For many Australians approaching retirement, a common tax strategy has been to defer the sale of investment assets until employment income falls. The logic is straightforward: if salary and other taxable income are lower in retirement, a capital gain realised after retirement may be taxed at a lower marginal rate.

That strategy can still be relevant after the capital gains tax changes applying from 1 July 2027, but the outcome will be more complicated than simply waiting until retirement.

The key issue is that a capital gain is itself included in taxable income. A sufficiently large gain can push a retiree back into the higher marginal tax brackets even if they have no employment income at all.

The new rules also change the way capital growth accruing after 1 July 2027 is calculated and taxed. For investors who already own highly appreciated assets, particularly property, there will effectively be two different CGT regimes applying to the same asset.

This makes record keeping, valuation and the timing of future sales increasingly important.

A typical retirement scenario

Consider an investor aged 64 who intends to retire after 1 July 2027.

They own a holiday home that was purchased 20 years ago for $500,000 and is expected to be worth approximately $1.5 million at 1 July 2027.

Assume:

• the property is owned solely by the investor;
• it has never qualified for the main residence exemption;
• there are no carried-forward capital losses;
• the $500,000 represents the relevant cost base, including recognised acquisition and capital improvement costs; and
• the property has been held for more than 12 months.

At a value of $1.5 million, the unrealised capital gain at 1 July 2027 is approximately $1 million.

Under the transitional rules, growth that accrued before 1 July 2027 remains subject to the existing CGT regime.

For an eligible individual, this means the pre-1 July 2027 gain can continue to benefit from the existing 50% CGT discount.

If the full $1 million gain were attributable to the pre-2027 period, the taxable capital gain would be approximately $500,000 after applying the discount.

It is important to distinguish between the taxable capital gain and the actual tax payable.

The $500,000 is not the tax bill. It is the amount that would generally be added to the investor’s taxable income in the financial year in which the property is sold.

Why retirement does not necessarily mean low CGT

One of the most common misunderstandings around CGT is that retiring before selling a major asset will automatically result in a low tax bill.

That can be true for relatively small gains, but it becomes much less effective once the gain itself is large.

If an investor retires and has little or no salary income, the first portion of their taxable income may benefit from lower marginal tax rates. However, a large capital gain can rapidly move them through the lower tax brackets and into the higher ones.

For example, a taxable capital gain of $500,000 would itself create substantial taxable income in the year of sale.

Even with no salary income, a significant proportion of that taxable gain would therefore be taxed at higher marginal rates.

The tax system remains progressive, so the whole gain is not taxed at the top marginal rate. However, once taxable income reaches the upper brackets, the marginal rate applying to the top portion of the gain can be high.

This means that retiring before selling a large investment asset may still reduce tax compared with selling while earning a high salary, but the benefit may be much smaller than expected.

The size of the gain matters more than salary income

For large investment assets, the amount of the capital gain can be more important than the investor’s employment income.

An investor could retire with no salary, no business income and relatively modest investment income, but still generate a very high taxable income in the year a major asset is sold.

This is particularly relevant for people who own:

• investment properties;
• holiday homes;
• commercial property;
• long-held direct shares;
• concentrated shareholdings;
• private companies;
• business interests;
• managed investments with significant unrealised gains; or
• land acquired many years earlier.

Where an asset has appreciated substantially over a long period, the year of disposal can effectively become a high-income year regardless of whether the investor is otherwise retired.

This is why retirement timing and CGT timing should be modelled together rather than considered separately.

How assets held across 1 July 2027 will be treated

Assets held both before and after 1 July 2027 will need to be considered in two parts.

Broadly, the total economic gain will be divided between:

• growth accumulated up to 30 June 2027; and
• growth accumulated from 1 July 2027 onwards.

The pre-2027 component remains subject to the existing CGT rules.

The post-2027 component is calculated under the new regime.

This transitional treatment is important because it means the existing 50% CGT discount is not retrospectively removed from growth that has already accrued before the new rules commence.

For investors who have owned an asset for many years, a large part of the accumulated gain may therefore continue to receive the benefit of the current system.

Pre-1 July 2027 growth

Under the existing regime, an individual who has held an eligible asset for more than 12 months is generally entitled to reduce the relevant capital gain by 50% before including it in taxable income.

Using the earlier example:

• original cost base: $500,000;
• value at 1 July 2027: $1.5 million;
• pre-2027 capital gain: $1 million;
• 50% CGT discount: $500,000;
• taxable amount attributable to the pre-2027 gain: approximately $500,000.

The value of the asset at 1 July 2027 therefore becomes a critical reference point for future calculations.

Post-1 July 2027 growth

Growth occurring from 1 July 2027 is treated differently.

The new system effectively uses the asset’s value at the commencement of the new regime as the starting point for the post-2027 component.

That starting value is then adjusted for inflation.

When the asset is eventually sold, the taxable post-2027 gain is broadly the amount by which the sale proceeds exceed the inflation-adjusted value.

The new approach is therefore designed to tax the real increase in value above inflation rather than automatically applying a 50% reduction to the nominal gain.

