Forward planning key to reducing your capital gains tax

Forward planning key to reducing your capital gains tax

Getting around capital gains tax CGT it is always a popular topic, but unfortunately, one where misunderstandings are common.

Two of the most common ones are that CGT can be avoided by deferring the liability to a new purchase, and the other is that it can be reduced by making a large tax-deductible contribution to superannuation.

The first proposition is wrong, and the second one is only partly true. Let's start by thinking about the way CGT is calculated. The purchase date is the date the original sales contract was signed, and the sales date is the date of the sales contract, not the date of settlement.

Dates are particularly important as we approach 30 June, because signing a sales contract before or after 30 June may have a look huge difference to the amount of CGT that may be payable.

If the asset has been held for more than a year, the capital gain can be reduced by 50%.

Once that has been calculated, the net gain is added to the taxable income of the investor, which means it will be taxed at their marginal rate.

Obviously, a tax deduction of any kind will reduce the investor's income which could result in the taxable capital gain being taxed at a lower rate. The only problem is that the maximum deductible contribution, in normal circumstances, is $25,000 a year which includes superannuation from all sources.

Given the employer contribution is counted, there may be not much space left for the additional deductible personal contribution if the investor is working. However, there is a loophole in certain situations- using catch-up contributions. These were introduced to give people with an erratic employment history a chance to catch up on their missed contributions..

Individuals with super balances of less than $500,000 are now be able to access a higher annual cap and contribute their remaining unused concessional contribution cap on a rolling basis for a period of five years. Only unused amounts accrued from 1 July 2018 can be carried forward.

This does offer a window of opportunity for people who know they may be liable for substantial capital gains tax liability in the future.

Case study: John and Daisy both age 58 are retired. They intend to sell an investment property when they are aged 63, which may result in a taxable capital gain of $400,000.

This will reduce to $200,000 after application of the 50% discount, and will be split $100,000 to each party.

By the time they turn 63 they will have arranged their affairs so they have made no concessional contributions since they were 58, and also have less than $500,000 in their individual super accounts.

They make catch-up contributions of $100,000 each, four years at $25,000 a year, and then claim a tax deduction of $100,000 each. This eliminates the entire taxable capital gain - the only cost is $15,000 each in contributions tax.

If their superannuation balances were over $500,000 limit, forward planning is important. Once they reach 60 they can withdraw money from their super, and re-contribute it.

They could withdraw money from one account and contribute it to the other person super until they reach 63. Before June 30 they could withdraw an amount tax-free, and place the money in the bank.

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. noel@noelwhittaker.com.au

This story Forward planning key to reducing your capital gains tax first appeared on The Canberra Times.