I turn 65 in November and my wife turns 63 in March. Between us, we have only modest superannuation of about $150,000 because our main retirement asset has been an investment unit at Coolangatta that we bought in 2020 for $440,000. We believe it is now worth conservatively about $780,000. We also have about $270,000 in cash earning roughly 6 per cent interest and I will shortly start receiving a small military pension of about $300 a fortnight.
Our original plan was to live off the cash reserves first, which we estimate would last about four years, and then sell the unit and contribute the proceeds to superannuation. However, with the proposed capital gains tax changes, I am now wondering whether it may make more sense to sell the unit before June 2027 so we can still access the current CGT concessions.
The unit is owned jointly in both our names and our family home, which we own outright, is worth conservatively about $2.4 million. Is it beneficial to bring forward the sale of the unit, or should we stick with our original strategy?
Keep in mind the new CGT changes are only partly grandfathered; the capital gains accrued up to July 1, 2027, will be subject to the existing rules (50 per cent discount) and the amount of the capital gain that accrues from July 1, 2027, to the date of sale will be subject to the proposed regime (cost base indexation with a minimum 30 per cent tax rate).
I think the bigger issue is the potential capital gain and rental income you may receive between now and whenever you decide to sell. As you both have low superannuation balances, it may be possible to use catch-up concessional contributions to help reduce the capital gain when the property is sold.
Once you are past age 67, you need to pass the work test to make personal deductible contributions, so that is something important to consider.
My wife and I have organised a testamentary trust to distribute our estate after the last of us passes away. Our lawyer has completed all the paperwork and we have signed everything. At this stage, it has not been called upon because we are both still alive. Our three children will be trustees.
I have read that these trusts may also be taxed under this year’s budget if they are newly set up. If our trust has effectively been set up but is not yet holding any estate assets, do you think it would come under the new taxing rules?
Donal Griffin of Legacy Law in Sydney tells me that the key issue is that a testamentary trust is not actually ‘in existence’ merely because the will has been signed.
It generally comes into existence only after death, once the estate is administered and assets are transferred to the testamentary trust. So a will signed before July 1, 2028, does not necessarily grandfather the testamentary trust.
Signing the will before then probably does not save a discretionary testamentary trust if the will-maker dies after that date. Unless the final legislation says otherwise, the safer assumption is that a newly created discretionary testamentary trust after July 1, 2028, will be subject to the 30 per cent minimum tax.
Everyone should review their estate structures regularly. The important carve-out appears to be for fixed trusts, so you may want to consider those as options in your will, as testamentary trusts are usually discretionary trusts.
I have just read your latest remarks about the budget changes and wonder whether you may have made a mistake in the example about Jane, who bought an investment property for $800,000 in July 2022 and then sold it in July 2032 for $1.6 million. After all the adjustments, she made a taxable gain of $485,700, on which tax at 47 per cent was $228,579.
You have used the tax rate of 47 per cent when I understood that the new tax rate for CGT would be 30 per cent, irrespective of your personal tax situation. This would result in a tax saving of $42,290 for a person on the higher tax rates. This same 30 per cent rate would, of course, be detrimental to those on lower personal tax brackets.
I hate to be the bearer of bad news, but this is not how the system will work. My example came straight from the Treasury paper. Using what the department calls “ATO tools”, she discovered the asset was worth $1,131,400 on June 30, 2027, when the transition came into effect. The gain was then apportioned between the value from purchase price to then, and then to sale date
The 30 per cent you mentioned is the lowest rate of CGT applicable and assumed by Treasury that she was on the top marginal tax rate at the time, as she was a high-income earner. If she had no other income, the whole amount of $228,579 would be added to her taxable income.
She would then be subject to a 47 per cent tax rate on the portion from $190,000 to $228,579 – the present top marginal tax rate. If she had had the property valued at June 30, 2027, and that value was more than the notional value, using the ATO tools, she would have paid less CGT.
I own investment properties and hope you can shed light on some queries I have. If I buy an established property, and it is making a loss, can those losses accumulate and then, when the property starts making a profit, can those losses be offset against the profit until all the losses are exhausted?
On capital gains, can the losses on an established rental property be added up over the years and claimed as a capital loss against any profit from the property when it is sold? In relation to trusts being taxed at 30 per cent, if the money is then distributed to the beneficiaries of the trust, can they apply the same principle as dividend imputation with shares and claim some of the tax back if their personal tax rate is lower?
If you buy an established property now and use negative gearing, you cannot offset your rental losses against other forms of income (such as salary) beyond June 30, 2027.
You can offset them against any profits you make on your other residential investment properties or use them to reduce a capital gain if you sell a residential property. If none of these apply the losses are quarantined to use in the future.
A minimum tax of 30 per cent on trust distributions means the 30 per cent paid by the trustee can be used by you to pay your tax but if not fully utilised it cannot be refunded. There are no imputation credits.
Noel Whittaker is author of Retirement Made Simple and other books on personal finance. Questions to: noel@noelwhittaker.com.au
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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Noel Whittaker, AM, is the author of Making Money Made Simple and numerous other books on personal finance.Connect via X or email.
