Dodging tax is different to dodgy tax, and retiring Australians have plenty of great legal ways to avoid paying the taxman. Previous federal governments have been generous when it comes to retirees and tax, and there’s a growing chorus of people claiming they get it too good.
Before the rules change, here are five legal tax dodges that every retiree or person planning retirement should know about.
Australia’s super system is a smorgasbord for savings on the tax front, starting with low taxes while it’s building up and zero tax on earnings and withdrawals for most people once they retire.
Advisers have developed clever strategies, including shifting assets such as shares and property into self-managed super funds early to avoid tax in retirement, and reducing income tax sharply for older workers using the transition to retirement rules.
2. TAX OFFSETS
There’s a lot of tax-free income up for grabs outside superannuation.
Middletons Securities director David Middleton says the tax free threshold for all people of $18,200 can be combined with the government’s senior and pensioners tax offset to allow a single person to earn $38,000 and a couple to earn $58,000 without paying tax.
“People are not making enough use of it,” he says. The seniors and pensioners tax offset has income, age and pension eligibility requirements, and the Australian Taxation Office has a free calculator at ato.gov.au.
3. SHARE DIVIDENDS
Most quality Aussie shares pay dividends that come with an attached tax credit for the 30 per cent company tax the business already paid. For workers this helps to offset or negate income tax payable on their dividends, but for retirees and super funds it means an extra tax refund.
You don’t have to fill out a tax return to claim back this money — known as franking credits. The ATO has an online form for people to fill out.
4. CUT CAPITAL GAINS
Capital gains tax can hurt retirees because of its lumpy nature. Selling a wad of shares or an investment property pushes all the profit into one year, which can create a hefty tax bill and cause havoc with some government income tests. “Capital gains in your own name can mean you end up losing the health card if you get too much,” Middleton says.
Using superannuation wisely can cut CGT to zero, and a strategy to sell investments gradually during retirement often makes more sense.
A family home is free of capital gains, and doesn’t count towards the age pension asset test, making it an increasingly popular place to store wealth.
5. SMALL BUSINESS BENEFITS
UHY Haines Norton director James Tng says 1.4 million business owners are looking to exit shortly, and there are big tax benefits up for grabs.
“The GFC a few years ago made people put their retirement plans on hold, but now more are looking at retirement,” he says. A range of small business tax concessions can allow a business to be sold without the owner being slugged any capital gains tax if they meet the correct criteria.
“Start your planning now because there are ways to restructure,” Tng says. Middleton says tax planning is important well before you turn 65. “Have a strategy going in that final five years before retirement.”