Economists at ANU have used a simulation model and other data to update the Australian Bureau of Statistics household wealth distribution. The ABS haven't done a detailed survey since the pandemic.
I am surprised by the high estimate net worth to be in the top 5% of 25-29 year olds!
Unless you are quite wealthy, not well organised or under 60, you shouldn't be paying any income tax in this phase of life. The following breakdown is based on my expected income and tax figures for the 2026-27 tax year.*
First, since transferring the maximum allowed into an "account based pension", I should get a tax-free pension of $81k per year. This is the minimum allowed distribution to maintain the tax-free status of my pension account. For my employer superannuation, that is as simple as just setting up a payment of $2,750 each month from the account. For our self-managed super fund (SMSF), I have to make sure I have enough cash in our Macquarie Cash Management Account to pay the $4,000 a month pension. Currently, I have around one year's worth of cash there. The SMSF will still be paying tax on Moominmama's account, my small remaining accumulation account, and concessional contributions. More on that later.
Then I expect to earn to around $100k net outside super, which would put me in the 32% tax bracket. This includes quite a lot of capital gains that I plan to take this year before the new CGT regime comes into effect. To reduce my tax liability, I will make the maximum allowed concessional superannuation contribution. I call this a no-brainer contribution, as being retired, I could take it out again the next year. The contribution will reduce my taxable income by $32,500.**
The contribution is taxed at 15% in the SMSF. But as that is less than 32%, it is a win, and that is not income tax.
On the remaining $67k, there might be about $13.5k in tax payable. But I expect to have around $20k in franking credits and early stage venture capital offsets. These more than wipe out my tax liability, resulting in a tax refund of $6.5k adding to my income. So, I will have negative income tax. I have then $165k in disposable income, which almost covers our expected expenses of about $180k. The remainder will be covered from Moominmama's earnings.***
In order to pay income tax, you would probably need to be at least in the 37% marginal tax bracket–more than $135k of income outside superannuation. This is assuming you have a supply of franking credits and do a little borrowing etc. to generate deductions.
If you are a retired couple, you can double all these figures for a household income.
* In Australia, the tax year runs from 1 July to 30 June. All numbers are Australian Dollars.
** You can make concessional contributions up to age 67 without a work test. But after age 65 the minimum required pension jumps to 5% of the account value. So, you might want to reduce capital gains realisations.
*** I won't exactly spend the capital gain, as the proceeds of those transactions will largely be reinvested. First of all, the part of the proceeds that is the original investment doesn't enter income, and only 50% of the gain is recorded as income under the current rules. But I could spend the $165k and only need $15k from Moominmama.
Part way through the restructure. I have now sold 60 ounces of gold from the PMGOLD ETF (6,000 shares). I still have 6,000 shares. I have bought a QO mini gold futures contract (50 ounces) in the SMSF and am in the process of moving $97,500 from our offset account to the SMSF. I have also bought another 30k shares of the L1 Gold Fund (LGF.AX) in my own name and have withdrawn $50k from my CommSec margin account back to the offset account with more to come.
From 1 July the ATO is raising the transfer balance cap for superannuation to $2.1 million. This is the maximum amount of money that you can transfer into a tax-free pension account. There is a twist (as everything about superannuation is unnecessarily complicated). If you already started a tax-free pension, you only get a partial increase in your personal cap. ATO has already posted these new caps in MyGov. Mine is $2.023 million, up from $2 million. My total superannuation balance was already about $2k over that on 30 June. Despite that, I am contributing more money to superannuation. This is because the capital gains rate on the money that will have to remain in my "accumulation account" will be only 10% vs. a 32% minimum going forward outside superannuation. Even if my superannuation eventually exceeded $3 million, the capital gains rate will only be 20% on the returns attributed to the portion of the account above $3 million.
How much can I contribute? You can only make non-concessional contributions if your total superannuation balance is below the general transfer balance cap of $2.1 million. Your personal cap doesn't matter for this! If you have more than $1.97 million in super as of 30 June this year but less than $2.1 million, you can contribute up to $130k. But, if you already used the "bring forward rule" in the previous financial year, this is reduced to $120k. I already used $55k of that amount last year, so I can contribute $65k in non-concessional contributions plus $32.5k in concessional contributions this year. If my total balance is over $2.1 million at the end of this financial year (30 June 2027), I won't be able to make any non-concessional contributions after that.
