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 how the 30% minimum tax on capital gains affects some taxpayers with existing negative gearing arrangements in this article.
The Government has announced that taxpayers with residential properties acquired before 7.30pm on 12 May 2026 will be able to continue to negatively gear those properties.1
However, this case study shows that some taxpayers with existing negative gearing arrangements will be affected by the Bill, because of the proposal of 30% minimum tax on capital gains.
Policy
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.”
The Government has not made the case that its concerns about why taxpayers sell assets, warrant such a drastic change to our tax system. Nor has the case been made that capital gains should always be taxed at a floor 30% rate, when a taxpayer is not in those circumstances.
My experience from over 20 years of public practice is that most taxpayers who realize capital gains in low-income years do so because they need to supplement their cash flow or free-up resources to make new purchases or to fund one-off expenditures.
Often taxpayers have low-income years, because of changes in life’s circumstances, not because they have artificially planned to reduce their assessable income.
Implementing a blanket floor 30% CGT across the tax system (via the method statement in proposed Section 119-10(2)), rather than assessing taxpayers in accordance with their marginal tax rates is inequitable. The Government should not proceed with this measure.
The 30% floor tax works against the core feature of the Australian tax system, that people should be assessed in accordance with their marginal tax rates.
The case study below demonstrates how the benefit of a rental property loss on an existing residential property (said to be preserved under the Budget announcements) is almost entirely lost because of the 30% Floor Tax.
1 See Budget 2026-2027 Tax Explainer – Negative Gearing and Capital Gains Tax (page 4)
Analysis: “Sarah’s Case”
Sarah has recently taken a break from full-time employment to start a family. She has salary income of $20,000 for the year and has realized a net capital gain on shares of $50,000, representing her savings over many years of work.
We model two ‘scenarios’ in the Calculation Table below.
Scenario A where Sarah has no rental loss and in Scenario B Sarah has a rental loss of $15,000 on a residential property she acquired before 7.30pm on 12 May 2026.
Applying the 7-step formula in the proposed Section 119-10(2) to determine the “minimum tax gap amount” reveals a clear structural problem.
In Scenario A, where Sarah has no rental loss, she would pay $13,188 in tax (including Medicare) but if the Bill is passed Sarah would be required to pay $16,688 in tax on $70,000 of taxable income. This is an additional $3,500 in tax, merely because Sarah realized a capital gain.
In addition, to demonstrate how the benefits of Sarah’s residential rental loss would mostly be lost, we compare Scenario A with Scenario B.
In Scenario B, Sarah pays $16,100 in tax (including Medicare), even though her rental loss ($15,000) reduces her taxable income down from $70,000 to $55,000. The tax saving to Sarah for having the rental loss in this case is only $588.
Calculation Table
| Legislative Calculation Steps | Scenario A: WITHOUT Property Loss (Taxable Inc: $70k) | Scenario B: WITH Property Loss (Taxable Inc: $55k) |
| Step 1: Capital Gain × 30% | $50,000 × 30% = $15,000 | $50,000 × 30% = $15,000 |
| Step 2: Basic Income Tax Liability | Tax on $70,000 = $11,788 | Tax on $55,000 = $7,288 |
| Step 3: Tax if Taxable Income reduced by CG | Tax on ($70k – $50k) = Tax on $20k = $288 | Tax on ($55k – $50k) = Tax on $5k = $0 |
| Step 4: Subtract Step 3 from Step 2 | $11,788 – $288 = $11,500 | $7,288 – $0 = $7,288 |
| Step 5: Subtract Step 4 from Step 1 | $15,000 – $11,500 = $3,500 | $15,000 – $7,288 = $7,712 |
| Step 6 & 7: Minimum Tax Gap Amount | $3,500 | $7,712 |
| Add: Medicare Levy (2% of Taxable Income)* | 2% of $70,000 = $1,400 | 2% of $55,000 = $1,100 |
| Total Out-of-Pocket Tax Bill (Step 2 + Step 7 + Levy) | $11,788 + $3,500 + $1,400 = $16,688 | $7,288 + $7,712 + $1,100 = $16,100 |
| Effective Cash Value of the $15,000 Loss: $16,688 – $16,100 = $588 total net savings (vs. $4,800 under standard progressive rates. 87.8% of the deduction is lost). | ||
What If Sarah Had A Higher Salary During The Year?
Curiously, if Sarah instead had a salary of $80,000, she would receive the full benefit of her rental loss.
Her tax liability (including Medicare) would reduce from $32,388 to $27,588. Sarah’s rental loss of $15,000 would save her $4,800 in tax and there would be ‘no minimum tax gap amount’ on her capital gain.
How could it be equitable that Sarah loses most of the benefit of the deduction for her rental loss when she has salary of $20,000, but receives the full benefit of her rental loss if she earns a salary of $80,000?
Core Technical Anomalies And Removal Of Deductions
There are two main issues highlighted by this case study.
Arbitrary Removal Of Low Marginal Tax Rates
First, in Scenario A, Sarah loses the benefit of her low marginal rates simply because she makes a capital gain.
It is highly inequitable to require taxpayers like Sarah, who have low-income because of changing life circumstances, to pay more tax on a capital gain than their marginal tax rate would require, simply because they realize a capital gain in a year of low income.
In this example Sarah chose to work part-time to concentrate on starting a family, but there may be many reasons why a person has low income. They may be starting out in life, starting a business or looking after young children. They may have been retrenched from their job, maybe pursuing charitable work, or they may be in retirement.
Why should a person have to pay an additional tax, simply because they have realized a capital gain to free up funds to help with changing life circumstances?
Claw Back Of Negative Gearing Benefits For Existing Properties
Second, in Scenario B, there is negative gearing claw back. Sarah’s negative gearing benefits have been almost entirely lost – even though the Government announced that taxpayers would be able to continue to negatively gear residential properties acquired before 7.30pm on 12 May 2026.
In an arbitrary result, had Sarah’s salary income been higher, her negative gearing benefits would have been preserved. If she had a salary of $80,000 rather than only $20,000, she would have received the full benefit for tax deductions on her existing residential property.
The Bill does not preserve existing negative gearing outcomes for all taxpayers and could also result in the loss of negative gearing benefits for new residential properties.
In fact, the benefit of deductions for taxpayers on lower marginal rates can be lost or reduced by the presence of a capital gain, but not if they are claimed against other types of investment income – such as trading gains, dividends, interest and rents.
Matthew has written a submission to the Senate Standing Committees on Economics posing the following questions:
- Question 1: Why does the floor tax formula in proposed Section 119-10(2) fail to prevent the benefit of deductions for existing residential rental property from being denied when the Government stated that negative gearing benefits would be preserved for properties acquired prior to 7.30pm on 12 May 2026.
- Question 2: Why does the floor tax formula also apparently result in a similar outcome for some taxpayers with net rental losses on new residential properties acquired after 7.30pm on 12 May 2026, when it is the Government’s policy is that the benefit of deductions for new residential properties should be permitted?
- Question 3: Why does the floor tax formula in proposed Section 119-10(2) also prevent low-rate taxpayers receiving the full benefit of other tax deductions (such as work-related expenses, donations and concessional contributions) in a year when the taxpayer also makes a capital gain?
- Question 4: 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 because it claws back negative gearing benefits in situations where it is Government policy to permit negative gearing.
