Budget tax changes spell end for tried-and-true retirement plans

The tax changes announced in May’s federal budget are set to affect a broad swathe of Australians, including those who are planning for their retirement.

“They are the biggest changes I have seen in my 25 years as an advisor, and for pre-retirees, they mean that many of the tried-and-true strategies no longer apply,” says Sam Kitchen, director of Secured Wealth.

While some of the measures, such as the abolition of negative gearing for most properties, apply only to investments made after budget night, other changes, such as the new capital gains tax regime, will impact historical investments, too.

Not all the proposed changes have yet been finalised, Kitchen notes. “The proposed rules regarding trusts, for example, have not been legislated, and have changed since they were first announced,” he says.

But there is plenty pre-retirees can do now to prepare for the new regime. “Retirees still have options, and understanding the breadth of those options sooner rather than later is the smartest thing you can do,” Kitchen says.

Capital gains tax changes

From July 1 2027, the 50 per cent capital gains tax (CGT) discount on sold assets will be replaced with cost-base indexation (for example adjusting the purchase price for inflation) and a 30 per cent minimum tax rate on real capital gains.

For those approaching retirement, it means some common tax-minimisation strategies are no longer valid, Kitchen says.

“For example, in the past, we would build a portfolio of exchange traded funds, then draw down on those funds in retirement. This would result in the client paying less tax. However, with the minimum CGT rate of 30 per cent, those days are gone.”

If you hold assets, such as property, that you were planning to sell in retirement, the new rules don’t necessarily mean you should rush to offload them before July 1 2027, notes William Buck wealth advisory partner Scott Montefiore.

“Now more than ever, maximising your super balance prior to retirement makes financial sense.”

William Buck wealth advisory partner Scott Montefiore

“The new rates only apply to capital growth that accrues from July 1 2027, so if you’ve held an asset for many years, any historical capital growth will be taxed under the old rules,” he says. “There is no mad rush to sell.”

That said, Montefiore suggests pre-retirees with a portfolio of assets seek personalised advice sooner rather than later. “For many, the common strategy of selling assets progressively during retirement will change under these new 30-per-cent-minimum rules,” he says.

He recommends anyone holding substantial assets obtain an accurate valuation of them as of June 30 2027. “That will lock in a valuation that the old CGT rules can be applied against, and the new rules will only apply to growth after that date.”

New rules for trusts

The government is also proposing a 30 per cent minimum tax rate on income distributed through discretionary trusts – a common vehicle for retirees – from July 1 2028.

If passed, the changes would not be grandfathered, meaning the new tax rate would apply to all relevant trusts, not just those established after July 1 2028.

Under the current regime, recipients of income from such trusts are taxed at their marginal rate, which can be as low as zero for retirees.

Montefiore says the proposed changes could fundamentally alter the way pre-retirees and retirees manage their cash wealth. However, he recommends a wait-and-see approach.

“This legislation is still a work in progress,” he says. “If we look at the recent changes to superannuation [that reduced tax concessions for balances over $3 million], for example, what was proposed was quite different to what was eventually implemented.”

Super to the rescue

For Australians still in the wealth-accumulation stage of life, the government’s changes make superannuation an even more attractive investment method, Kitchen says.

“These changes make superannuation sexier. Why? Because the effective tax rate on superannuation gains after 60 can be as low as zero, while other capital gains will be taxed at a minimum of 30 per cent.”

Affluent Australians may still find alternative investments attractive, Kitchen notes, particularly if their super balances exceed $3 million, at which point the tax on earnings increases.

“A popular choice in those cases is investment bonds, which provide exposure to the stock market and a tax rate of 30 per cent,” he says.

Superannuation has emerged as the clear winner from the government shake-up, Montefiore says. “Now more than ever, maximising your super balance prior to retirement makes financial sense.”

• 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 personal circumstances before making any financial decisions.

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Dan F Stapleton writes on First Nations issues, visual art, property and more. His writing has appeared in The New York Times, the Financial Times and others. He is based in Sydney.