A year ago, I fixed most of my CommSec margin loan at a constant rate for the year ahead. The rate I got was 7.54% compared to a variable rate of 9.4%. I just got an email from CommSec asking whether I want to fix my rate again. The fixed rate is now 9.2%, but the variable rate has only increased to 9.65%. Clearly, I made the right choice to fix my loan, but this doesn't look like a good option going forward. Instead, I will reduce my borrowing probably by selling my gold ETF holdings, or at least some of them, especially if the recent budget CGT measures are passed by Parliament. The Greens hold the balance of power, but they think that nominal gains should be taxed at ordinary income tax rates and that there should be no grandfathering, so they might yet derail things for Labor.
The budget speech was tonight, and all of the worst stuff that was leaked in the lead up to the budget appears to be in it. The worst is a minimum 30% tax on capital gains instead of up till now a maximum of 23.5%! Australia now has the most favourable tax treatment of dividends in the world and the least favourable treatment of capital gains. I'm sure Labor is thinking about that discrepancy. They were in 2019. I am exactly the type of person worst hit by this budget–a retiree probably in the 30% tax bracket.
The existing capital gains tax discount served two purposes. One is that taxing gains that are just due to inflation seems unfair (though we do that to interest payments), and the second is that companies already pay corporation tax on the profits they reinvest to generate capital gains. While franked dividends in Australia fully pass on to shareholders a credit for tax already paid, the current CGT regime partially does that. Whether or not replacing that with inflation indexation makes sense, a minimum 30% tax on capital gains seems especially unfair.
I am already thinking about how to adapt to the new regime. I probably will sell my gold ETF holdings and replace them with futures contracts due to the new minimum 30% capital gains tax. And probably put the futures inside our SMSF for good measure. Freeing up the capital will allow me to reduce debt, contribute to super as much as I can and buy some dividend yielding investment instead.
Our Pershing Square Holdings, 3i, Berkshire Hathaway, Masterworks, and Angellist investments are all less attractive. Should also reconsider our accounts (outside the SMSF) with Colonial First State (CFS Imputation Fund and Acadian Global Long-Short Fund) that distribute capital gains. It doesn't make sense to get rid of all investments likely to have real capital gains. Instead, the expected rate of return needs to be high enough post-tax to hold onto those investments.
Also, it seems that the 30% minimum CGT will only apply to the gains relative to the investment's value at 1 July 2027. So, there is no rush to make changes. This is going to greatly complicate tax calculations.
I've now done some spreadsheet simulations of education bonds. Assuming that our marginal personal tax rate will be 30%, the goal is to pay out fund earnings equal to the 30% tax threshold, which is currently $45k (everything in AUD of course) in each of the three years the children are in university. I assume a nominal fund return of 9% and inflation of 3% per year. I increase the amount saved each year by the rate of inflation. When the children finish university, all the contributions are removed.
For Little My, who is now in school year 1, you need to start by saving $17k in the scheme this year. In the end there will be $241k of contributions. The maximum tax saving over the 3 payout years is $40,600 in total and the management fees incurred over the course of the scheme are $18k. The cost of the management fees is a bit higher than this–about $3-$4k–due to compounding. So, the tax benefit is roughly double the extra cost. However, if Little My earned the equivalent of $18,200 per year–the current tax-free threshold–the tax benefit goes down to $16,500!
For Moomin, who is now in school year 5, you need to start by saving $31,750k in the scheme this year. In the end there will be $282k of contributions. The maximum tax saving over the 3 payout years is $36k in total and the management fees incurred over the course of the scheme are $15,500k. The cost of the management fees is again a bit higher than this due to compounding. So, the tax benefit is roughly double the extra cost. However, if Moomin earned the equivalent of $18,200 per year–the current tax-free threshold–the tax benefit goes down to $14,900.