Why inflation becomes important

Under the existing system, the 50% discount does not depend on inflation.

Under the new system, inflation becomes central to the calculation.

This creates very different outcomes depending on how the asset performs relative to inflation.

For example, if an asset grows slowly and much of the increase merely reflects inflation, the taxable post-2027 gain may be relatively modest.

If the asset grows substantially faster than inflation, a larger portion of the post-2027 gain may be taxable.

The practical result is that the new system may produce:

• a more favourable outcome for assets with relatively low real growth; and
• a less favourable outcome for assets with strong growth substantially above inflation.

This will vary significantly between asset classes and individual investments.

Example of post-2027 growth

Assume the holiday home is worth $1.5 million at 1 July 2027 and is eventually sold several years later for $1.9 million.

The nominal post-2027 increase is $400,000.

However, the taxable amount would not simply be the full $400,000.

The 1 July 2027 starting value would first be adjusted for inflation over the period of ownership.

If inflation increased the indexed value from $1.5 million to, for example, $1.65 million, the real gain above inflation would be approximately $250,000.

That $250,000 would then form the relevant post-2027 taxable gain, subject to the detailed operation of the legislation.

The exact amount will therefore depend on:

• the asset’s value at 1 July 2027;
• the eventual sale price;
• the length of time the asset continues to be held;
• the inflation adjustment over that period; and
• any other relevant cost-base or legislative adjustments.

The 30% minimum tax treatment

A major change for post-1 July 2027 capital gains is the introduction of a minimum tax rate of 30% on the relevant post-2027 gain.

This is particularly important for retirees.

Under the current system, an investor may attempt to realise gains after retirement because their taxable income has fallen and lower marginal tax rates are available.

The minimum 30% rate reduces that advantage for the post-2027 component of a capital gain.

The rate is a minimum rather than a flat rate.

This means that if the investor’s marginal rate is higher than 30%, the higher rate can still apply.

The 30% rate therefore does not cap the tax payable.

Why this matters in practice

Consider an investor who retires and has almost no other taxable income.

If they realise a relatively modest post-2027 capital gain, the minimum tax rate may mean that the benefit of using the tax-free threshold and lower marginal rates is reduced or eliminated for that portion of the gain.

If the same investor also realises a large pre-2027 gain in the same financial year, the taxable pre-2027 component could already push them into a high marginal tax bracket.

In that case, the additional post-2027 gain may effectively sit on top of already high taxable income and be taxed accordingly.

For investors with large pre-existing gains, the minimum 30% rate may therefore be less significant than the broader issue of having substantial taxable income in the year of sale.

Determining the value at 1 July 2027

For assets held across the transition date, establishing the value at 1 July 2027 becomes a major planning issue.

This is particularly relevant for assets that are not continuously priced on a public market.

Examples include:

• residential property;
• holiday homes;
• commercial property;
• private companies;
• business interests;
• unlisted investments;
• rural property; and
• specialised assets.

Where an asset is publicly traded, such as an ASX-listed share or exchange traded fund, establishing a market value around the transition date should generally be straightforward.

For property and unlisted assets, the position is more complex.

A formal valuation may provide strong evidence of the asset’s market value at the relevant date and may be useful if the asset is not sold until many years later.

Why a formal valuation may be worthwhile

A valuation obtained close to 1 July 2027 may provide greater certainty around the division between the pre- and post-2027 components of the gain.

This can be particularly valuable where:

• the asset has already appreciated significantly;
• the asset is likely to be retained for a long period after 2027;
• there have been renovations or substantial improvements;
• comparable market evidence is limited;
• the asset is unusual or specialised;
• ownership records are incomplete; or
• the eventual sale price may be significantly higher.

A valuation may also assist executors, beneficiaries and advisers if the asset is later sold as part of an estate.

Apportionment versus valuation

Where transitional rules permit a choice between a valuation approach and an approved apportionment formula, the outcome may differ depending on the asset’s actual growth pattern.

A simple time-based formula may not accurately reflect how an asset appreciated.

For example, a property could have:

• grown very slowly for the first 15 years;
• experienced rapid appreciation in the five years before 2027; and
• then grown at a different rate after 2027.

A valuation at the transition date can potentially capture the actual market value at that point rather than relying on a mechanical allocation.

The appropriate methodology should therefore be considered carefully, particularly for high-value assets.

Cost-base records remain critical

The transition to the new rules does not reduce the importance of keeping accurate cost-base records.

For property, relevant records may include:

• original purchase price;
• stamp duty;
• conveyancing costs;
• legal fees;
• buyer’s agent fees;
• certain borrowing expenses;
• capital improvements;
• renovations;
• structural works;
• extensions;
• selling costs; and
• other eligible costs that form part of the CGT cost base.

Poor records can result in a higher taxable gain because legitimate cost-base additions may not be able to be substantiated.

For assets purchased many years ago, this can be particularly significant.

Investors approaching the transition date should therefore consider reconstructing missing cost-base records before the asset is eventually sold.

Selling after retirement can still be useful

Despite the changes, selling after retirement can still provide tax advantages in some circumstances.

