Retiring to Australia’s sunny shores may seem like a dream come true, but understanding the tax implications is a must before packing your bags.
Capital gains tax (CGT) is one tax that catches many retirees off guard. You may be envisioning lazy days spent beachcombing, not worrying about asset sales and tax returns. However, Australia’s tax system doesn’t exempt retirees from paying capital gains tax.
The good news is that, with proper planning, you can minimise your CGT bill.
This guide will explain everything you need to know about capital gains tax for retirees. We’ll cover the CGT rates and rules, outline some exemptions, and provide tips to reduce your tax burden
How Does Capital Gains Tax Work?
Capital gains tax (CGT) refers to the tax levied on the profits earned when certain assets are sold or disposed of in Australia. It applies to gains from selling things like:
- Investment properties
- Shares/stocks
- Collectables like art or antiques (if it cost more than $500)
- Businesses
- And more
Capital gains tax is not a separate tax but rather part of your overall taxable income. So, any net capital gains get added to your regular income, and your total taxable income determines your marginal tax rate and how much you owe the Australian Taxation Office (ATO) for the financial year.
Do Retirees Pay CGT?
Yes, Australian retirees are still required to pay CGT. There is no age limit exemption that allows seniors to avoid paying CGT.
The ATO treats capital gains as part of your overall taxable income. So even after you enter your pension phase and are no longer earning a salary, you still must report capital gains and losses on your annual income tax return. So, any net capital gains will be assessed at your income tax rate, just like it would have if you weren’t retired.
While reaching retirement age doesn’t provide a CGT exemption, retirees may qualify for concessions and exemptions that minimise your obligations when you pay tax.
What Exemptions Can Retirees Claim on their Capital Gain?
While most capital gains are subject to CGT, there are some exemptions that may help retirees minimise their CGT liability.
Assets Purchased Before September 20, 1985
Any assets purchased before September 20, 1985, are fully exempt from capital gains tax in Australia. This grandfathered exemption applies to things like property, shares, collectibles, and more.
So if you purchased an investment property, for example, prior to that date and held onto it into retirement, you would not owe any capital gains tax when you eventually sell it.
Sale of Main Residence
Selling your main residence is exempt from capital gains tax under certain conditions. To qualify, it must have been your primary place of residence for the entire time you owned it.
Additionally, the residence cannot have been used to produce income during your ownership period. This means you didn’t rent any part of it out, run a home business from the property, build granny flats to rent, etc.
If you meet all the eligibility criteria, selling your main home in retirement would mean you would avoid capital gains tax, regardless of any gain made on the sale.
Eligibility Criteria
According to the ATO, the eligibility criteria for the main residence exemption include the following:
- You and your family live in the property as your main residence
- Your personal belongings are in the property
- The property has been your main residence for the whole time you owned it
- You have not used the property to produce income (e.g. rent it out, run a business from it, etc.)
- The property is on 2 hectares of land or less
So in summary, your principal place of residence qualifies for the main residence exemption if you live in it continuously with your dependents, don’t earn income from it, and it meets the land area requirement.
Meeting all these conditions allows the property sale to be exempt from capital gains tax.
Small Business Retirement Exemption
The small business retirement exemption allows eligible small business owners to disregard some or all capital gains made when selling active business assets.
To qualify, you must be over 55 or retiring due to permanent incapacity. Additionally, the exempt amount must be contributed to your super fund or used for retirement. Up to $500,000 can be exempt. This allows small business owners to sell their business assets and put the proceeds towards retirement without incurring a substantial CGT burden.
Tips to Minimise CGT for Retirees
While most capital gains are taxable for Australian retirees, you aren’t without options to reduce how much tax you have to pay. Here are some tips:
Claim the 50% Discount
If you aren’t fully exempt from CGT, the ATO may allow you to claim the 50% discount, provided you have owned the asset for over 12 months. This effectively halves your CGT rate. However, assets held for less than a year do not get discounted, and the full assessable capital gain is taxed.
Add Expenses to Your Cost Base
Your cost base is what an asset originally cost you, plus certain other costs associated with acquiring, holding and selling it. The higher the cost base, the lower your taxable capital gain. So tally eligible expenses like stamp duty, legal fees, repairs, capital improvements, etc. to minimise CGT.
Use Losses to Offset Gains
You can use capital losses from asset sales to offset capital gains. This helps further minimise the CGT impact in a given tax year.
Key Takeaways
- CGT applies to Australian residents on profits from selling most assets.
- Retirees pay CGT at their income tax rates, with assets held over a year qualifying for a 50% discount.
- While reaching retirement age doesn’t exempt you from paying CGT, concessions and strategic planning can help minimise what you owe.
- Exemptions for some main residences, pre-1985 assets, and small businesses may reduce CGT obligations.
- Adding expenses to cost bases and offsetting losses can also limit tax bills.
With proper planning, Australian retirees can aim to limit CGT impacts. Contact KNS Accountants and Business Advisors for tax advice and planning.
Disclaimer
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to contractors and small businesses. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal or tax advice. You should, where necessary, seek your own advice for any legal or tax issues raised in your business affairs.