Here is Little My's analysis:
Of course, if they don't go to uni, but work instead, you pay a whole load of management fees and get into maybe a suboptimal investment for nothing.
Also, up till now I have assumed that all our income is ordinary income. If instead it is all long-term capital gains–for example from selling gold ETF shares–then the tax benefit is halved and the maximum tax benefit is equal to the management fees. Of course, the 50% capital gains discount might not exist in the future–Labor wants to abolish it. If all our income came from franked dividends, then in the 30% tax bracket we would pay no tax on these anyway and so there would be no tax benefit, just management fees!
P.S.
It seems unlikely that the two of us would earn more than $270k between us outside of super, but just for completeness, I looked at the case where we are in the 37% tax bracket. In this case the tax benefit for Little My assuming they don't work and keeping all other assumptions the same, rises to $54k or three times the management fee. But again, if all our income came from capital gains that would only be $27k and if all our income came from franked dividends our tax rate on the grossed up dividend is only 7% after the franking credit or 10% of the net dividend. This means there is only a tax benefit on the first $18.2k paid out for education expenses, which would be negated if Little My worked. So, I don't think I am going to do this.
I just discovered an investment structure I had never heard of: Education Bonds. These are an Australian investment structure that is similar to investment bonds but with some twists. We have an investment bond in Little My's name at Generation Life. We used it to invest the money he inherited from my mother.
First, I will describe an investment bond again. It is an investment that pays tax in the fund nominally at 30%. If you hold it for 10 years and then withdraw the money you don't pay any additional tax. If you withdraw it before 10 years you owe tax on the earnings at your regular tax rates but get a 30% tax offset. You can reset the 10 year term by contributing a new investment of more than 125% of the previous year's investment. Why would you want to do that? If your tax rate or a child who you made the beneficiary end up having a tax rate below 30%, you'll pay less tax then if you withdraw the money.
Most of this applies to an education bond too. These are the differences:
1. You can withdraw the contributions without tax or penalty at any time. Only the earnings are locked up for 10 years.
2. You can make a claim to pay for education expenses and withdraw earnings to do so. When you do this, you get the tax paid added onto the amount you withdraw. So, there is no tax in the fund on these withdrawals. This can be done at any time, not just after 10 years.
3. The twist is that the beneficiary whose education you are paying for is liable for tax on the earnings. Children under 18 have very high penalty tax rates (one reason we used an investment bond for Little My). So, beyond the tax-free $416 per year this really wouldn't make sense. Once they turn 18, the regular adult rates apply including the tax free threshold.
4. Here is the really interesting part: You can keep any education bills incurred since you started the education bond and claim them in a later year. So, you could claim school tuition from 2026 in 2036 say!
5. If you withdraw all your contributions and then want to withdraw earnings without valid education bills, the standard investment bond rules apply.
6. The downside is you are limited to the investment options the provider has and an additional administration fee. After all, they have to deal with all these education claims... For Australian Unity this additional fee is 0.7% p.a.
There are only a few providers and so far Australian Unity seems most attractive. Generation Life don't offer this product.
Basically, this is a way of tax-sheltering some investment income in a similar way to income splitting through a family trust. But it is much more restrictive on investments and possibly has higher fees (our SMSF pays 0.3% p.a.). You are only really going to be directly paying for higher education expenses using this.
For someone in my position, it might make sense after you have maxed out your tax free super pension and you are already above the tax-free bracket of income tax on your non-super earnings, which is true in my case. The problem is that actually trying to reclaim all the children's private school fees during the 3 or so years they are in Uni would push them into the 30% marginal tax bracket, which is probably where I will be myself. If they are working part time they might already use up the tax free allowance (currently AUD 18.2k), which would make the tax savings small. And this is assuming they go to Uni. With these considerations, the 0.7% annual fee, and limited investment options, I am undecided if this is worthwhile.
I just updated my tax credits chart to include last year's tax returns and expected tax credits on this year's returns:
There are various reasons for the decline in franking credits since 2021/22. One fund reorganized and now doesn't pay Australian tax (WCMQ.AX). Tribeca Global Resources (TGF.AX) paid a huge dividend in that year, and so on.
