Wally David
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Few could begrudge selling an investment for a gain, but careful planning needs to be undertaken beforehand to manage the potential tax bill come the end of June.
How to reduce capital gains tax
Let’s start with the basics.
What is a capital gain or loss?
If you sell an asset for more than you initially paid for it, you make a capital gain. If you sell it for less, you realise a capital loss.
When you hear the term ‘realise’ a capital gain or loss, this simply refers to the fact that a CGT event has occurred and you will need to deal with this event in your tax return. The most common CGT event is when you sell an asset or investment.
When you sell multiple assets in a given year, you will need to apply the capital losses against any capital gains to work out whether you have made a net capital loss or gain for that period. If you make a net capital gain, you will likely be up for CGT.
Are any assets exempt from CGT?
Yes, certain assets are exempt from CGT. These include:
Your family home
In Australia, you can generally ignore a capital gain or loss that occurs from selling your family home. The home must be the main residence where you reside.
Even with the main residence exemption, it is still wise to keep records of your family home, such as the purchase details and up-to-date valuations, in case your circumstances change. For instance, you may purchase another home to become your new family home and retain your former home as an investment property. As an investment property, any future capital gains may be taxable, so these purchase details and valuations become important to calculate any tax liability when eventually sold.
Assets acquired before 20 September 1985
Assets and investments acquired before 20 September 1985 are normally exempt from CGT.
So what can you do to reduce your potential CGT bill?
Four simple ways to reduce your potential CGT are:
Hold assets for more than 12 months for a 50 per cent discount.
You are entitled to claim a 50 per cent discount on capital gains you make on assets you have owned for longer than 12 months. This applies to assets purchased after 21 September 1999.
Example:
Julie purchased XYZ shares for $10,000 in 2006 and sold them in June 2014 for $20,000. She had no other capital gain or loss for the year and no unapplied losses from previous years.
In Julie’s case, her net capital gain for the 2013/14 tax year should be:
($10,000) – ($5,000 CGT discount) = $5,000
Sell poor performing assets to offset your tax.
Selling poor performing assets that have fallen in value since your original purchase will realise a capital loss.
This loss could be used to offset a capital gain from another asset that you have sold in the same financial year.
Delay sale until after the end of the financial year.
If you are considering selling an asset on which you have made a gain, consider the timing of the sale.
Waiting until 1 July means the potential CGT bill is deferred until the following financial year. This can assist with cash flow by providing an extra 12 months to deal with the tax bill.
This can also be useful if you know your income will fall in future years. A common example is when an individual is approaching retirement. Their taxable income is likely to fall upon retirement, which may help reduce the CGT bill if the asset is sold in the same period.
Make concessional contributions into your super.
These contributions are made by using before-tax money. Concessional contributions carry a tax deduction. The trade-off is that a 15 per cent contribution tax is deducted from the contribution once it hits your super fund.
Employees could salary sacrifice into super through their employer to reduce their taxable income for the year they are planning to realise a capital gain.
For the self-employed, you can make a lump sum personal contribution and claim a tax deduction for this amount.
Please note limits do apply to how much you can contribute into super in a given year. For more details, please see – Super for self-employed people.
Other things to keep in mind
Assets acquired between 20 September 1985 and 21 September 1999
If you purchased an asset between 20 September 1985 and 21 September 1999, you have a couple of options to calculate CGT payable. One is the discount method, which allows for a 50 per cent discount on assets held for more than 12 months. The other is the indexation method, which takes into account inflation so that you pay tax only on the capital gain in excess of inflation.
You can usually decide on the option that will ensure the least amount of tax is paid. It’s a tricky area, so always seek taxation advice on this matter.
Contract date, not settlement date for real estate
When it comes to real estate, it is generally when you enter the contract of sale that determines your purchase date, as opposed to your settlement date, which may be some months later.
Get advice beforehand
Before pulling the trigger and selling an asset for a profit, you should seek some professional advice. They will help you estimate the potential CGT bill and discuss any ways you can reduce it. Investment advice can also be sought to assess which investments are suitable for selling and which investments are best retained.
Did you find this information helpful? If so, please share it with your friends. Thanks!
My dad purchased a commercial property for $250,000 now wants to give it to me worth $1,000,000 cause of other greedy hands cant wait for his will need to do it now . how much is the cgt ??? he is 83 and mum is 80 & the have retired 4 yrs ago.
Thank you for your question, Sue.
The CGT treatment would depend upon a few factors. Your dad should seek advice from an accountant to provide him with this estimate.
– Wally