The Australian government has proposed a new capital gains tax (CGT) rule that would establish a 30% minimum tax rate on real capital gains accruing from July 1, 2027. Recipients of certain income support payments, including the Age Pension and JobSeeker, would be exempt from this minimum rate and would instead be taxed at their marginal rate.
Proposed Tax Rules
The proposed measure applies a 30% minimum tax rate to real capital gains, which are adjusted for inflation. The rule is scheduled to take effect for gains accruing from July 1, 2027.
The government has stated the policy is designed to reduce the incentive for taxpayers to defer realizing capital gains until periods of low income, when their marginal tax rate would be lower.
Treasurer Jim Chalmers stated: "The minimum tax reduces the incentive to defer realising capital gains until marginal tax rates are low, and better aligns the tax rate on gains with the tax rates paid by most workers."
Exemptions for Income Support Recipients
Recipients of specific government payments, such as the Age Pension and JobSeeker, are exempt from the 30% minimum rate. For these individuals, capital gains will be taxed at their marginal tax rate after the application of the inflation-adjusted CGT discount.
Age Pension Eligibility Criteria
As of the reporting period, approximately 2.67 million Australians receive the Age Pension. Of this group, 860,000 are part-pensioners.
Eligibility for the Age Pension requires an individual to be 67 years old, an Australian resident, and to meet income and asset tests.
- Income test cut-offs: $2,619.80 per fortnight for singles; $4,000.80 per fortnight for couples.
- Asset test cut-offs for homeowners: $722,000 for singles; $1,085,000 for couples. For non-homeowners: $980,000 for singles; $1,343,000 for couples. The family home is not counted in the assets test.
Practical Implications for Retirees
Financial advisers have indicated that the exemption may lead some clients to consider strategies to receive a partial Age Pension. Emma Burckhardt, an adviser at Perks Private Wealth, noted that advisers would evaluate age pension strategies for clients near the eligibility threshold but not at the expense of long-term wealth.
An analysis of the potential strategy for retirees indicates that while the exemption is technically available, its practical application is limited.
- Means testing: The Age Pension is subject to income and asset tests. An individual with sufficient assets to generate a significant capital gain is likely to have their pension reduced or eliminated.
- Reassessment: Services Australia regularly reassesses pension eligibility.
- Anti-avoidance provisions: Australia's general anti-avoidance rules allow the Australian Taxation Office (ATO) to cancel tax benefits from arrangements entered into primarily for a tax advantage.
Comparative Case Study
A comparative example illustrates the potential tax savings for an individual eligible for a partial pension:
- Scenario A (Pension eligible): A retiree eligible for $1 of the Age Pension with a capital gain of $44,999 in the 2027-28 financial year would pay an estimated $3,752 in tax.
- Scenario B (Not pension eligible): A retiree with the same total income ($45,000) from capital gains but not receiving the Age Pension would pay $13,500 in tax under the proposed 30% minimum rate.
The pension-eligible individual would save $9,748, but the example assumes the individual holds sufficient assets to generate the capital gain, which typically reduces pension eligibility.
Conclusion
The proposed 30% minimum CGT rate with exemptions for income support recipients is under Senate scrutiny.
While the exemption creates a theoretical pathway to reduce tax liability by obtaining a partial pension, analysis suggests that strict means testing and existing safeguards make large-scale exploitation of this strategy unlikely.