Since the advent of Budget night, a lot of time and thought going into what these changes mean. In previous newsletters, I have attempted to explain these.
This week, our topic is explaining the new minimum 30% capital gains tax that comes into effect from 1 July 2027. Supporters of the legislation are of the view that it closes a loophole, while others claim it is a wealth tax by another name. The truth is always buried in the detail, which we will explain today, and let you be the judge.
Under the proposed rules, all capital gains are subject to a minimum tax rate of 30%. If the tax you would otherwise pay is less than this amount, then an additional “top-up” tax may apply to bring the total tax paid on the gain up to the minimum rate. This is particularly relevant for self-funded retirees, who often derive most of their income from investment and superannuation income rather than income from personal exertion.
Let’s look at some example scenarios.
Example 1: Self-Funded Retiree
Jo has retired and earned $10,000 of taxable income before she sold a share portfolio, which she had accumulated over many years. Jo realises $100,000 in capital gains. Jo would pay zero tax on the $10,000 of ordinary income, as it is below the tax-free threshold. However, the capital gains represent the majority of Jo’s income for the year, and the additional tax generated by the capital gain is less than 30% of the gain. Under the new provision, the minimum tax gap is $6,748. Jo’s tax bill increases by circa 30%.
Example 2: Part-Time Worker
John, aged in his forties and working part time is earning $40,000 per annum. John realizes $100,000 in capital gains from the sale of his share portfolio. John is only paying 15% tax because his earned income is in the tax band $18,201-$45,000 which pays 15% tax above $18,200. The $100,000 capital gain pushes John into the next tax bracket – the $45,001 – $135,000 which is 30%. However, the calculation with the next tax bracket still puts John below the 30% minimum, meaning John will need to come up with an additional $800 in tax.
Example 3: Non-Working Spouse
Jane is a non-working spouse whose only income is $10,000 per annum in dividends. She has sold her share portfolio, which she accumulated over a number of years, and generated a $20,000 net capital gain. Under the old system, Jane would have received the 50% discount on the sale, meaning $10,000 was assessable. This, combined with her franking credits, would mean she would pay zero tax. Under the new system, the minimum tax amount is $4,348.
Impact on superannuation contributions
Under the old system, we could mitigate the tax by putting monies into superannuation and claiming the contribution as a tax deduction. Under the new system, a tax-deductible superannuation contribution will not reduce the tax or minimum tax gap below the 30% rate.
Our concerns with the proposed changes
The examples I have provided demonstrate our key concern: that the concept of the minimum tax amount of 30% will likely affect people on lower taxable incomes rather than those who are paying higher marginal tax rates. The groups of people it affects are part-time workers, non-working spouses who are staying at home raising children, young investors who are trying to get ahead, and self-funded retirees who sacrificed to become financially independent so they would not be a burden on their family or the Government.
Unfortunately, the rushed nature of this legislation is bringing about the need for amendments and increased regulations to clarify the intent. We are still waiting to see the regulations because, as we all know, the devil is in the detail. One of the recent development is that Australians could face Capital Gains Tax (CGT) on assets they have not sold and have received no sale proceeds from. Under the rollover provisions, CGT is usually deferred when assets change hands as a result of death, divorce, or small business rollovers. From 1 July 2027, that provision is removed. This is a major change in the legislation, and both CPA Australia and the Tax Institute have made detailed submissions outlining the issue to Treasury. No response has been forthcoming as yet.
The classic example of this is someone going through a divorce. One party receives the investment property or shares, and the transfer is now deemed a CGT event, meaning tax is payable. In some cases, this may force the sale of the asset just to pay the tax. It is unimaginable that this was the intent of the legislation, and we look forward to seeing the regulations and overcoming the uncertainty that has been created.
As mentioned, there is considerable uncertainty, and we hope to be able to keep you in the loop as to what the changes mean once we have seen the regulations.
Feel free to come back to me with any questions.