By: Noel Whittaker
So June 30 is rapidly approaching – a good time to think about capital gains tax. It’s the friendliest tax you can pay because it is not triggered until you dispose of the asset, and this may be many years after you acquired it.
Furthermore, if you have owned it for over 12 months, the capital gains tax is reduced by 50 per cent. This means the maximum capital gains tax that can be paid by people in the top tax bracket is 23.25 per cent, provided they qualify for the 50 per cent discount.
There is no separate rate of capital gains tax – it is calculated by simply adding the gain to your taxable income in the year the transaction takes place, after adjustment for items such as cost, improvements and the 50 per cent discount. Therefore, it can be a good strategy to defer triggering a capital gain until a year when you have a low taxable income.
When planning your affairs for tax purposes, keep in mind that the relevant dates are the contract dates, not the settlement dates. If you sign a sales contract on 28 June 2018 for settlement in July 2018 the gain would be deemed to have occurred in June.
If you would prefer to push the sale into the next financial year it may be worthwhile to avoid signing a contract until after June 30. However, this strategy opens you to the risk of losing the buyer.
Tax on a capital gain cannot be deferred past June 30, but capital losses can be carried forward indefinitely. For this reason, it may be appropriate to sell loss-making assets in a year when you have a taxable capital gain, as the capital losses will offset the capital gain.
There is much confusion about using deductible contributions to superannuation to reduce a capital gain, but it’s really quite simple to understand if you take it step by step.
If a person is eligible to make a superannuation contribution, and eligible to claim a tax deduction for the contribution, they can lower their taxable income by contributing part of the proceeds of the sale to superannuation and claiming a tax deduction up to the limit of $25,000.
As always take advice – getting it wrong can be very costly.
Once, you could not claim a tax deduction for additional superannuation contributions if your employer was making the normal compulsory contributions. However, that rule was changed from 1 July 2017, and now anybody who is eligible to contribute due to their age can make personal contributions and claim a tax deduction for them.
Just keep in mind that the maximum concessional contribution is $25,000 a year in total. So the amount the employer is contributing on your behalf must be taken into account when deciding how much you can contribute yourself. Also, bear in mind that it is currently Labor policy to rescind this rule if they regain office, so take that into account when doing your tax planning.
As a case study consider “Ana”. Ana earns $50,000 a year, including $5000 employer super. She sells an investment, making a $40,000 capital gain. This will be reduced to $20,000 by the 50 per cent discount, and CGT will be calculated by adding $20,000 to her taxable income. Or Ana could contribute $20,000 to super as a concessional contribution, creating a tax deduction of $20,000, which will wipe out the taxable capital gain. Then the only tax payable is the 15 per cent on the concessional contribution. This way Ana can keep $20,000 of the capital gain to use now, and lock $17,000 away for her future, having paid only $3000 tax, rather than $6,500.
As always take advice – getting it wrong can be very costly.
Source: The Sydney Morning Herald
