The tax advantages of retirement have been dealt a sharp blow with a little-reported measure aiming to curtail any self-funded retiree looking to cleverly escape the government’s minimum capital gains tax floor of 30 per cent.
Under previous arrangements, investors could build wealth and then sell assets when they hit retirement and their marginal tax rates drop to as little as zero. This has allowed many to avoid being stung with a CGT bill.
The government, to ensure retirees did not escape its push to carve a minimum of 30 per cent in CGT, quietly added a new provision to the final draft of the CGT legislation last month.
Dubbed a “top-up tax”, the new provision dictates that self-funded retirees on zero tax rates cannot arrange their tax affairs in a way that they pay less than 30 per cent under any circumstance.
The measure is only now being digested by financial advisers, who have encouraged a generation of investors to accumulate and hold assets such as property and shares throughout their working life in order to optimise low tax rates once they retire.
The majority of retirees are on a zero tax rate.
At a stroke, the 30 per cent minimum CGT measure means that advice doled out to a generation of investors is no longer useful. From July 1, 2027, when the new tax regime kicks off, the advice effectively will become redundant.
Financial advisers and tax experts had little warning of the change.
Evalesco financial adviser Melody Edwards says the new top-up tax is a targeted measure.
“It’s going to directly affect self-funded retirees who might have planned their retirement around the previous rules,” Edwards says.
She says the sting in the final legislation is that “put simply, under the new rules an additional top-up tax may apply to bring the total tax paid on capital gains up to the new minimum rate”.
Edwards says that, under the new rules, a retired investor on a low income could see tax bill increases of up to 30 per cent.
What’s more, she says potential workarounds such as investors making super contributions to try to get their tax rate down won’t work either, because the 30 per cent minimum tax rules are fixed for all investors.
The new rule amplifies the difference in tax rates faced by older people in retirement.
In relation to the CGT top-up tax measure, the retirees most sharply affected will be those on middle incomes who have kept investment assets outside the superannuation system.
Superannuation CGT rates were left untouched by the budget; in this respect SMSF investors now have a clear competitive edge over most other investors.
The rules also offer a clear advantage to people who receive an age pension, because anyone who receives the pension is exempt from the minimum rate.
This has advisers suggesting the new art form in wealth planning will be to ensure access to the pension, even if it is only $1.
“The main change now may be trying to ensure that you are receiving at least $1 of age pension on the date you sell the asset to avoid the minimum 30 per cent rate,” financial adviser Liam Shorte says.
Advisers are still struggling to rewrite the rules of long-term investing in the wake of the budget, with its sweeping changes to CGT, negative gearing, family trusts and SMSF borrowing.
Accountant Adrian Raftery says the tax changes will have a big impact. “Put together, all these tax changes represent a seismic change to investors in terms of their personal lives and what they may have been planning to do with their money,” Raftery told The Australian’s The Money Puzzle podcast.
He says the minimum 30 per cent tax rate applied to retirees would make a big difference to investors who entered long-term plans based on the old rules, especially those who had acquired assets in recent years.
“I think investors are going to have to look right across their investment portfolio and consider if their strategies are still worth pursuing,” he says. “The old way of investing, it’s gone for most investors – especially those planning retirement – you need to do your numbers again.”
Outspoken fund manager and investor activist Geoff Wilson has come out strongly against the proposed change in CGT – where the old 50 per cent discount offered after one year is to be replaced by an annual cost-based indexation. Wilson has also sharply criticised the decision to impose a 30 per cent minimum CGT rate on every investor.
Wilson has called for the key elements of the CGT legislation to be repealed. In turn, Anthony Albanese has said the fund manager “has opposed everything my government has done”.