The minimum tax will not apply to recipients of certain payments of a kind prescribed in a legislative instrument by the Minister, if they receive a payment at any time in the income year. It is intended that such payments include payments or pensions relied upon for basic living expenses, such as the Age Pension or JobSeeker. See below for further information. The minimum tax will also not affect individuals who are already taxed at rates of tax of at least 30 per cent on capital gains.
The minimum tax applies in relation to capital gains from CGT events happening on or after 1 July 2027. The minimum tax also only applies in relation to gains accrued after 1 July 2027, excluding deferred residential and non-residential gains (i.e. the gains an entity is treated as having made from a deemed sale of CGT assets held just before 1 July 2027 under Subdivision 112-E). [Schedule 1, items 6, 58 and 60, paragraph 119-5(2)(a), subsections 102-6(1), (2) and (5), Division 119 of the ITTP Act]
The minimum tax applies to all CGT assets. However, the minimum tax does not apply in relation to new residential dwellings or affordable housing unless the relevant entity with these asset classes chooses indexation and the minimum tax over applying the CGT discount. [Schedule 1, items 58, 30 and 36, paragraphs 119-5(2)(b) and (c) and subsections 115-102(5), 115-125(6) of the ITAA 1997]
When the minimum tax is payable
Extra income tax must be paid on the ‘minimum tax capital gain’ for an income year by an individual who was an Australian resident at any time during the income year who has a ‘minimum tax gap amount’ for the income year. [Schedule 1, item 58, subsection 119-10(1) of the ITAA 1997]
This means that the minimum tax may be payable by an individual who was a foreign or temporary resident during part of the income year. Further consideration will be given to the appropriate application of the minimum tax to such individuals as part of a further tranche of amendments.
A ‘minimum tax capital gain’ for an income year is the total amount of covered capital gains that are remaining after step 6 in the method statement for working out net capital gains in the new subsection 102-5(1). Covered capital gains are the post 1 July 2027 portion of a capital gain from a CGT event happening on or after 1 July 2027 in relation to a CGT asset. As discussed above, this is because the covered gains are defined by reference to ‘residential capital gains’ and ‘non-residential gains’. Generally, all asset classes are covered. However, gains from a CGT event happening to new residential dwellings and affordable housing are excluded unless the relevant entity chooses indexation and the minimum tax over applying the CGT discount. Capital gains attributed to a beneficiary of a trust under section 115-215 are covered. [Schedule 1, item 58, section 119-5 of the ITAA 1997]
The method to work out whether an individual has a minimum tax gap amount for the income year and the quantum of that amount is:
Step 1: Multiply your minimum tax capital gain by 30 per cent.
Step 2: Work out your basic income tax liability for the income year (apart from Division 119) in accordance with step 2 in subsection 4- 10(3).
Step 3: Work out what the amount under step 2 would be if your taxable income for the income year were reduced (but not below nil) by the amount of your minimum tax capital gain.
Step 4: Subtract the amount at step 3 from the amount at step 2.
Step 5: Subtract the amount at step 4 from the amount at step 1.
Step 6: Round the result down to the nearest whole dollar if the result is not already a number of whole dollars.
Step 7: If the result (as rounded) is more than nil, you have a minimum tax gap amount for the income year equal to that amount.
[Schedule 1, item 58, subsection 119-10(2) of the ITAA 1997]
The minimum tax gap amount is designed to equate to the extra income tax that a taxpayer must pay, to ensure that a minimum 30 per cent tax applies to the capital gain. As such, the method statement ensures that only a positive figure for the minimum tax gap amount results in extra income tax, as a nil or negative amount means a taxpayer is already paying at least 30 per cent tax in relation to the capital gain.
Step 1 is designed to calculate a benchmark figure for the amount of tax that would be payable if the relevant capital gain were subject to a rate of 30 per cent tax.
Steps 2 to 4 are designed to work out what amount of tax the taxpayer would already be subject to on that capital gain (disregarding the minimum tax provisions introduced by these amendments), assuming that the capital gain is the last slice of the taxpayer’s income when applying the taxpayer’s marginal tax rates to their income and before applying any offsets to the taxpayer’s basic income tax liability.
Steps 5 to 7 calculate the difference between the benchmark from step 1 and the amount of tax the taxpayer would already be subject to on that capital gain, as worked out under steps 2 to 4, and round the result.
Various consequential amendments are made to reflect the introduction of Division 119. These amendments are to guidance provisions as well as operative provisions including those which explain how to calculate tax liability and define terms used within the Division.[Schedule 1, items 54, 55, 56, 57 and 59, section 4-25 and subsection 995‑1(1) of the ITAA 1997]
Exceptions for recipients of certain payments
The requirement to pay top up tax does not apply to an individual if they received a payment of a kind specified in a legislative instrument made by the Minister for this purpose, at any time during the income year. The Minister may specify a kind of payment that is:
a social security payment, as defined in the Social Security Act 1991; or
a payment made by an Australian government agency under an Australian law, where eligibility for the payment or the amount of the payment depends on the recipient’s means or financial position or the recipient’s impaired capacity to work or incapacity more broadly.
