2026

May 2026 Budget Announcement

As part of the 2026 Federal Budget the government announced its intention to remove the 50% capital gains tax (CGT) discount and replace it with an inflation adjustment so that only real capital gains will be subject to income tax. This change affects all property sales from 1 July 2027, except the family home which remains exempt from CGT. This change also has the potential to impact the realised (final) value of equity-based remuneration such as is typically offered to executives and directors. However, the degree to which the change impacts such remuneration depends significantly on the plan type selected, with one plan type in particular being the biggest loser from the change, and another plan type gaining significant advantages … in most circumstances.

New CGT Indexation vs. the 50% Discount: Which Approach Costs More?

Ignoring the special arrangements that often apply to executive equity for a moment, and examining the changes to CGT only, it is necessary recognise that the answer to the above question depends upon the excess of sale price over the CPI indexed purchase price. This examination is relevant not only to those few equity plans that are subject to CGT treatment instead of Employee Share Scheme (ESS) treatment, but also to any equity that is held beyond the ESS taxing point for those plans that fall within the ESS framework. With many current equity plans typically involving a short life (3-5 years, or at least less than the 15 years available under ESS) and forcing participants to exercise into shares rather than holding the interest long-term, the current CGT regime applies to most equity interests after their first taxing point, for example from the point of exercise until the date of final disposal (often many years later once the initial tax liability has been settled). This is important to note since the findings of this examination lead to an inevitable conclusion regarding the interplay between ESS and CGT taxable arrangements, once the new CGT regime takes effect.

The following tables illustrate the CGT taxable value under the proposed new CGT provisions. It is based on an asset purchased for $100,000 being held for 5 years before sale.

The “Growth” rows show:

1. the annual percentage rate of growth in value of the asset due to valuation improvement (market value), and
2. the total amount of capital gain.

The “Inflation” columns show:

1. the annual percentage rate of growth in value (equivalent to the cost base for CGT purposes) due to inflation, and
2. the amount of the capital gain that is tax free.

The amounts shown in the body of the matrix are the amounts of capital gain that will be subject to CGT. These tables show that:

1. When growth in value is no better than inflation, CGT will be nil which is less than would apply under the 50% discount approach, and
2. if growth exceeds inflation, then CGT will apply;

therefore, there must be some point at which tax payable under the new regime is greater than under the 2026 regime, depending on the interaction between asset growth and inflation. The following tables highlight this crossover point.

In order to compare the proposed new CGT approach with the current 50% discount approach the following tables show the amount of CGT discount that will apply under the new CGT indexation approach for the foregoing example.

These tables show:

1. 1. 1. there is a 100% CGT discount when growth does not exceed inflation, which represents a benefit arising from the changes,
      2. generally, when growth exceeds inflation the CGT discount is less than the current 50%, which represents a worse outcome arising from the changes, and
      3. there is a narrow band (highlighted in yellow) where the CGT discount falls between 50% and <100%, which represents an improvement arising from the changes.

If inflation falls into the 2% to 3% range being targeted by Treasury, the CGT discount will be nominal when growth of say 7%+ per annum is achieved. Of course, higher risk investments that produce high rates of growth will, in effect, receive little by way of CGT discount. In this regard there does not appear to be CGT indexation for purposes of calculating capital losses under the proposed new CGT provisions.

Impact of Shorter or Longer Holding Periods

For comparison purposes two additional sets of tables follow. One covers a one year holding period and the other a 15 year holding period. Otherwise the assumptions are the same as for the previous examples.

One Year Holding Period

15 Year Holding Period

Clearly, the patterns of 100% discount, between 50% and <100% discount and less than 50% discount are similar irrespective of the length of time the investment is retained.

Impact of New CGT Rules on Executive Equity Remuneration Plans

The following summarises the expected impact on executive equity remuneration plans of the proposed new CGT approach.

