In the sunset years of our lives, most of us would prefer to indulge in the fruits of our labour. Often this means selling off assets we’ve invested in over our working years, whether the profits are put towards day-to-day living costs or taking a camper van tour around Australia. However, selling assets for a profit generally means paying some form of tax, and that can be a major factor when deciding when it’s best to sell a high-value asset.
One of the most common CGT questions we hear is whether retirees still pay Capital Gains Tax in Australia. As capital gains increase your overall taxable income, this question is especially critical for those looking to minimise their post-retirement taxes.
Retirees still have to pay Capital Gains Tax in Australia, unless they qualify for another exemption. It’s a common myth that retirees, pensioners or over 65s don’t have to pay CGT, but unfortunately, there is no age limit to CGT in Australia. However, assets purchased before 20 September 1985 are exempt, and exemptions apply for certain SMSF asset sales.
It’s always best to consult a financial advisor when making big decisions about retirement or choosing the best time to sell an asset. Basing your investment decisions on hearsay or common misconceptions can lead you down the wrong path – and when it comes to your finances, it’s crucial to have a secure long-term plan.
To learn more about how Capital Gains Tax applies during retirement, read our helpful guide below. You may be eligible for other CGT exemptions based on when and how the asset was purchased.
What is Capital Gains Tax?
The Australian Taxation Office (ATO) provides some great resources for understanding Capital Gains Tax on their website. Most personal possessions – like your home, car and furniture – are exempt from CGT. Depreciating assets used for business purposes also aren’t considered capital assets.
Selling a capital asset (like property or shares) will result in a gain or a loss for the investor. A capital gain or a capital loss is the difference between the sale price and the purchase price (i.e. the capital an individual spent to acquire it).
Whenever a sale results in a capital gain, Australians are required by law to pay Capital Gains Tax (CGT). Despite having unique rules and regulations, CGT is actually considered part of an individual’s income tax. Since it isn’t automatically withheld, you’ll need to allow for capital gains tax if you’ve sold an asset during the tax year.
On the other hand, if you make a capital loss on an asset, you can’t use it to offset your general income. You can, however, use it to reduce another capital gain, lowering the amount of Capital Gains Tax you’ll need to pay that year.
Do Retirees pay Capital Gains Tax in Australia?
It’s a common myth that there is an age limit to CGT in Australia, or that retirees are exempt from Capital Gains Tax. Unfortunately, much like everyone else, retirees are required to pay Capital Gains Tax, which can dramatically add to their yearly taxable income.
However, retirees are exempt from Capital Gains Tax if:
- the asset is owned/acquired through an SMSF, and;
- the asset is sold after retirement, when all members of the SMSF are in the pension phase.
It’s important to note that Capital Gains Tax does not apply to the majority of personal use assets, such as an individual’s home, car, and furniture. This means retirees who sell the family home they reside in don’t need to pay Capital Gains Tax to downsize.
Capital Gains Tax also doesn’t apply to assets purchased before 20 September 1985, including property. Retirees can sell an investment property or other asset bought prior to this date without needing to pay Capital Gains Tax.
CGT also does not apply to depreciating assets used 100% for taxable purposes. This includes business equipment and fittings within rental properties.
Do Retirees Pay Capital Gains Tax on Investment Property?
In general, retirees do have to pay Capital Gains Tax when selling an investment property in Australia. However, there are some CGT exemptions available, and no Capital Gains Tax will be paid if:
- the property was purchased through an SMSF and sold after retirement
- the property was purchased before 20 September 1985
- the property meets the conditions for the six-year rule (see below for more on the six-year CGT exemption)
Do Retirees Pay Capital Gains Tax on Shares?
Much like real estate, shares are categorised as a capital asset. They are also subject to capital gain and loss — as such, under ATO rules, shares are also subject to CGT. If shares are sold after retirement, Capital Gains Tax still applies in Australia unless the asset is owned by an SMSF.
How Does Buying Property Through an SMSF Affect Capital Gains Tax?
A property purchased through a Self-Managed Super Fund offers some unique tax benefits. If an investment property held by an SMSF is sold after retirement, the sale will be exempt from Capital Gains Tax.
However, it’s important to note that borrowing through an SMSF (i.e. gearing into property) comes with some very strict conditions, meaning there’s a significant degree of investment risk.
Risks Associated With Geared Real Estate (Property Purchased Through an SMSF)
- Cash Flow – All loan repayments need to be made through the SMSF, meaning that the fund must, at all times, be liquid enough or have ample cash flow to make the loan repayments.
- Difficulty in Cancelling – Depending on the details of the loan documentation, cancelling the arrangement might not be permitted. This can require the individual to sell the property if payments can’t be made, leading to significant losses for the SMSF.
- Higher Cost – Property loans taken out through an SMSF are generally more costly than other methods of borrowing. Always consider the relative returns and compare them to other investment strategies.