[Schedule 1, item 58, subsections 119-15(1) and (2) of the ITAA 1997]
The kinds of payments that are intended to be prescribed for this purpose include:
an income support payment within the meaning of the Social Security Act 1991 (including but not limited to the Age Pension, Disability Support Pension, JobSeeker, Parenting Payment, Youth Allowance and certain DVA payments);
farm household allowance within the meaning of the Farm Household Support Act 2014;
an amount identified as living allowance under the ABSTUDY scheme (noting this would only pick up the living allowance component of an ABSTUDY payment, no other components); and
a special rate disability pension under Part 6 of Chapter 4 of the Military Rehabilitation and Compensation Act 2004.
The kind of payment specified by the Minister could be a specific payment or a broader category of payments.
Individuals receiving such payments or pensions, which are intended to include those generally relied upon for basic living expenses, will not be subject to the minimum tax to ensure low-income, low-wealth individuals are not disadvantaged.
The Ministerial instrument power to specify other payments is considered appropriate and necessary to ensure that the types of payments can be updated over time to ensure fair application of the minimum tax. The limits on the scope of payments that can be specified means that this power can only be exercised to include payments that are linked to the income, wealth or capacity of the recipient (that is, payments reflecting an identified need for government support), consistent with the policy intent. In accordance with the Legislation Act 2003, a legislative instrument made by the Minister is disallowable and subject to sunsetting and will therefore be subject to appropriate parliamentary scrutiny and periodic review.
Application of minimum tax when receiving other payments
Jenny is an Australian resident and purchases shares on 1 January 2028. On 1 July 2029, Jenny sells the shares and makes a gain. Jenny is a recipient of income support payment determined by the Minister for the income year.
Jenny will not be subject to the minimum tax as she is also a recipient of a prescribed income support payment in the year that she sells the asset.
Application of the minimum tax
Rate of tax
Once an individual is liable to pay extra income tax on their ‘minimum tax capital gain’ under Division 119, the Rates Act prescribes a tax rate that applies to that capital gain, which ensures that a minimum 30 per cent rate of tax applies for the gain.
New section 12AA of the Rates Act prescribes a formula to calculate the rate of extra income tax payable under subsection 119-10(1) on every dollar of a taxpayer’s minimum tax capital gain for a year of income. The formula is to divide the minimum tax gap amount by the minimum tax capital gain. Each term is defined by the ITAA 1997, as explained above, and is the amount in whole dollars.[Imposition Bill, Schedule 1, item 1, section 12AA of the Rates Act]
The extra income tax that a taxpayer must pay in relation to their minimum tax capital gain is designed to equate to their minimum tax gap amount. The formula in the Rates Act for the rate of tax that applies to the minimum tax capital gain ensures this result.
Calculating minimum capital gains tax
Genevieve makes a net capital gain from the sale of listed shares in the 2029 income year. She does not have any other capital gains for that year. After applying the relevant steps in subsection 102-5(1), her minimum tax capital gain is $50,000.
Excluding that capital gain, Genevieve’s 2029 taxable income is $40,000.
As a single homeowner with more than $750,000 in assets, Genevieve does not qualify for any government payments, which means that she cannot be exempt from the minimum capital gains tax. Genevieve works out her minimum tax gap amount for the 2029 income year using the method statement in subsection 119-10(2) as follows:
Step 1: Multiplying her $50,000 minimum tax capital gain by 30 per cent gives a result of $15,000.
Step 2: Disregarding Division 119, Genevieve’s basic 2029 income tax liability on her taxable income of $90,000 under step 2 of the method statement in subsection 4-10(3) is $18,000.
Step 3: If Genevieve’s step 2 amount was worked out on the basis that her $50,000 minimum tax capital gain was excluded from her $90,000 taxable income (but not reducing it below nil) her basic 2029 income tax liability on the remaining taxable income of $40,000 would be $3,500.
Step 4: Subtracting the amount at step 3 ($3,500) from the amount at step 2 ($18,000) gives Genevieve a result of $14,500.
Step 5: Subtracting the amount at step 4 ($14,500) from the amount at step 1 ($15,000) gives Genevieve a result of $500.
Step 6: The step 5 result is a whole dollar amount, so rounding it down to the nearest whole dollar is not relevant.
Step 7: The $500 result, being more than nil, means Genevieve has a $500 minimum tax gap amount for the 2029 income year.
Section 12AA of the Rates Act provides that an additional rate of income tax applies to Genevieve’s $50,000 minimum tax capital gain, which results in extra income tax equal to her $500 minimum tax gap amount. That rate is worked out using the formula:
minimum tax gap amount / minimum tax capital gain
Applying that formula (500 / 50,000) results in a 1 per cent rate for Genevieve, which results in $500 extra tax when applied to her $50,000 minimum tax capital gain.
Pre-CGT Assets
Overview
Schedule 1 also amends the ITAA 1997 to bring pre-CGT assets into the CGT regime for capital gains that arise on or after 1 July 2027. These changes apply to all entities that hold pre-CGT assets.