Rights Plan (nil exercise price)

Typically, executives pay nothing for the rights and are taxed under the employee share scheme (ESS) provisions on the market value of the shares acquired when the rights are exercised. Any subsequent gain or loss falls under the CGT provisions when the shares are sold.

While rights are held and the taxing point is deferred there is no CGT. Accordingly, the proposed new CGT provisions have no impact on the rights. CGT will only apply to gains made after the rights are exercised.

Our Insight 133 – The Myth of CGT Tax Advantages makes it clear that deferring tax under the ESS taxing provisions produces far greater net benefits for executives than the current 50% CGT discount. The relative benefit of ESS taxing over CGT taxing becomes much greater under the proposed new CGT provisions when the effective discount is lower than 50%, as shown in the previous tables. However, this finding becomes much stronger due to the new CGT arrangements, and those plans that do not allow executives to hold equity unexercised for the maximum 15 year tax deferral period should be urgently reviewed.

Options and Share Appreciation Rights (SARs)

Options and SARs have an exercise price or a notional exercise price. Hence, the gain represents the benefit contained in the option or SAR. That benefit is the excess of the market value of a share at the time of exercise over the exercise price or notional exercise price. That benefit is typically taxed under the ESS taxing provisions and is therefore on much the same footing as rights – see above. However, these arrangements are disadvantaged by the changes because they typically cannot allow for a 15 year term prior to exercise, and must typically be exercised within 3–7 years, forcing gains after exercise to be taxed under the new CGT regime with poorer outcomes. As a result, options and SARs become less attractive.

Premium Exercise Priced Options (PEPOs)

These instruments were typically used when very high share price growth was expected. The PEPOs were typically valued under the ESS safe harbour valuation provisions and structured such that they had a nil ESS taxable value at grant. Then no tax was payable until the PEPOs were exercised and then the CGT provisions applied. The 50% CGT discount also applied provided the shares were held for at least 12 months.

Under the proposed new CGT provisions it is expected that indexation of the cost will only apply from when the PEPOs are exercised and then only to the amount paid to exercise the PEPOs. This should mean that the tax free indexation adjustment, which replaces the 50% discount, will generally be much lower than the previous 50% CGT discount. These arrangements are disadvantaged by the changes because they typically cannot allow for a 15 year term prior to exercise, and must typically be exercised within 3-7 years, forcing them to be taxed under the new CGT regime with poorer outcomes. As a result, options and SARs become less attractive.

Share Purchase Loan Plan (SPLP)

These plans have often been misrepresented as producing greater benefits for executives due to the 50% CGT concession. The misrepresentation occurred because the higher costs of SPLPs were ignored when comparing outcomes.

The proposed new CGT provisions will reduce the perceived attractiveness of SPLPs particularly when high share price growth is anticipated. However, in GRG’s view, this is only going to make clear what was always true; ESS tax treatment is superior, if the share price is rising.

Conclusion

There are a couple of key conclusions that all companies should be considering, which arise from the changes and this analysis:

1. The power of the 15 year ESS tax deferral becomes even clearer: it was always the clear winner when share price is rising, however, the changes to CGT will likely make it more apparent to various stakeholders.
2. Option and SAR type structures with short periods prior to exercise (less than 15 years) will become much less attractive since value will be moved out of ESS (100% CGT discount equivalent) into CGT treatment which will result in higher tax and lower net benefit in most cases.
3. Equity plans that do not facilitate long term holding of Rights unexercised should be reviewed immediately to ensure that the maximum benefit of ESS tax treatment can be obtained, as participants become more concerned about CGT.

ESS tax treatment is now the most attractive investment treatment available to any investor. Companies should be thinking about how they can offer this advantage to all staff, non-executive directors and executives. It can be used to supplement superannuation savings, and plans can be operated on a salary sacrifice basis if so desired. Recent changes to legal frameworks even make this possible for unlisted companies.

Contact GRG to discuss replacing your plan with one that provides the maximum benefits to participants through innovative features like dividend replacement and salary sacrifice arrangements, alongside tax deferral for up to 15 years.