The Age Pension Detail Hiding in the Budget's CGT Changes
Most of the conversation about this year's Federal Budget has centred on negative gearing, the new capital gains tax (CGT) rules due to start on 1 July 2027, and the changes affecting discretionary trusts. One detail has had far less airtime, but it could matter a great deal to clients approaching or already in retirement.
What's changing
Under the proposed CGT rules, gains on investments would generally attract a minimum effective tax rate of 30% once the new regime applies from 1 July 2027. For many investors, this could mean paying more tax on a capital gain than they would under today's settings.
The exception for pensioners
Here's the part that hasn't had much attention: anyone receiving an income-tested government payment (including the Age Pension, even a partial entitlement) in the year they realise a capital gain is expected to be carved out of the new minimum tax rule. Their gain would instead be taxed under the standard marginal rate rules that already apply today.
This matters because a large number of retirees who could technically qualify for at least a small Age Pension payment choose not to apply. Some see it as unnecessary if they can fund their own retirement; others simply haven't looked into it. Under the proposed rules, that decision could carry a real cost.
Why it's worth a second look
Consider a retiree who plans to sell a share portfolio to help fund a move into aged care, or simply to rebalance their investments after 2027. If they aren't receiving any Age Pension in the year of sale, the new minimum tax of 30% could apply to the gain. If they are, even for a small fortnightly amount, the sale may instead be taxed more favourably under marginal rates, which for many retirees could translate into a noticeably smaller tax bill on exactly the same transaction.
Beyond the tax outcome, an Age Pension entitlement, even a partial one, can also open the door to a Pensioner Concession Card and associated cost-of-living benefits, adding further value on top of any tax saving.
A simple worked example helps show the difference. Ida is selling $50,000 worth of shares she has held for many years to help fund a move into aged care, and has no other taxable income for the year. Of the $50,000 in proceeds, $30,000 represents a capital gain.
Without an Age Pension entitlement, the gain would be taxed at the proposed minimum rate of 30%, resulting in $9,000 in tax and net proceeds of $41,000. If Ida instead receives even a part Age Pension, the carve-out means her gain is taxed under ordinary marginal rates: the first $18,200 is tax-free, and the remaining $11,800 is taxed at 17% (including the Medicare levy), for tax of $2,006, leaving net proceeds of $47,994. That's an extra $6,994 in Ida's pocket, purely as a result of holding an Age Pension entitlement in the year of sale.
What to do about it
If you're approaching retirement, hold assets that may realise a gain in coming years, or simply haven't checked your Age Pension eligibility recently, now is a good time to revisit it, well ahead of the 1 July 2027 start date. It's also worth starting to keep clear records of your cost bases, including asset values as at 1 July 2027, since these will matter more under the new rules.
The final shape of these changes is still being settled, and the interaction between social security and tax rules can be more nuanced than it first appears. As always, we're here to help you work through what it means for your specific situation, please get in touch if you'd like to talk it through.
This article is general in nature and does not take into account your personal objectives, financial situation or needs. Please speak with us before making any decisions based on this information.