* If your franking credits exceed your tax liability the government sends you the difference!
Two of the partners of ASA who managed the Diversified Property Fund we are invested in have been on podcasts recently. Here are the links for Chris Aylward and Tim Slattery.
The Australian reports on superannuation funds' performance for calendar year 2025. Neither of our employer funds - Unisuper and PSS(AP) - made the top ten. Unisuper Balanced is in the top 10 for the last 10 years. The average return for 2025 was between 8.8% and 9.3% depending on the source. I assume this is for accumulation funds. I estimate that Unisuper made 7.8% pre-tax or around 6.8% post-tax. PSS(AP) made 10.5% or 9.2% post-tax. On the other hand, our SMSF returned -6.1% pre-tax :( This is mostly because of its outperformance in 2024 (34.0%) and cryptocurrency coming back down to Earth in 2025.
As part of participating in the Aura Group capital raise, I had to get a new wholesale investor certificate. You have to do this every 2 years to remain current. There are two main ways to qualify: Show you have more than AUD 250k in income per year in the last two years or show you have more than AUD 2.5 million in net worth. You need an accountant to certify this. The test is on an individual not household basis. I am using the net worth approach.
I was certified in 2020, but when I tried to renew in 2022, the accountant I used said I didn't qualify, as she wouldn't count my superannuation including my SMSF towards the amount as I was under 60. This didn't stop me from continuing to meet capital calls for my existing Australian venture capital investments.
Now I meet the required level with or without superannuation. I also argued that I am receiving a TTR pension from each of my superannuation accounts and am over 60 and about to retire. Anyway, I qualified. It cost AUD 550.
It is much easier to qualify as an accredited investor in the US. You only need USD 1 million net worth and you don't need an accountant to prove it, so it is free. A couple can qualify with just USD 1 million between them. However, primary residences are excluded, which is not the case in Australia. Moominmama qualifies as an accredited investor for our investments via Angellist and the Unpopular Ventures syndicate.
In Australia, if you are between the ages of 60 and 67 and you are retired, you can make concessional retirement contributions even if you aren't working at all.* Why would you want to do that?
A concessional contribution is one you can deduct from your income on your tax return. However, the superannuation fund does have to pay 15% tax on the contribution. If your marginal income tax rate is in the 16% bracket–18% including the Medicare Levy–or above, you will save on total tax paid. For example, if you have a paid-off investment property, you might be earning $30k a year in rent. If you make a $12k contribution to super, you will wipe out your income tax bill. Obviously, this saves a lot more tax if you are in a higher income tax bracket.
Now here is the no-brainer bit. As you are retired, if you want, you can turn around the next day and take the money out of super again!
Assuming I retire later this year, I am planning to make a concessional retirement contribution to top my concessional contributions for the year up to $30k. As I will probably be in the 30% tax bracket this tax year, the savings will be worthwhile. But I probably won't take it out again right away, unless I have already hit the transfer balance cap.
* After age 67 you need to meet the "work test" to make concessional contributions. You can continue to make concessional contributions even if you have more than $2 million in superannuation. You can't make non-concessional contributions after you reach that level.
A year ago, I wrote a post about whether you should initially keep your superannuation in accumulation mode when you retire. I thought that if you don't need to spend the money in your superannuation accounts right away, it doesn't make sense to pay out that money to sit in regular taxed investments. But I missed one key point. Dividends from what Americans call "taxable accounts" are taxable whether you spend them or not, but capital gains are only taxed if you sell. The more capital gains you realise, the higher tax bracket you are going to be in. Unless you are lucky enough to be able to live on dividends from the "taxable accounts" alone, you are going to have to realise capital gains if you don't have a superannuation pension.
In my case, I might be able to stay in the 16% tax bracket if I don't need to realize capital gains. So, with tax free superannuation, I will pay very little tax. If I kept my superannuation in accumulation mode, I would be paying an average of 12.5% tax on earnings in superannuation and I would have to realise $80k of capital gains in "taxable accounts" instead of receiving a superannuation pension. That would push a lot of my earnings into the 30% tax bracket.* So, I am planning to put my superannuation accounts into tax-free pension mode and pay out the minimum distribution of 4% a year until I am 65.
