Following the announcements in the 2026 Australian budget provided by Treasurer Jim Chalmers on 12 May 2026, Matthew Marcarian, Principal of our Sydney office, examines the financial impact of the proposed 30% Capital Gains Tax (CGT) minimum floor tax on self-funded retirees who rely on franked dividends, interest, and investment growth.
Many self-funded retirees do not utilize negative gearing and do not receive the Aged Pension.
For these individuals the floor tax formula introduces a particular hidden penalty on top of the inequity of having to a minimum 30% CGT on capital gains when their marginal tax rates might not require that.
When a self-funded retiree makes a capital gain from shares or ETFs, the formula forces a “minimum tax gap” top-up. This can be an effective way of clawing back the benefit of franking credits by arbitrarily increasing the tax liability when a capital gain arises and then using franking credits to offset the liability.
Policy Outcome: Franking Credits Used To Offset The CGT Floor
Paragraph 1.172 of the Explanatory Memorandum to the Bill states that a 30% minimum floor CGT prevents taxpayers from “deferring the realization of capital gains to years where their marginal tax rates are low” and “ensures their gains are subject to a tax rate closer to the rate they faced during their working life and is commensurate with the tax rate paid by most workers.”
However, self-funded retirees often have low-income and should benefit from the same low marginal tax rates as other taxpayers. Imposing a minimum floor 30% tax rate on capital gains made by people in retirement is an arbitrary approach which should be rethought.
It is not possible for a person to control or influence the distribution strategy of an Exchange Traded Fund or Managed Fund and consequently manipulation of tax outcomes is not usually possible.
For those self-funded retirees who do hold direct investments, the decision to sell is usually not taken because they are seeking an outcome that manipulates their tax position. They may be simply rebalancing a portfolio, realizing a long-term capital gain on a prudent basis or actively managing their portfolio through turbulent global markets.
Under current tax rules, taxpayers can utilize franking credits to offset their personal tax liability. This sometimes results in a refund where the taxpayer has a lower effective tax rate than 30%. See the example below.
If the Bill is passed self-funded retirees are likely to have their franking credits applied to help pay the floor 30% CGT on distributions of capital gains from ETF’s and Managed Funds and may still be left paying more.
Analysis: “Arthur’s Case”
Arthur is a self-funded retiree who does not qualify for the Age Pension.
Arthur’s Parameters: Assessable Assets: $800,000 (Exceeds the 2026 Single Homeowner asset cut-off of $722,000) | Interest Income: $2,000 | Franked Dividends: $7,000 cash + $3,000 Franking Credits = $10,000 | Capital Gain: $20,000. Total Taxable Income: $32,000.
The table below shows the calculation of Arthur’s tax position under the current and proposed system.
| Legislative Calculation Steps | Current Tax System | Proposed 2026 Floor Tax System (Franking Credits Absorbed) |
| Step 1: Capital Gain × 30% | Not Applicable | $20,000 × 30% = $6,000 |
| Step 2: Basic Income Tax Liability | Tax on $32,000 = $2,208 | Tax on $32,000 = $2,208 |
| Step 3: Tax if Taxable Income reduced by CG | Not Applicable | Tax on ($32k – $20k) = Tax on $12k = $0 |
| Step 4: Subtract Step 3 from Step 2 | Not Applicable | $2,208 – $0 = $2,208 |
| Step 5: Subtract Step 4 from Step 1 | Not Applicable | $6,000 – $2,208 = $3,792 |
| Step 6 & 7: Minimum Tax Gap Amount | $0 | $3,792 |
| Add: Medicare Levy (2% of Taxable Income) | $477 | $477 |
| Gross Tax Bill Before Offsets (Step 2+ Gap + Levy) | $2,208 + $477 = $2,685 | $2,208 + $3,792 + $477 = $6,477 |
| Less: Available Franking Credit Tax Offset | -$3,000 | -$3,000 |
| Final Out-of-Pocket Position | $315 CASH REFUND from ATO | $3,477 PAYABLE to ATO |
The Imputation Benefit Claw Back
Arthur would receive a $315 refund under current rules but would have to pay $3,477 if the Bill is passed. The floor tax formula in proposed Section 119-10(2) arbitrarily drives up Arthur’s gross liability to $6,477.
The tax assessment process would claw back Arthur’s entire $3,000 franking credit to fund the floor tax gap and still leave Arthur with $3,477 to pay.
Systemic Anomalies
Penalising Capital Gains – it is an arbitrary outcome that a taxpayer in Arthur’s position should have to pay more tax than would otherwise be required simply because he had a capital gain.
Claw Back Of Franking Benefits – The policy of taxing gains more highly for low-income taxpayers means that franking offsets are used to offset the floor CGT, an indirect outcome of the policy.
The ETF \ Managed Fund Penalty – Retail investors in diversified ETFs or Actively Managed (widely held trusts) have no control over the timelines of fund asset management. Often ETFs will often distribute capital gains. If the Bill is passed those distributed capital gains will eat away franking credits distributed by the same ETF.
Matthew has written a submission to the Senate Standing Committees on Economics posing the following questions:
- Question 1: Why does the minimum tax formula in proposed Section 119-10(2) treat an ordinary capital gain distributed from an ETF or retail managed fund as deliberate taxpayer deferral manipulation?
- Question 2: Did the Government intend that the Floor 30% CGT Policy should claw back franking benefits from low-income individuals who own shares, ETFs and managed funds?
- Question 3: The removal of the CGT Discount is a significant measure. Why has the Government gone further to deny taxpayers the benefit of lower marginal rates simply because they have made a capital gain?
Matthew recommends the proposed 30% floor tax policy should be discontinued from the current Bill given that the 50% CGT discount is being phased out in any event from 1 July 2027. It results in franking credit offset being used to pay an arbitrarily higher tax merely because an individual taxpayer has a capital gain, including a distributed gain from an ETF or managed fund.
