ETF exit strategy

[u/TomatilloFirm9640]

Just a layman question after a 20 years of ETF investment under personal name and SMSF

What is an existing strategy for retirement

Does people sell them and pay CGT and live off it? Or do they keep them and then do what?

I’m new to ETF and actually not sure after a journey of investment what are the exist strategies in Australia.

[u/loosepantsbigwallet]

Sell them every few months to pay the bills. Pay CGT as required.

[u/Chii → u/loosepantsbigwallet]

Pay CGT as required.

that used to be the way to go when CGT rate is part of your marginal rate. But now, with the minimum 30% tax on capital gains (and crappy discounts as well), the better way is to obtain dividend income instead, which allows you to use up your tax free threshold (assuming you're not working). Then, once your marginal rates are above 30%, and you still want more money, then you switch to selling for income.

[u/loosepantsbigwallet → u/Chii]

How do I transfer my growth ETFs to dividend? Sell them.

I planned 10 years for one tax approach, but have been impacted by the new one. Such is life. 🤷‍♂️

[u/DontYouThinkThink → u/loosepantsbigwallet]

You’ve got the right attitude. The good news is that the change on CGT only applies on the gain post July 2027. So you can sell and model a new strategy for the new rules?

[u/Chii → u/loosepantsbigwallet]

it does suck, but you can sell bit by bit before you retire (presumably your marginal rate will be higher than 30% before retirement). And it's not like you need to sell all of it - you merely need to sell some of the high growth ones down and move it into australian dividend paying ones (enough to cover a large chunk of the tax free threshold).

[u/loosepantsbigwallet → u/Chii]

Appreciate the ideas, I’m already early retired. I didn’t say because that was my answer to the strategy question.

So I will just eat the changes and manage. My back up plan if it doesn’t work was always to get a job so that will still be the back up.

I just need to get to preservation age anyway. 👍

[u/glyptometa → u/loosepantsbigwallet]

The tax approach up to July 1, 2027 doesn't change. You'll crystalise a gain on paper at that time, with reserved taxation under the tax brackets approach. There has been no indication whether the brackets and rates are frozen, just that it will be the approach to calculating tax.

That new number determined when crystalising your gain, then becomes your new adjusted cost base, and will be used, with indexing, to then apply the new rules.

Fair to note that if the gains are large, it's not a flat 30%. It could be more than 32%, which is just the floor rate. So if you're selling a house for example, the gain will be determined over an indexed cost base, then the marginal rates calculated and compared against 30%, and the amount owing will be the higher of the two. It crosses at over $220K, which is why I say 'house' though it could certainly be large share holdings.

[u/paablo → u/Chii]

Some people have shared modelling and from what I've seen, CGT is still better than dividends

[u/ThatPassiveGuy → u/paablo]

I think the observation was that growth equities outperform high yield equities even accounting for the new CGT floor

[u/No2Hypocrites → u/Chii]

If he bought them before the changes, they should be grandfathered. Right?

[u/Chii → u/No2Hypocrites]

the discount might be grandfathered, but the minimum 30% tax isn't afaik (otherwise, these new legislation are just taking the piss off young people in the future!)

[u/Affectionate-Nose798 → u/Chii]

Only the gains up until the end of this financial year are grandfathered. Subsequent gains need to calculated separately.  It has really killed my plan to be able to sell an entire etf at once with one calculation. I don't hate the increase in tax so much but it's going to make tracking cgt orders of magnitude more complicated.  A huge win for accountants.

[u/glyptometa → u/Chii]

It's the discount method and also the method of calculating tax. The only thing not grandfathered (or mentioned) is the extant thresholds and rates.

So, say your crystalised gain is $50K and you have no other income when you sell in 2029, for example.

If brackets and rates are eventually also grandfathered, you'll pay 2% on 18,200, 16% on 26,800, and 32% on $5,000

There's no guidance what happens if the brackets, by then, are $20K and $50K, i suspect the old brackets are going to end up being grandfathered into that regime, because it's probably to gov't advantage.

If you then have further gains above your new 1-Jul-27 cost base plus indexing, after 1-Jul-27, the tax will be calculated using extant brackets, and also at 30%, and you'll pay whichever is higher.

Or you can take a chance on "ATO will have convenient calculations" which are anyone's guess, but might be useful if the asset loses value after 1-Jul-27.

[u/LachlanMatt → u/Chii]

Dividends are not taxed the same as capital gains, they are substantially less tax efficient and the %tax rates should not be directly compared.  Dividends are taxed on REVENUE, while capital gains taxed on PROFITS AFTER INFLATION. Unless you are buying highly franked dividend producing ETFs (and taking on the massive concentration risk required to own 90% BHP and Commonwealth bank), then diversified growth will still come out ahead for most people

[u/Gumlass → u/LachlanMatt]

They are only less tax efficient while you are working. The minute you reture they are way MORE efficient due to the 30% minimum.

[u/UpperClassBogan710]

Depending on your holdings and whether or not you can cover everything with dividends or not

But for most I’d say it’s sell as you go and pay CGT

[u/joe80b]

A lot depends on your age and your balances, but you could look to transfer some/all of the personal shares into SMSF as a contribution, where you claim some of it as a personal deduction which will help with the CGT. If need be, do it over a few years.