With my wife still earning around $45k a year in salary for now, I might not need to do much in the way of realising capital gains outside superannuation.
What about just spending the redundancy payment for the first couple of years? Some of that is going to go into superannuation and the rest will sit in our offset account. The more we spend it, the more mortgage interest we are going to have to pay. Despite that, it might actually make sense to spend that first, but psychologically I prefer a big cash buffer, low mortgage interest, and a steady pension coming in. I can just set and forget the pension from Unisuper.
* Of course, long-term capital gains are only taxed at half the headline tax rate, so the effective marginal rate would be 16% including the Medicare levy.
The Reserve Bank of Australia Building
Same as last year, I just fixed my margin loan rate for the next financial year. The variable rate offered by CommSec was 9.4% and the fixed rate for one year is 7.54%. The Reserve Bank would need to cut interest rates by an average of 1.86% over the year for the variable rate to be better. The current RBA cash rate is 3.85%. Under the assumption that they cut in a straight line, even if they cut rates to zero by June 2026 the fixed rate is better. The only way the variable rate would be better is if they frontload a very significant cut of say 1.5% and then end up with a cut of 2.5% or so in total at the end of the year. I don't see them frontloading to that degree given history. Anyway, we will see if I was right...
Interesting article in the AFR on what it takes to be in the top 1% in Australia currently by both income and wealth. You can go to the free article to see lots of charts, so I won't post them here.
To be in the top 1% by income, you need a household income of AUD 532k. The top 5% is above AUD 306k. The top 10% starts at AUD 235k. I predict that our taxable income will be AUD 263k for this tax year. So we fall within the top 10%.
The wealth data are also broken down by age group. For the 41-64 age bracket the top 1% starts at AUD 7.7 million, while the top 5% starts at AUD 3.8 million. At AUD 7.4 million we are just outside the top 1%. Our average adult age is 55. The top 1% for 65+ starts from AUD 10.9 million!
There are also breakdowns by type of asset. The top 5% by home equity for our age band starts at AUD 1.42 million. So we are well below that. The top 25% is AUD 650k and above. We are within the top 25%.
A top 1% household superannuation balance is one of more than AUD 2 million. We are definitely in the top 1% by this criterion. Moominpapa alone has almost 1.9 million and Moominmama more than 900k. The top 1% of individuals starts at 1.4 million.
The Australian reports on the best performing super funds for 2024. They focus on lifecycle, balanced, and sustainable options. I am sure there is some retail super option invested in international shares that did better than these. How did we do? I compute our SMSF returns pre-tax, while super funds report post-tax results. But anyway, our SMSF gained 34.1%! Estimated pre-tax numbers for Unisuper and PSS(AP) balanced options were 14.3% and 13.4%, respectively.
Intramonth, I've blasted through the transfer balance cap. This is the limit of AUD 1.9 million that you can transfer from an Australian superannuation account into a tax free pension when you retire or reach 65 years old. I'm now nearer AUD 2 million. The important thing is that when you exceed this limit you can no longer make "non-concessional" (post-tax) contributions to superannuation. However, I can continue to make recontributions to superannuation from my transition to retirement pension until the end of June this year. This is because this rule depends on your balance at the beginning of the current financial year, which in Australia starts at the beginning of July. But if I do stay over the AUD 1.9 million level on 30 June this year, I won't be able to make non-concessional contributions to my account next financial year. Instead, I will make them to Moominmama's account.
P.S. 20 January
The Australian is reporting today that the transfer balance cap is likely to be raised to AUD 2 million next July.
When you get your notice of assessment from the Australian Taxation Office when they have processed your tax return, they send you statement of how the government spends your taxes, which they quaintly call a receipt:
I was a bit surprised by how little interest they are paying. Only a 2.3% average rate of interest and 3.8% of the budget.
Note that this tax total doesn't include the Medicare Levy, which was another $4,411 tax that I paid.
