How to use the Greatest Tax Perk in Australia

Financial Autonomy - Blog
How to use the Greatest Tax Perk in Australia

Often when people think about making the transition from full time work to semi or complete retirement, there is consideration given to rejigging existing investments, whether to produce more income, reduce debt, or improve tax efficiency. But selling investments typically incurs capital gains tax and much of the planning work we do for our clients is thinking through how we can minimise this impact. There is however one asset that is totally exempt from the capital gains tax regime, and it’s frequently our clients most valuable or at least in the top three most valuable assets that they hold. That asset is of course is your home.

In Australia, residential property as an asset class has performed extremely well in recent decades spurred on by ever falling interest rates enabling new entrants to borrow more and more, bidding up prices. Consequently, many people who have owned their home for a decade or perhaps multiple decades have experienced very strong growth in the value of their property since they purchased it. Now were that growth experienced on an investment property or on a share portfolio, some portion of that gain would have to be paid to the tax office, likely somewhere between 15% and 25%. A home purchased 20 years ago for $300,000 and now worth $1.3 million, a not uncommon scenario on the East Coast of Australia at least, would have a capital gains tax bill of somewhere between $150,000 and $250,000 were it not for Australia’s greatest tax perk, the capital gains tax exemption on your primary residence. This is significant money that can have a meaningful impact on your life. So let’s take a look at a few interesting ways our clients are making the most of this incredibly generous tax break.


In the first scenario that I want to share, our client owned two investment properties plus her own home and was looking to retire. All three properties had some debt on them. After receiving rental income our client needed to come up with about $30,000 per year to continue as is. She had a good amount of super but not so good that it could afford to produce the amount of income needed to give her a comfortable retirement and also come up with this $30,000 a year to support her property holdings. Somehow, the debt needed to be reduced significantly to eliminate the need for this $30,000 per year shortfall.

Now the obvious thing to do would be to sell one or both of the investment properties, pay off their respective debts, use the remaining funds to clear the mortgage on her home, and any leftover can top up super. Whilst this would work, we determined that even if we spread the sales over two different financial years, she would be up for several hundred thousand dollars in capital gains tax. Now of course that’s a good problem to have. It means the properties that she purchased have increased in value considerably over time. But it’s still a significant leakage from her personal wealth, and it has an impact on the quality of her retirement.

Thinking about Australia’s greatest tax break, we explored whether she could instead sell the home that she is living in. This has also seen significant capital appreciation but in selling this property there is no tax payable. We determined that she could clear all debts upon the sale of this property and leave around $200,000 available to renovate one of her investment properties and move in. This meant she went from having three properties to two, one of which she would live in, and one of which would be rented out. The remaining rental property would now throw off cash flow, assisting meet her retirement income needs, and her superannuation can top up that retirement income. Her long-term outlook was improved considerably through adopting this approach.

In the next scenario I want to share, my clients had a home in the suburbs and for a long time had owned a pretty basic holiday house near the beach. The building wasn’t much, but the location was great. In retirement, they decided they’d like to move down to this seaside location, but the existing house was not suitable as an everyday home.

They had owned their home in the suburbs for about 30 years and experienced very significant capital appreciation, in line with Australian residential property broadly. Through selling that property, and keeping all the gains due to the capital gains tax exemption, they were able to knock down the holiday home, and build a completely new, beautiful home with views of the ocean, in which they can enjoy the rest of their days.

Were the money used to fund the new house build sourced from any other investment, the tax man would have taken a chunk before they got anywhere.

The third scenario that I wanted to share with you relates to a hardworking couple who had built up a portfolio of five investment properties whilst also owning their own home. There was debt across all the properties, indeed it could be argued that they were a little stretched. They had retirement plans for about 7 years down the road and asked us to look at how that might unfold, and whether they were on track to produce the level of income that they were after to live an active and enjoyable later life.

Their plan had always been to sell off the investment properties at retirement, clear all the debts, and then dump the profits into superannuation, particularly for the wife as a bit of a catch up measure, and then live worry free. Whilst this was a valid approach, we identified that in adopting this strategy they would have to payout over $300,000 in capital gains tax.

So we worked up an alternative. The starting point was selling their primary home. One of their investment properties would become their home in retirement. We would sell one investment property to help with debt reduction but we could choose the one with the least capital gains tax implications, and sell it after they had both retired so they had minimal other income which resulted in the lowest possible amount of tax payable. The remaining investment properties still had some debt however cash flow was comfortably positive, assisting them in their retirement. The expectation is the remaining investment properties will be slowly sold throughout their retirement, and while some capital gains tax will be payable at these times, by spreading it out and incurring these gains in years where other taxable income is low, they will be able to minimise the tax impact, thereby maximising their wealth and retirement income generating potential. It also means they can spread the exits across the market cycle.

Before I wrap up this episode just one other useful rule around your primary residence. It’s known as the six year rule. If you own a home and you move out for a period, perhaps you get an overseas posting through your work. Even though that property will be income generating for a period of time, so long as you don’t buy a new primary residence, and you’re not away for more than six years, the property will continue to be fully exempt from capital gains tax under the principle residence provisions. This can provide some great flexibility, particularly for those looking to have some international experience in their career. One to have up your sleeve.

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