Superannuation

The Superannuation "Tax Wipe": How to Legally Delete Your CGT at Retirement

Baron Barnet

— 3 min read
The Superannuation "Tax Wipe": How to Legally Delete Your CGT at Retirement
Photo by Land O'Lakes, Inc. / Unsplash

If you’re currently holding your super in a standard "Balanced" or "International Shares" pooled fund, you are likely paying a "success tax" every single year that you probably don't even see.

In the industry, this is known as a Tax Drag. For high-balance members, this invisible leak can cost more than your actual management fees.

Today, we’re looking at how to use Direct Investment options (like Hostplus Choiceplus or AustralianSuper Member Direct) to stop the leak and prepare for the "Holy Grail" of Australian investing: The Pension Phase Reset.

1. The Problem: The "Invisible" Tax Provision

Most super accounts are pooled. Your money is mixed with thousands of others in one big tax bucket. Even if you never sell your units, the fund manager is constantly buying and selling assets within the pool to rebalance or pay out members who are leaving.

Every time they realize a gain, they set aside money for the ATO. You’ll see this on your statement as a "Provision for Taxes." The Catch: When you eventually retire and move to a Pension account, the pooled fund doesn't give you a "refund" for all that tax they provisioned over the last 20 years. That money is already gone. For a deep dive into the mechanics of why this happens, check out this excellent breakdown on The Problem with Pooled Funds from Passive Investing Australia.

2. The Solution: Deferring with Direct Holdings

By using a direct investment option within your super, you buy ETFs directly. Because you own the specific units, you—not the fund manager—control the tax event.

Instead of paying a small slice of capital gains tax every year because other people left the fund, you defer 100% of your capital gains until the day you sell.

3. The "Tax Wipe" (The 0% Reset)

This is the most powerful wealth-building tool in the Australian tax system.

When you move from the Accumulation Phase (working) to the Retirement Phase (Pension), your tax rate on investment earnings and capital gains drops from 15% (or 10% for assets held >12 months) to exactly 0%.

The "In-Specie" Magic

If you hold direct ETFs, many super funds allow you to move those units "in-specie" (meaning the actual units move, you don't sell them) into your new Pension account.

Because you never sold the units during your working life, that "tax debt" you were technically carrying on your gains is legally deleted. You can sell the units the next day inside the Pension account and pay zero tax on decades of growth.

4. When Does This Strategy Make Sense?

Direct investment platforms usually come with a fixed annual fee (e.g., ~$160–$180) plus brokerage. To ensure the tax savings outweigh these costs, you need to consider your "break-even" point.

When NOT to use it:

  • Low Balances (<$100k): The fixed platform fees will represent a high percentage of your balance, likely canceling out any tax benefit.
  • Frequent Selling/Rebalancing: The entire purpose of this strategy is to defer CGT until you hit the 0% pension phase. If you sell your ETFs while still in the accumulation phase (working), you trigger a CGT event at the 10-15% rate. This crystallizes the tax debt early and defeats the purpose of the "Tax Wipe." This strategy is best suited for a "Buy and Hold" approach.
  • Frequent Small Trades: If you are contributing small amounts weekly and want to buy ETFs immediately, brokerage fees ($10–$20 per trade) will eat your returns.

5. How to Execute the Strategy

  1. Switch to Direct Investment: Move the maximum allowed (usually 80%) into your fund's direct platform.
  2. Choose All-In-One or Broad ETFs: Instead of complex picking, use low-cost, diversified ETFs.
    • DHHF (BetaShares All-In-One): A single trade that gives you thousands of stocks globally.
    • VGS / VGAD (Vanguard International): Broad global exposure (unhedged or hedged).
  3. Minimize the Pool: You are usually required to keep 20% in the "pooled" funds. Move this 20% into the cheapest Indexed option available (e.g., International Shares - Indexed) to keep fees as low as possible on that mandatory slice.
  4. The Long Hold: Let the "tax man's money" stay in your account and compound. At age 60+, move the units to Pension and enjoy the 0% reset.

Resources & Further Reading

Read more