The capital gains tax in Australia is levied on the profit made from selling or disposing of a capital asset.
This is true for most assets, but not for all. There are some exemptions and certain conditions that need to be met before you can even think about paying taxes on your assets in this country.
Let’s take a closer look at the subject: when do retirees pay capital gains tax?
Do retirees pay capital gains tax in Australia?
First of all, it is important to know that when you sell an investment after holding it for more than one year you will pay only half the taxes (this is called 50% CGT discount but if you sell shares that were part of an investment you held for less than 12 months -called “short term”- then you’ll pay the full tax).
The following assets are exempt from capital gains tax:
- One property that is your principal residence
- Personal belongings (personal items like jewellery, artworks, etc.)
Retirees may be surprised to learn that while they are no longer earning an income, the Australian Taxation Office (ATO) still wants their money. However, many retirees fail to realise how much taxation is taken from their savings and investments until it is too late – by which time, the ATO has already received a significant amount of money.
Retirees who do not understand the concept of capital gains tax can easily make costly mistakes when filing their annual returns. Retiree mistakes are made all the more likely because retirement-aged individuals commonly rely on accountants or other financial advisors for assistance with their tax filings.
Unfortunately, these professionals are not always equipped to provide advice regarding CGT.
For example, a recent survey found that while 86 per cent of accountants may be familiar with the basics of CGT, only 5% were aware of the existence of the ‘CGT relief’ rules. It is, therefore, no surprise that many retirees are unaware that they can claim full or partial exemption from capital gains tax on investments held for more than 12 months.
In some cases, retirees may even be exempt from paying capital gains tax on certain assets completely – either permanently or for a short period – due to a variety of systemic exemptions. Even if a retiree is not exempt from all forms of taxation on their investment returns, they still have the potential to lower their overall tax burden through planning and good record keeping.
A 2006 Australian Tax Office (ATO) report on CGT exemptions found that 83% of all capital gains tax claims in 2003-04 were residential properties purchased before 20 September 1985. The same study revealed that only 3 per cent of taxpayers claimed they purchased their property to invest.
This suggests that most homes purchased before this date were intended for use as long-term dwellings, rather than assets subject to capital gains tax.
The ATO has also identified several other common areas where retirees may be less likely to understand the tax implications associated with them. These include:
- Income from shares
- Bonus amounts paid by super funds
- Rental income
- Proceeds from insurance policies
Readers who believe they may be exempt from capital gains tax should seek the advice of a suitably qualified accountant or financial advisor.
Retirees can reduce or eliminate their exposure to capital gains tax by implementing good record keeping and asset management practices: Invest in assets that have low growth and low risks, such as cash and term deposits; · Only take out an income that is less than the amount earned through investments and Ask advisers to review all fees before signing any contracts.
While retirees need to make sound investment decisions to maintain their lifestyle, it is also important for them to do so in such a way that ensures maximum returns while limiting exposure to unnecessary taxation.