- Potential Tax Losses – Tax losses from SMSF acquired property cannot be offset against the individual’s taxable income, unlike personal investment losses.
- Alterations & Modifications to Property are not Allowed – No alterations may be made to the property until the SMSF property loan is paid off, and the original ‘character’ of the investment must always be retained.
See our helpful blog post for more information about real estate investment as an SMSF strategy.
Capital Gains Tax Exemptions for Retirees
While there is no CGT exemption based on age or retirement status, there are a number of other CGT exemptions available to Australians.
Although these are not specific to retirees, individuals may be eligible for:
- CGT exemption for assets sold by an SMSF during pension phase
- The six-year primary residence exemption rule (see below)
- No CGT applies if the asset was first purchased prior to 20 September 1985
- 50% CGT discount for individuals if you have owned the asset longer than 12 months (for eligible super funds, this is 33⅓%)
Why Are Capital Assets Acquired Before 1985 Not Subject to Capital Gains Tax?
Simply put, there were significant changes to Australia’s tax system based on the Hawke/Keating government’s Taxation Summit in July 1985. This was the date that Capital Gains Tax was first introduced in Australia.
The Income Tax Assessment Amendment (Capital Gains) Bill of 1986 specifically stated that CGT only applies to assets acquired on or after 20 September 1985. This means that CGT does not need to be paid on the sale of an asset (including real estate) purchased before this date.
It’s important to note that significant changes to property purchased before 1985 can still be CGT-eligible – for instance, a house built after 1985 on a previously vacant lot. In these complex scenarios, it’s best to talk to a financial advisor, and possibly consult the ATO for a private ruling on exactly how CGT applies to the asset sale.
What Is the Six-Year Rule for Capital Gains Tax?
The six-year rule means a property can still be treated as a principal place of residence for Capital Gains Tax purposes, despite the person not living at the property itself.
This rule is intended for unique circumstances where someone may be living away from their PPOR. Even if an individual is producing income from the property (such as rental payments), the property can still be designated as the primary residence for up to six years, and therefore be exempt from CGT when it is sold.
Keep in mind that for the duration of those six years, the individual is not allowed to designate another property as their primary residence, or the exemption will be nullified.
Do You Have to Live in Your ‘Primary Residence’?
Generally, yes, but under the six-year rule, there are some circumstances in which an individual is not required to live at their ‘primary residence’ while still being eligible for the Capital Gains Tax exemption upon its sale.
However, for this method to work, the property should have previously been a Principal Place of Residence (PPOR), meaning the individual should have previously lived at the property.
There are two specific instances where the CGT exemption will no longer be valid:
- If the individual does not sell the property within those six years
- If the individual fails to reoccupy or reside in the designated property within those six years
What Counts as a Principal Place of Residence (PPOR)?
A property is considered a PPOR when an individual resides, occupies, and lives in the property as his own home. Identifying the PPOR of an individual is critical to determining which tax exemptions they are entitled to, particularly if the property is sold.
At What Age Do You No Longer Have to Pay Capital Gains Tax in Australia?
Unfortunately, there is no age limit to Capital Gains Tax in Australia, and all CGT eligibility is based on the circumstances of how and when the capital asset was purchased. This means both retirees and pensioners are subject to the same taxation laws governing CGT.
Are Seniors and Pensioners Exempt From Capital Gains Tax in Australia?
No, unless they meet certain eligibility conditions – for example, if the capital asset was purchased through an SMSF and sold in the pension phase, or the asset was acquired before 20 November 1985.
How Can I Avoid Capital Gains Tax With an SMSF?
While SMSFs do qualify for some Capital Gains Tax exemptions, it should not be the sole motivation to purchase a property through an SMSF. Ultimately, any asset purchased through an SMSF should form part of your long-term investment strategy and future goals, and must be permitted in the SMSF’s trust deed.
The taxation benefits of using an SMSF to buy property include a 33% CGT discount after the asset has been held for over 12 months, and a CGT exemption for assets sold when all SMSF members are in the pension phase.
This article is provided as general information only and does not consider your specific situation, objectives or needs. It does not represent financial advice upon which any person may act. Implementation and suitability requires a detailed analysis of your specific circumstances.
Matthew has a wide ranging background in business, finance, taxation and accounting with over 25
years’ experience, firstly as an Accountant before becoming a Financial Planner. Matthew has been in
the Financial Planning Industry since March 1998 and has been the principal of his own financial
planning practice since 2003.
Matthew has studied a Bachelor of Commerce degree from Newcastle University majoring in Financial
Accounting and the Diploma of Financial Planning from Deakin University. Matthew is a Registered Tax
Agent and is a member of the National Tax & Accountants Association (NTAA).
Matthew has particular expertise in the areas of retirement planning, superannuation, investments and
insurance. His emphasis is on building a professional, integral and lasting relationship with clients with
the objective of assisting them to achieve their financial and lifestyle goals.