I have long recommended that the best way to achieve high net worth when you retire is to build a quality share portfolio when you are working. Then, after you retire, and your taxable income is probably quite low, you can sell small parcels of shares as necessary to top up your spending. Using this strategy, most retirees will pay no capital gains tax on their shares if they time their asset sales in an orderly manner.

Let’s look at a simple example, focusing on the early years of the investment. You invest $100,000 dollars in an index fund, and at the end of the year it is worth $109,000. This is made up of $5000 capital gain, and $4000 of fully franked income, which you have wisely re-invested. The franking credits should be $1714.

The tax position will depend on the person who owns the portfolio, but let’s pretend it’s your spouse, who is the lower income family member, so the funds are held by a person with an income of just $25,000 a year. Even though the income is reinvested it still needs to be declared each year, so they will have to add the $4000 dividend, and the franking credit of $1714 to their taxable income.

The tax on $5714 will be $1086, but they will have the benefit of the franking credit to pay it with. As the franking credit is $628 more than the tax due, they get a refund for it.

How good is this? Their total gain has been $5000 in growth that is not taxable until many years in the future, and tax-free income of $4000, which generated an extra $628, which they can use to buy more shares. The returns have not just been tax-free – you have received a bonus by way of the refund of excess franking credits.

Obviously, the tax would depend on the income of the investor, but high-income earners also have the ability to invest in insurance bonds, where the tax rate is a maximum of 30 per cent, paid by the fund.

I hope this example has shown you that tax is not the enemy of the share investor – it is inertia that is the enemy. By that I mean the inability to move forward towards a wealthy retirement because you never got around to starting.

This advice is general in nature and readers should seek their own professional advice before making any financial decisions.

noel@noelwhittaker.com.au