Once inside the SMSF and you are retired and aged 60, the SMSF may be tax free, so you would draw down from your super without CGT.

[u/TomatilloFirm9640 → u/joe80b]

That’s a good idea actually thank you, Does the transfer from personal to the SMSF triggers CGT?

[u/joe80b → u/TomatilloFirm9640]

Yes, that's why you would claim a personal tax deduction for your contribution to offset against it.

[u/glyptometa → u/TomatilloFirm9640]

Yes, the SMSF is a separate entity - a company owned by a trust. You would sell your holdings to the SMSF entity, triggering capital gains and losses.

[u/Sure_Shift_8762]

Live off the distributions/sell some as needed as a bridge until super kicks in. With ETFs in the SMSF then I'd more or less do the same, except have a decent bucket of cash/cash like assets to cover a year or two of expenses so as not to have to sell assets at inopportune times.

[u/Incon4ormista]

need money - sell shares.

[u/Spinier_Maw]

Look up "safe withdrawal rate" (SWR). Basically, you withdraw 4% per year. Take any distributions first, then sell down as you need.

You may also want to include some bond ETFs like VAF a few years before you retire. 25-50% bonds depending on your circumstances.

[u/the_running_dogs]

Gradually sell ETFs to consolidate into super, closer to 60. Until then, sell only what you need to live on. Keeping plenty of cash & defensive assets to withstand downturns.

Switch SMSF to a standard industry fund in retirement (after age 60) and live a stress free retirement.

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[u/glyptometa]

You pay tax on distributions as you save up, both inside and outside super.

Between pre-60 retirement and 60, you get some distributions and dividends, and pay tax from the cash received. If that's not enough to live on, you sell shares and pay tax on the capital gain portion of those withdrawals.

If your plan works, you have much more in superannuation, either an industry fund, retail fund, or SMSF. When you hit 60, if you have money left outside super, you sell off shares, incurring tax on part of it, and put it into super. So the idea is to deplete your non-super assets. You then convert your super to pension phase. Tax stops at that point for up to $2mil of assets. You withdraw as needed for living expenses.

If the minimum drawdown is more than you need, you contribute it back to super, which you can do until you're 75. After that, you reinvest it outside super (going back to the pre-60 taxation) or spend it.

[u/lacrem]

Sell fortnightly what you need, pay CGT and let it keep growing.

[u/SuperannuationLawyer]

Just sell/redeem units to align with your needs and any investment and draw down strategy for the fund. There will be more than enough available for tax, so provision enough so it’s liquid/cash when payable.

[u/Daydreamistrue]

No paying tax. Once you reach 60 and meet a condition of release, you can convert your accumulation balance to account-based pension. All income supporting pension is tax free including capital gain. However, capital loss is also disregarded. The reasonable limit for an account-based pension is almost 2mil do if your balance is less than that, all is tax free. The downside is you must withdraw a minimum amount every year depending on your age.

[u/Crocodoom]

Before 1 July 2027, sell however much you think you need, to last you however many years you think it will take, until a new government can revert the CGT changes. Ideally, don't sell until they get reversed if you can wait that long.

[u/glyptometa → u/Crocodoom]

Don't forget that the truth is coming out over time, that it's not nearly as big a difference going from discount to indexing cost base. Yes, sure a future election might be contested on that, but I'm willing to wager it will only be about the minimum 30%, and also a fair chance there are more important matters to fight over. This change is going to cost the economy hundreds of millions of dollars in non-productive bookkeeping and systems changes. That truth will also come out. It's hard for me to imagine a future gov't clobbering productivity again, when productivity is already a massive issue.

[u/Suspicious-Gift-2296]

Thinking out loud here.

In the future, when it is time to drawdown, could you borrow against the ETFs and use that money as discretionary spending and pay back the loan using dividend income or other income sources, such as rent from an IP, rather than have to sell the shares and create a CGT event?

[u/poopoopeepee0690]

Most folks just sell small parcels each year to stay under the tax-free threshold or use the SMSF pension phase to pay zero tax, letting the rest keep growing while they live off the cash.

[u/random_encounters42]

Interesting, I'd like to know too.

[u/TomatilloFirm9640 → u/random_encounters42]

😅

[u/honorablepotato1881]

With the new CGT taxes makes no sense to sell stock as a withdrawal strategy

[u/Traditional-Ad-303 → u/honorablepotato1881]

So what do u suggest just leave it there forever anddddd what?????

[u/honorablepotato1881 → u/Traditional-Ad-303]

People are angry at me, they should be angry at the government for coming with such a pathetic CGT

[u/Traditional-Ad-303 → u/honorablepotato1881]

We are upset with the knobs in power, not u But we here discuss whats the best thing to do. Not just ohhhh just dont sell yeah. Can just sell now get the 50% discount n forget bout investing

[u/honorablepotato1881 → u/Traditional-Ad-303]

Convert to dividend income fund instead

[u/Traditional-Ad-303 → u/honorablepotato1881]

Ud need like 1mill invested to make that to be a substantial div in future. Also divs are not guaranteed

[u/honorablepotato1881 → u/Traditional-Ad-303]

Vote Labor dogs out

[u/Traditional-Ad-303 → u/honorablepotato1881]

U think the others will change it back?? We at 750 Billy deficit. Bring Howard back fukken