The Labor tax "top-up" rule every investor should know

Since Labor announced its capital gains tax reforms, one of the biggest talking points has been the new 30% minimum tax on capital gains from 1 July 2027.

Supporters say it closes a loophole. Critics argue it amounts to a new wealth tax by another name. Whatever your view, the 30% floor has become one of the defining features of the reforms.

But buried deep within the legislation is an obscure provision: the minimum tax gap amount.

While it sounds like something only a tax lawyer could love, it's the mechanism that ensures investors actually pay the new 30% minimum tax.

In simple terms, if your capital gain hasn't effectively been taxed at 30%, the Australian Taxation Office calculates the shortfall and collects the difference through additional income tax.

Importantly, it creates potential unintended consequences for how super contributions and capital gains interact.

To understand exactly how the provision works - and who is most likely to be affected - I spoke with two tax specialists:

• Marguerite Vo, Tax Manager, HLB Mann Judd
• Melody Edwards, Senior Financial Adviser & Aged Care Specialist, Evalesco 

Understanding the minimum tax gap amount

The purpose of the minimum tax gap amount is simple: to ensure investors ultimately pay at least the new minimum tax on their real capital gains.

Traditionally, you could blend capital gains with other forms of income that benefited from the tax-free threshold and lower marginal tax rates. That's no longer the case.

As Edwards explains:

"In simple terms, a minimum tax gap amount can arise when you sell an asset, such as direct shares, ETFs, managed funds, an investment property or a holiday home, and make a capital gain while your marginal tax rate is below 30%.

Under the proposed rules, capital gains are effectively subject to a minimum tax rate of 30%. If the tax you would otherwise pay on the gain is less than that amount, an additional 'top-up' tax may apply to bring the total tax paid on the gain up to the minimum rate."

Vo reaches much the same conclusion, adding that the provision is likely to be particularly relevant for self-funded retirees, who often have relatively low levels of labour income.

"Whether a minimum tax gap amount arises is driven by the size of the capital gain relative to an individual's other taxable income in the relevant income year, rather than by an individual's marginal tax rate in isolation," she says.

4 worked examples every investor should understand

In the table below, Vo provides worked examples that illustrate how the provision operates from FY28.

Sarah has recently retired and earned $10,000 of other taxable income before selling a long-held investment portfolio that she realises for $100,000 in capital gains.

The $10,000 is taxed at the ordinary income rate which is 0%.

"But because the capital gain represents the majority of Sarah’s taxable income for the year, the additional tax generated by the capital gain is less than 30% of the gain," Vo explains.

"As a result, a minimum tax gap amount of $6,748 arises."

Compared to the current rules, Sarah's tax bill increases by around 30%.

Example 2: modest other income, modest tax gap

Michael works part-time and earns $40,000 before realising the same $100,000 capital gain.

"Because Michael already has some employment income, the additional tax generated by the gain is closer to the 30% benchmark. However, it is still below 30%, resulting in a modest minimum tax gap amount of $800," Vo says.

Example 3: large labour income, no tax gap

Emma earns $100,000 from full-time employment before realising the same $100,000 capital gain.

In her case, the additional tax generated by the capital gain already reaches Labor's 30% minimum tax benchmark. 

As such, no minimum tax gap amount arises.

Example 4: low total income, huge tax gap

In this example, the taxpayer is a non-working spouse whose only regular taxable income is $10,000 in dividends.

Her partner earns above the income test threshold, meaning the household is not eligible for any prescribed government income support payments that exempt her from the 30% tax.

She then sells part of her share portfolio, realising a $20,000 net capital gain.

"The result is a minimum tax gap amount of $4,348. That's equivalent to 263% of the tax that would otherwise have been payable on her total taxable income," Edwards says.

Why putting more into super could leave you worse off

Many investors' first instinct will be to look for ways to reduce the top-up tax.

One obvious idea is making a tax-deductible super contribution. Unfortunately, Edwards says that strategy won't work.

"A personal concessional (tax-deductible) super contribution will not reduce the tax or minimum tax gap below the 30% rate and in some instances may result in additional tax payable due to the 15% contributions tax and Division 293 tax (where applied) on contributions."

Instead, both her and Vo agree investors will increasingly focus on timing and the use of available capital losses.

"To the extent an individual has flexibility, they may place greater focus on the timing of when a capital gain is realised and less focus on their marginal tax rate," Vo says.

"They may also pay closer attention to whether they fall within one of the exemption categories in the year a capital gain is realised, particularly where their eligibility for certain prescribed government payments may differ from year to year."

Geoff Wilson says the tax hits the wrong people

The worked examples illustrate one of the biggest criticisms of Labor's reforms: that the minimum tax gap amount is more likely to affect investors on lower taxable incomes than those already paying higher marginal tax rates.

Wilson Asset Management founder Geoff Wilson AO has been one of the most vocal critics of the changes, arguing the minimum tax provisions miss their intended target.

"This floor doesn't touch the wealthy. Anyone already paying 37 or 47 cents in the dollar never feels it.

"It lands on the part-time workers, the young investors and the self-funded retirees who did everything right and it strips away the one legitimate tool they had, putting the proceeds into their super, to avoid being taxed at 30% on a modest, once-in-a-lifetime gain.

"That's the opposite of what this government says it's trying to do.

"Every week we seem to discover another provision that wasn't part of the public debate. Australians deserve to know the full consequences of changes this significant before they become law, not months after the legislation has been introduced."

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The exemptions

The minimum tax gap amount is contained in the Treasury Laws Amendment (Tax Reform No. 1) Bill 2026.

Under the provisions of the Bill, the minimum tax rules generally do not apply to investors receiving certain government support payments, including:

• Age Pension, Disability Support Pension and Carer Payment under the Social Security Act 1991
• Other social support payments, including Family Tax Benefit and Parental Leave Pay
• Certain payments under the Veterans' Entitlements Act 1986, including the Carer Service Pension and Invalidity Service Pension
• Certain payments under the Military Rehabilitation and Compensation Act 2004

Vo also says broadly, the minimum tax will not apply where: