Recent news articles have floated the idea some retirees might try to sidestep the government’s new minimum capital gains tax (CGT) by qualifying for as little as A$1 of the age pension.
That’s because under the government’s proposed tax reforms, people on certain income support payments, including the age pension, would be exempt from the new 30% minimum tax on capital gains.
The reforms are now under scrutiny in the Senate. If passed, from July 1 2027, they would mean pensioners in receipt of support payments would continue to have capital gains taxed at their marginal rate – which for some people would be lower than 30%.
The question then becomes: could retirees restructure their affairs, qualify for a pension and avoid the new tax? Or is this another example of a technically possible strategy that’s unlikely to be practical in the real world?
How hard is it to qualify for the pension?
The age pension is subject to both income and assets tests. Collectively, these are known as “means tests”.
There are different thresholds for singles and couples in different circumstances. But broadly speaking, the more assets you own or income you have, the less pension you receive until the payment cuts out altogether.
This creates an immediate problem for many pensioners who may have hoped to use this new “capital gains” minimum tax exemption. A capital gain is the profit you make when you sell an asset (such as a company share or a property) for more than you paid for it.
For many retirees, the very asset they hold or intend to sell may be large enough to prevent them from even qualifying for an income support payment, such as the pension.
And unless a specific exemption applies – such as for the main home they live in – trying to dispose of this asset to qualify would trigger the capital gains tax they may be trying to minimise.
How much could someone really save?
For many retirees, the actual benefits of this strategy would be less than some news headlines have implied.
The proposed exemption removes the 30% minimum tax floor. This minimum tax matters most when a person’s other income is low. Under current tax rates, income that exceeds $45,000 is already taxed at at least 30%.
That means the exemption is most valuable to a relatively narrow group of taxpayers: people with low incomes, but meaningful capital gains.
Some retirees in this position could achieve genuine savings. But the people most likely to enjoy very large capital gains are often the same people least likely to satisfy the pension means test.
Richard Sagredo/Unsplash
How it could work
Let’s look at a simplified example comparing two retiree neighbours in the future, ignoring offsets and the Medicare levy.
The proposed changes will come into force from July 1 2027, so for this example, we will use the new tax rates set to come into effect from that date.
The first retiree is eligible for $1 of pension income and, in the same year, also has a capital gain of $44,999.
Under the 2027-28 tax rates, income between $18,201 and $45,000 will be taxed at 14%. Income below $18,201 will be tax-free.
In this example, the first neighbour’s entire $44,999 gain sits within that 14% tax bracket or else below the tax-free threshold. That means the gain and other assessable income would attract tax of about $3,752.
Now let’s look at their next door neighbour. They have the same total income – $45,000 – but all of that is from their capital gains, and they’re not on the age pension.
This means they could face the new 30% minimum tax on that gain. On a $45,000 gain and assuming no other income, that would be $13,500 in tax.
So the person on the pension would be better off than their neighbour by $9,748 in this simplified example.
But here’s the catch – and why this example isn’t likely to be a common one. To have such a significant capital gain, you would typically need to hold significant assets. That makes you far less likely to qualify for the pension in the first place, because of the means test.
In other words, the group wealthy enough to benefit most from this proposed exemption will often be too wealthy to access it. This loophole tends to narrow itself.
What safeguards already apply?
There are other important safeguards in place to stop people gaming this system. Services Australia regularly reassesses eligibility for entitlements.
The rules also make it difficult to simply give assets away (such as to children) to qualify.
And Australia’s general anti-avoidance provisions remain in place. These give the Australian Taxation Office commissioner the power to cancel any benefits arising from an arrangement, if an investigation determines taxpayers have entered into it primarily to obtain a tax benefit.
The bottom line
So is it really worth getting on the pension just to avoid Labor’s new capital gains tax?
While some people might try, it’s harder than you might think, due to the combination of strict means testing, plus rules that stop you giving assets away to become eligible for the pension.
Will large numbers of retirees successfully restructure their affairs to exploit the exemption? Given these hurdles involved, that seems far less likely than the headlines imply.
Getting $1 of pension and avoiding the new tax makes a great headline. Turning it into a practical strategy is another matter entirely.
Disclaimer: This is not tax advice, it is for educational purposes only. Taxpayers should seek advice from a registered tax agent or suitably qualified professional.
