Free Australian Tax Gifts

Slack Investor was taught to appreciate gifts and … who doesn’t get a little bit excited when they encounter free stuff. Australia offers many lifestyle advantages to those who live here. The Australian Government also offers a few financial tax gifts … for free!

Capital Gains Tax

A capital gains tax is usually applied to the profit made from selling an asset (usually property or shares). The tax can be seen as a reasonable part of the Australian income tax system (personal earnings + business earnings + capital gains). The tax is applied in the tax year of the capital gain at your marginal tax rate – although there is a 50% concession for assets held more than 12 months.

Your own home – A ‘Partial Tax’ Gift

Slack Investor is across the difficulty of owning your own home these days – yet, it is one of the major financial goals to achieve before retirement.

There is no tax for any capital gains on your principle residence in Australia. As those lucky enough to be in the property market, tend to change houses every 11.3 years (9.6 years for units), there are opportunities to passively increase your property stake without incurring any Commonwealth taxes.

However, the cash strapped state governments have got their hands on this free gift by applying Stamp Duty (Tax) to property purchases. These stamp duties can be substantial, For a $700K dwelling , a non first home buyer will pay around $25K (NSW, Vic, Qld, Tas), and over $30K in some states/territories (SA, NT).

Your Super after 60 – A ‘Solid Gold’ Tax Gift (for now)!

For most people, an income stream from superannuation will be tax-free from age 60 – _{MoneySmart.gov.au}

Contributions and the earnings of your super fund are usually taxed, though this may be at a concessional rate. While saving your superannuation, it sits in an Accumulation account. When you retire, you can transfer some (or all) of that money into Retirement phase – an Account-based Pension. For FY 2025, the ATO have set a transfer balance cap (TBC) (limit) of $1 900 000 that can be transferred into retirement phase and remain tax free.

Up to the TBC limit – all earnings (Dividends, Distributions, Capital Gains) from your retirement phase Account-based pension are not taxable – This is a great gift to retirees!

Using the Super Balance Detective calculator from Superguru, you can see exactly how your super balance is tracking. ABC News have an excellent article How does my super compare to others? where references are made to the ASFA ‘comfortable retirement’ standard. All of these sources were used to make the following chart to measure how your current super balance measures up for retirement.

The Red line was generated as a track towards a $1.9m super balance at retirement. Although the red line super numbers are, admittedly, ‘heroic’. Readers of Slack Investor would always like to aim high for an independent retirement – and try to get at least towards the $1.9m in super at retirement that will maximize this tax-free gift.

Thanks to compulsory super, people with a solid employment history will be on track to have a super balance for a ‘Comfortable’ retirement (Yellow Line). This comfortable retirement definition assumes that you own your own home and have access to the full (or part) aged pension.

Using the 4% rule, a $1.9m super balance at retirement will generate a $76 000 tax free income each year. This would be a ‘Very Comfortable’ retirement – but there may be a few changes in the wind.

But Wait … Division 296

This all sounds too good to be true … You’re right! The legislators are coming after this gift.

The Australian government is considering a very muddled legislation known as Division 296 – which aims to target large superannuation balances. They reference Total Superannuation Balance (TSB) for this proposal. The sum of any accumulation accounts plus any pension accounts. The legislation is currently held up in the senate.

Division 296 tax is imposed at a rate of 15 per cent on a percentage of earnings equal to the percentage of superannuation balances that exceed $3 million – _{treasury.gov.au}

The concept behind this is very reasonable. Slack Investor doesn’t object to the idea of tax on large super balances. Super should ultimately be all about funding your own retirement – and not be used as a tool to preserve wealth for your estate.

However, in a sensible world, some amendments to the current form of the bill should be made. They include:

• The $3 million threshold for the application of Division 296 needs to be indexed
• In its current form, Division 296 unusually proposes taxation on unrealised gains – rather than being based on the actual taxable income. This is a first for the Australian tax system – it does not make sense and needs to be rectified.