Do retirees pay capital gains tax in Australia?
Updated on January 22, 2025
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Nick Wee, an IRS Enrolled Agent with 18 years of expat tax experience, specializes in US tax preparation, tax planning, and tax advice for US citizens and Green Card holders living and working in Australia. *Schedule a consultation with Nick today.
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Table of Contents
Yes, retirees may still need to pay capital gains tax (CGT) in Australia, depending on their specific circumstances. Being retired does not, by itself, exempt them from paying their dues.
What is Capital Gains Tax in Australia?
Like in other countries, capital gains are the profits earned from selling assets such as property, stocks, or businesses. These gains are considered taxable income and attract a special tax, the capital gains tax (CGT).
What is the CGT rate in Australia?
The tax rate on capital gains depends on the duration of asset ownership.
If you hold an asset for less than 12 months, capital gains are taxed at your marginal tax rate based on your total taxable income. However, if you hold an asset for over 12 months, you may be eligible for a 50% discount on the taxable gain.
If a couple buys a property in Sydney for AUD$500,000 and sells it three years later for AUD$800,000, the capital gain is the difference between the purchase price and the sale price—in this case, AUD$300,000.
Because they have owned the property for more than 12 months, only half of that amount is taxable. That means they only pay tax on AUD$150,000.
What are the investment types affected by CGT in Australia?
Here are the different types of investments that are taxed with CGT:
- Investment properties: Gains acquired from selling investment properties are fully taxable.
- Inherited properties: CGT is not immediately payable when you inherit a property, but it may apply when you sell or dispose of the property in the future with certain requirements.
- Individual share ownership: CGT is triggered when shares are sold or transferred, not when they increase in value.
- Managed Funds and ETFs: these funds may distribute investment income to investors, even if you don’t sell the investment. These gains are taxable and must be reported in your income tax return.
- Collectables: Only items under this category with an acquisition cost over AUD$500 are subject to CGT.
Can retirees be exempted from paying CGT?
Yes, if they plan on selling their main residence, they can be exempt from paying CGT, provided certain conditions are met. This is called the main residence exemption and applies to regular individuals. However, the exemption may be affected if you have used your home to produce income (e.g., through renting a portion of it).
There are also concessions for small businesses with a criterion to be met. These concessions are designed to reduce or eliminate the capital gains tax liability when selling a small business.
How is Capital Gains Tax applied to retirees?
In Australia, CGT usually applies to retirees in the same way as it does to other individuals, but there are specific concessions and exemptions that may make it more manageable for retirees like the small business CGT concessions for business owners and when you sell your main home. This also affects capital gains tax on investment properties for retirees.
What are small business CGT concessions?
In Australia, small business owners may qualify for CGT concessions when they sell their business assets in lieu of supporting their retirement or reinvestment. They must pass the active asset test, the significant individual test, and the retirement exemption to be eligible.
There is a full small business retirement exemption from CGT if the asset was held for at least 15 years and the owner is retiring or permanently incapacitated. Otherwise, the concessions reduces the capital gain on active business assets by 50%, in addition to the general 50% discount for individuals.
What are the tax implications for American expats?
If you’re wondering how to avoid double taxation in Australia, a double taxation agreement (DTA) between the two countries prevents dual taxation on the same income.
US expats and retirees may also be eligible for the Foreign Earned Income Exclusion (FEIE), which allows them to exclude a certain amount of foreign-earned income from their US tax return. However, it is essential to note that the FEIE does not apply to capital gains.
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Can pension phases impact CGT for retirees?
Yes, The pension phase in superannuation significantly reduces or eliminates CGT on assets held within the fund, providing substantial tax benefits for retirees.
In the pension phase, the investment earnings, which include capital gains of superannuation assets that are used to pay a retirement income stream, are exempt from tax.
Can retirees avoid CGT by holding assets within superannuation?
Yes, while contributions to superannuation or account-based pension are generally taxed at a concessional rate, the earnings on superannuation investments are generally tax-free in retirement. This makes superannuation a tax-efficient vehicle for managing assets and avoiding CGT in retirement.
However, capital gains on assets held within a self-managed superannuation fund (SMSF) may still attract CGT.
Impact of Superannuation
Superannuation provides a tax-efficient vehicle for retirement savings, offering reduced tax rates on contributions, investment earnings, and potential tax-free income in retirement.
Do I pay CGT when moving from the accumulation phase to the pension phase?
No, because transitioning between these phases does not trigger a sale. Transitioning from the accumulation phase to the pension phase is an internal reclassification within the superannuation fund, not a sale or transfer.
What strategies can I use to minimize CGT?
Here are some strategies you can adopt to minimize your CGT:
- Transition to the pension phase to take advantage of the tax-free environment for investment earnings.
- Plan the timing of asset sales to coincide with the pension phase.
- Contribute to superannuation before retirement to reduce taxable income and benefit from concessional tax rates.
- Diversify investments between superannuation and personal ownership to optimize tax outcomes.
Can I offset CGT with other tax credits?
Yes, retirees can use capital losses to offset capital gains, reducing the taxable amount. Unused losses can also be carried forward to future tax years.
You will obtain capital losses when the sale proceeds of your asset are less than the cost base, which is the original purchase price with associated costs.
Is there available professional financial advice for my CGT?
Yes, it is important to seek professional financial advice to navigate capital gains tax obligations effectively in retirement.
You can seek an SMSF specialist to cater to your private super funds and account-based pensions. A financial advisor in Australia can also provide guidance on establishing and managing your assets and financial decisions to reduce your CGT further.