The 2026-27 Budget announcement to move from a 50% CGT discount to a ‘cost base indexation’ method is a threat to the ‘upside’ of loan-funded share plans (loan plans), but not the executioner.

Key Takeaways

• The 2026 CGT Policy Shift: From 1 July 2027, the 50% discount on capital gains will be replaced with a CPI-linked indexation of the cost base model, as well as a new 30% minimum tax floor on capital gains.
• Decline of Loan Plans Tax Efficiency: Loan Plans work on the executive directly owning the company shares at the outset to access the CGT regime. The new rules mean executives lose the prized 23.5% (top marginal rate of 47% x 50%) capped tax rate on subsequent gains on sale.
• Larger-than-expected tax liabilities: Executives holding Loan Plan shares well past July 2027 will face tax liabilities higher than they were expecting. This is because inflation indexation after July 2027 provides minimal protection for high-growth assets.
• Remuneration Committee Strategy: A limited number of ASX 200 companies (as well as many unlisted companies) use Loan Plans. Loan Plans will continue to be effective as the tax liability arises on ultimate disposal, and then on capital account. This is still a preferred treatment than that of income tax on rights and options plans at the time of exercise.

The Policy Shift

On 12 May 2026, Treasurer Jim Chalmers announced a major overhaul of the CGT regime. Assets held for more than 12 months will no longer be eligible for the 50% discount of the capital gain on disposal. The current 50% discount model will be replaced with a CPI-linked indexation model. The new framework means that taxpayers will only be exempt from tax on the portion of their gain that matches inflation (CPI) after 1 July 2027. The remaining “real” gain is taxed at the taxpayer’s marginal rate for the year in which the gain is realised.

Importantly, however, there will be a new 30% minimum tax floor on capital gains – that is, the gain will be taxed at 30% if the taxpayer’s marginal rate in that year is less than 30%.

Crucially, the changes are not retrospective, although they do impact from Budget night. Loan shares, for example, that have previously been granted and are still held will continue to be eligible for the 50% discount on gains made in the period from grant to 30 June 2027. If they continue to be held following 1 July 2027, the subsequent gain on disposal will need to be split across the two periods – the 50% discount applies to the proportion of the gain up to 30 June 2027, while indexation and the 30% minimum rate apply to the gain made after that date. To split the gains, the ATO will require either a market valuation as of 1 July 2027, or a pre and post 1 July 2027 apportionment to estimate the asset’s value.

Listed company Loan Plans will have no difficulty with this apportionment as the share value is readily available. Unlisted companies will need a valuation at that time. We can expect the ATO to provide some administrative practice rules before June 2027.

Here’s how the old and new frameworks measure up:

Why will Loan Plans take a hit?

Loan Plans have long been a popular LTI vehicle for unlisted companies and used by some ASX listed companies – there is no reason why they are not more popular in listed companies. The company provides an interest-free, limited recourse loan to the employee to buy shares in the company on the date of grant. The shares are not subject to the employee share scheme (ESS) provisions of Division 83A of the Income Tax assessment Act (ITAA) because they are purchased at market value. This means that the taxing point for the shares is the date of disposal at which time they are taxed under the CGT regime. And, until now, only 50% of any gain is taxed if the shares have been held for more than 12 months.

The discounted CGT treatment has been the preferred model for many, rather than the gains being taxed at marginal rates as ordinary employment income under the ESS rules of Division 83A.

The 2026 Budget strips this away, exposing the shareholdings to a potentially less favourable indexation model, albeit still better than being taxed at marginal rates on the full gain.

RemCo strategy: is it time to pivot to performance rights, or options?

Not really.

While the tax effectiveness of Loan Plans has diminished, they will still remain an effective preference over income tax being paid on the gains as ordinary employment income at the time of exercise.

Boards and RemCos will still need to consider their current program, its objectives and the alternatives well before the 1 July 2027.

• ASX listed companies: there will be no need for a valuation as the 30 June 2027 VWAP will be a sound basis for the capital gain to that date.
  • A secondary point is that Loan Plans should no longer get the opprobrium of a few proxy advisers who felt they should not be used for executive compensation because of their tax-effectiveness, notwithstanding the ATO has signed off all aspects of the structures!
  • Those listed companies not using them may still put Loan Plans on the list of alternatives. Particularly as they are dividend inclusive by their very nature, and not only reward share price appreciation.

• Unlisted companies: Consider the need for a formal share price valuation as of 30 June 2027 to lock in the 50% discount on historic growth.

• They will still be used by unlisted companies as they have the economic effect of market value exercise price

• Shift to Performance Rights? Firstly, the Loan Plan will still be an attractive alternative to ordinary options, share rights and performance rights, the market value of which is taxed at marginal rates at the deferred taxing point.

• Additionally, since the executive’s shares are owned outright from the grant, loan shares still provide the upside of dividend yield that some rights and options do not.

The Loan Plan provides for taxation of only the “real” gain at marginal rates. The real gain will be a function of time held and the inflation cover. It is still attractive, but, simply put, not as good as it has been.

Consideration will certainly need to be given to traditional Performance Rights. They avoid complex loan funding, eliminate downside capital risk, can be configured to include dividend equivalents, and are easily understood because they are taxed at marginal rates as ordinary employment income under Division 83A at the deferred taxing point.

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