The strategy may remain effective where:

• the capital gain is relatively small;
• other taxable income is low;
• disposals can be spread over multiple financial years;
• carried-forward capital losses are available;
• only part of the portfolio needs to be sold;
• there are deductible expenses or other tax offsets;
• superannuation strategies reduce other taxable income; or
• the investor has flexibility around the timing and sequence of sales.

The key difference is that it will be less appropriate to rely on the general assumption that retirement automatically means low CGT.

Each proposed disposal should be modelled individually.

Spreading asset sales across multiple years

For investors with multiple appreciated assets, one of the most important planning opportunities may be to avoid selling everything in the same financial year.

Selling several large assets at once can combine multiple capital gains and push taxable income significantly higher.

Where circumstances permit, spreading sales over different years may allow taxable gains to be distributed across multiple income years.

For example, an investor might:

• sell a share portfolio in one year;
• sell an investment property in a later year; and
• retain another asset for longer.

The appropriate strategy will depend on investment risk, liquidity needs, market conditions, estate planning and tax.

Tax should not be the only driver, but the sequencing of disposals can have a meaningful impact.

Capital losses become increasingly valuable

Capital losses can continue to be used against capital gains in accordance with the tax rules.

For investors with large unrealised gains, existing or future capital losses may therefore become an important planning tool.

Before selling a major asset, it may be worthwhile reviewing:

• carried-forward capital losses;
• underperforming investments;
• existing loss positions;
• the timing of loss realisation; and
• the interaction between losses and the pre- and post-2027 components of gains.

Capital losses should not be manufactured purely for tax reasons, but where an asset no longer has investment merit, the timing of its disposal may become relevant.

Ownership structures will matter

The tax outcome can also differ depending on how an asset is owned.

Relevant structures may include:

• individual ownership;
• joint ownership;
• discretionary trusts;
• unit trusts;
• companies;
• superannuation funds; and
• deceased estates.

An asset held jointly by two individuals may, for example, result in each owner recognising their share of the gain rather than the entire gain being assessed to one person.

Trusts may also have flexibility in the distribution of capital gains, although the taxation of trusts is complex and requires specific advice.

The structure should not be changed solely to obtain a tax advantage without considering stamp duty, CGT, legal ownership, asset protection and estate planning consequences.

Superannuation planning may also be relevant

For people approaching retirement, CGT planning should often be considered alongside superannuation contribution strategies.

The sale of an asset may create liquidity that could potentially be contributed to superannuation, subject to contribution caps, eligibility rules and the individual’s broader position.

Strategies may include:

• concessional contributions;
• non-concessional contributions;
• carry-forward concessional contributions;
• spouse contribution strategies; and
• contribution planning before and after retirement.

These strategies do not automatically eliminate tax on the capital gain itself, but they can improve the overall after-tax retirement position.

In some cases, concessional contributions in the same financial year as a capital gain may provide an additional deduction, subject to available caps and eligibility.

Estate planning implications

The CGT changes may also affect estate planning decisions.

An investor who originally intended to retain an asset for life may need to consider how the new rules interact with:

• deceased estate CGT rules;
• beneficiaries;
• testamentary trusts;
• jointly owned assets;
• main residence exemptions;
• inherited cost bases; and
• the timing of asset sales by an estate.

For highly appreciated assets, the future tax burden may become an important factor when deciding whether to sell during retirement or retain the asset for beneficiaries.

Practical steps before 1 July 2027

Investors with significant unrealised capital gains should consider taking several practical steps before the new rules commence.

These include:

1. reviewing all assets with substantial unrealised gains;
2. checking and reconstructing cost-base records;
3. identifying assets likely to be sold during retirement;
4. estimating the gain already accumulated before 1 July 2027;
5. considering whether a formal valuation is appropriate;
6. reviewing carried-forward capital losses;
7. modelling the effect of selling before and after retirement;
8. considering whether disposals can be staggered;
9. reviewing superannuation contribution opportunities;
10. assessing ownership structures;
11. updating estate planning where relevant; and
12. seeking tax advice before making major disposal decisions.

The key planning message

The capital gains tax changes do not mean investors must sell assets before 1 July 2027, nor do they eliminate the benefit of retiring before making certain disposals.

However, the new system makes the timing of large capital gains more complex.

For assets already held before 1 July 2027, growth accumulated up to that date remains subject to the existing CGT treatment, including the 50% discount where applicable.

Growth after that date will be treated under the new inflation-adjusted regime and may be subject to a minimum tax rate of 30%.

For investors with substantial unrealised gains, especially in property, the transition date creates an important planning point.

The focus should be on understanding how much of the gain has already accrued, preserving evidence of the asset’s value at 1 July 2027, maintaining accurate cost-base records and modelling the tax impact of different sale dates.

The most effective strategy may ultimately involve a combination of retirement timing, asset sequencing, valuation evidence, capital loss management, superannuation planning and broader estate considerations.

The key is to plan ahead rather than relying on the assumption that selling after retirement will automatically result in a low CGT liability.

If you would like to discuss how these changes may affect your retirement or investment strategy, please contact Cadre Capital Partners to arrange a discussion.