New tax treatment of pre-CGT assets
The amendments apply to pre-CGT assets held on 30 June 2027. From 1 July 2027, these assets are subject to the CGT regime. However, CGT only applies in respect of capital gains that arise on or after 1 July 2027 and only once a realisation event that happens in relation to the asset (i.e. it is sold) on or after 1 July 2027.[Schedule 1, item 13, subsection 112-175(1) of the ITAA 1997]
An entity that is entitled to apply indexation under the new CGT regime can do so to the cost base of the CGT asset (which is no longer a pre-CGT asset) after 1 July 2027 in calculating their capital gains.
Deemed sale and reacquisition of pre-CGT assets
The amendments remove the pre-CGT status for assets by deeming them to be sold on 30 June 2027 and reacquired on 1 July 2027 for market value (or equivalent). As a result, from 1 July 2027 there will no longer be any remaining pre‑CGT assets. [Schedule 1, item 13, subsections 112-175(2) and (3) of the ITAA 1997]
This provision applies to all entities that hold pre-CGT assets, including companies, individuals and trusts.
Any capital gains or losses arising from the deemed sale of a pre-CGT asset are disregarded under the pre-existing rules for disregarding gains arising from pre-CGT assets.
However, the deemed reacquisition on 1 July 2027 means that the asset will no longer be a pre-CGT asset. The CGT regime will apply to these assets in relation to any capital gains arising on or after 1 July 2027.
To determine the capital proceeds for the deemed sale and the new cost base of the CGT asset that is taken to have been reacquired on 1 July 2027, the entity has a choice between market value (the default option), or an apportioning method set out in a legislative instrument made by the Minister.
The existing ‘choice’ rules in section 103-25 apply to the making of a choice to use an apportioning method, subject to the modification that the realisation event is the relevant CGT event for the choice. This means that the choice must be made on or before the day the entity’s income tax return is lodged for the income year in which the realisation event happens.[Schedule 1, item 13, subsection 112-175(4) of the ITAA 1997]
See discussion above regarding the Minister’s ability to determine an apportioning method under new section 112-185.
Consequential amendments are made to Division 149, to add an explanatory note into section 149‑10 that a CGT asset will cease to be a pre-CGT asset on 1 July 2027 as a result of section 112-175. [Schedule 1, items 45 and 46, section 149-10 of the ITAA 1997]
Application of the deemed disposal and reacquisition for pre-CGT assets.
Eileen acquired an investment property in 1980 for $100,000. The property is a pre-CGT asset
On 30 June 2027, the property has market value of $1,000,000.
Under the amendments, Eileen is taken to have disposed of the property just before 1 July 2027 and reacquired it on 1 July 2027. Any capital gain arising from the deemed disposal is disregarded, upon a realisation event, as the asset was pre-CGT.
Eileen is taken to have acquired the property on 1 July 2027 with a cost base of $1,000,000 (being its market value at that time).
In 2030, Eileen sells the property for $1,500,000.
Eileen makes a capital gain of $500,000, being the difference between the sale proceeds and the cost base of $1,000,000.
The gain attributable to the period before 1 July 2027 is not subject to CGT.
CGT event K6 and pre-CGT assets
CGT event K6 is an exception to the general rule that capital gains and losses on pre-CGT assets are disregarded. Broadly, it can apply where certain other CGT events, including CGT event A1 for the disposal of a CGT asset, happen in relation to a taxpayer’s pre-CGT asset that is shares in a private company or an interest in a trust if among other things, the company or trust holds post-CGT property that makes up at least 75 per cent of its net value (the 75 per cent test) (see section 104-230).
The purpose of CGT event K6 is to ensure that taxpayers cannot shelter capital gains from CGT by holding significant post-CGT assets in a pre‑CGT company or trust.
On 1 July 2027, all pre-CGT assets will be deemed to be sold and reacquired for market value. As a result, CGT event K6 will apply if assets satisfy the 75 per cent test and meet the other requirements for CGT event K6 to occur.
However, the amendments mean that any liability for any capital gain arising from CGT event K6 from the deemed sale and reacquisition is deferred until the taxpayer disposes of the share in the company or interest in the trust.
Despite this deferral, in working out whether CGT event K6 occurs and the amount of any capital gain, the taxpayer must use the market value of its assets and the assets of the company or trust as at 1 July 2027.
In effect, the amendments mean that any capital gains from CGT event K6 that would arise as a result of the deemed sale are crystallised immediately before 1 July 2027, but any resulting CGT event K6 liability is deferred until the subsequent realisation of the underlying asset. This ensures that CGT event K6 does not apply to any capital gains arising after 1 July 2027, which will already be subject to CGT.
From 1 July 2027, there will no longer be any remaining pre-CGT assets (as outlined above about bringing pre-CGT assets into the CGT regime). As a result, after that time the operation of CGT event K6 is expected to be limited to its application to pre-1 July 2027 gains on the realisation of assets that were previously pre-CGT assets.
CGT event K6 and deferral of liability
Fahdi has owned the only share in Pony Co since the company was incorporated in June 1983. He acquired the share for $10. Pony Co carries on a retail and trading business that has grown significantly over time, including through substantial acquisitions of land after 20 September 1985. As a result, a significant proportion of the company’s assets are post-CGT property.