Will a spouse with no taxable income have to pay under Albanese government Budget changes?
My wife does not need to file a tax return because her annual income is less than $10,000 and consists entirely of bank interest and stock dividends. We do not qualify for age pension due to my taxable defined benefit pension. Under the proposed capital gains tax changes, am I correct in thinking that if he sells shares after June 30, 2027, he may have to pay the new 30 percent minimum tax on capital gains even though his income is so low? This doesn’t seem very fair.
You are right. This is unfair and another example of unintended consequences from the budget. Because your defined benefit pension does not make you eligible for age pension, your wife cannot benefit from the pension exemption on offer, despite having almost no taxable income.
As a result, it will still be able to pay the new 30 per cent minimum tax on capital gains made after June 30, 2027, and will effectively benefit from both the tax-free threshold and the 16 per cent tax bracket.
If the shares have been owned for many years, the gain will be split between the periods before and after June 30, 2027, but the calculation will be much more complicated. It would be sensible to seek advice on whether it would be beneficial to sell before that date.
If either of you is under 75, it may also be possible to contribute the income to a pension fund as a non-concessional contribution where future earnings and earnings would generally fall outside the recommended guidelines.
I have an investment property that I purchased in 2004 for $250,000. What if I appraise it at $850,000 on June 30, 2027 to establish the cost basis, and then sell it for $850,000 or even $800,000 in 2028? This seems like a realistic possibility as property prices appear to be falling at the moment. Accrued capital gains through June 30, 2027 will be approximately $600,000, leaving approximately $300,000 in taxable gain after applying the 50 percent deduction.
However, from July 1, 2027, taxable earnings are based on index increases. However, if the sales price is not higher than the June 30, 2027 valuation, no profit or capital gain will occur after July 1, 2027, and even a loss may occur. Under these circumstances, how will the property be taxed from July 1, 2027?
BDO’s Mark Molesworth says you have two capital gains tax calculations on the sale. The first is earnings until June 30, 2027. This gives rise to a “deferred gain” of $600,000 at that date before CGT relief is applied, as you point out.
You then make further calculations regarding the gain or loss from July 1, 2027 to the date of sale. In this case, considering the lower potential sales price of $800,000, there is a capital loss of $50,000 for this period.
It is assumed that both of these results are achieved in the year in which you sign the contract to sell the property. So you will have a gain of $600,000 and a loss of $50,000.
Assuming this was the only asset sold that year that gave rise to CGT consequences, the $50,000 post-30 June loss would reduce the $600,000 pre-30 June gain. This would result in deductible gain of $550,000 after the application of losses and taxable gain of $275,000 after the application of CGT relief.
You’ll pay taxes at your marginal rate on this $275,000 in earnings. Since there is no gain component after June 30, the minimum 30 percent tax rate rule will not apply.
I am a 75-year-old retiree who lives alone in my own home and receives a full-age pension. My house is worth about $1.2 to $1.3 million and I have $265,000 in retirement savings. I have three children: a 42-year-old son who is about to get married, a 38-year-old daughter with a husband and a three-year-old child, and a 36-year-old single daughter.
My 38-year-old daughter suggested tearing down my house and rebuilding it as a multi-generational home so her family could live with me and care for me as I got older. I like the idea, but I also want my inheritance to be divided equally between my three children and I worry that this arrangement could cause problems or create a perception of injustice. I also considered building a duplex or deeding some of the land to my daughter so she could fund the project. What issues should I consider before doing anything, particularly regarding old age pensions, taxation, property, estate planning and ensuring that all three children are treated fairly?
My first reaction is: don’t do it. Based on the information you provided, this suggestion creates many more problems than it solves. It entangles your finances, your home, your estate planning, and your family relationships in ways that can be difficult and expensive to unravel.
You live independently, are financially secure and receive a full age pension. I wouldn’t even consider such an arrangement without detailed legal, tax and financial advice.
The first problem is affordability. Demolishing and rebuilding is expensive; a duplex would require significant costs, council approval and inevitable delays.
Transferring part of your property to your daughter may also affect your age pension under withdrawal rules. This will also make property, estate planning, and equitable distribution of your assets among your three children more difficult.
I have seen many situations where an adult child offers to build on family property in exchange for caring for his or her aging parent. Some succeed, but most do not. Circumstances change, expectations differ, and family disagreements can easily arise.
I would leave everything as is unless your circumstances change. Your children should make their own housing decisions, and if you need care later, you can consider the options available without complicating your finances and estate planning.
I recently read your comments regarding minimizing capital gains tax when transferring shares to children. My wife and I are self-funded retirees with very little taxable income. I was wondering if we could sell our shares when our taxable income is low, pay the resulting capital gains tax, and buy them back immediately. This will ensure that the cost basis of the shares is much higher; so when our children inherit them after our death, future capital gains tax will be much lower. Are there any flaws in this strategy?
Your strategy may work, provided the sale is real. Selling shares, paying any capital gains tax at your current lower tax rate, and then buying them back resets the cost basis to the new purchase price. This can significantly reduce the capital gains tax your children may pay if they inherit the shares.
The important thing is that the sale must be made for a genuine business purpose and not merely as a tax avoidance arrangement. The ATO may object to so-called wash sales, where an asset is sold and bought back primarily for the purpose of obtaining a tax advantage. Get expert advice before continuing. It may be easier to buy similar assets, but not identical ones.
Noel Whittaker is the author of: Retirement Made Easy and other books on personal finance. Questions: noel@noelwhittaker.com.au
- The advice given in this article is general in nature and is not intended to influence readers’ decisions about investments or financial products. They should always seek their own professional advice, taking into account their personal circumstances, before making any financial decisions.
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Noel Whittaker, AM is the author of Make Money Made Simple and numerous other books on personal finance.Connect with: X or email.
