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You'll lose 2 per cent of your taxable profit selling before June 30

Michael Pascoe

There's nothing like forewarning of a tax change to distort behaviour. If the government sticks with its policy of ending the 2 per cent deficit reduction levy on June 30, we're entering the season of delaying income and maximising expenses – and maybe holding off real estate auctions if all else is equal.

You become liable for capital gains tax (CGT) in the year that contracts are exchanged, not when the sale is settled. Thus there will be an effective 2 per cent penalty on many investors' taxable profits if they put a property under the hammer in what's left of this financial year instead of waiting another couple of months. 

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Beware the extra tax before June 30

For those who have an investment property, do you realise you could be liable for an extra capital gains tax by going to auction before June 30 compared with after July 1?

With the federal budget two weeks away, we should know to believe what politicians end up doing rather than what they say, but, in theory, the tax take on taxable income of more than $180,000 should drop from 47 per cent on June 30 to 45 per cent on July 1, plus the Medicare levy.

Only 3 per cent of us were in the $180k+ club in the 2014-15 year, but the government's beloved teachers, nurses and police officers can quickly find themselves signed up for membership in the year they sell an investment property.

As a rough example, a $500,000 Sydney property bought a few years ago could easily be worth $1 million (or more) today. The $500,000 capital gain is discounted by 50 per cent and added to the investor's other income for assessing income tax.

Say the investor's normal income is $80,000, the capital gain means total taxable income of $320,000, of which $140,000 will be taxed at 47 per cent this financial year and 45 per cent after June 30 – a difference of $2800.

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The numbers start to matter more if the individual is already in the $180k+ club and the capital gain is measured in millions. A property showing a profit of $2 million would pay $20,000 more tax after a successful auction on June 30 rather than July 1. And the vendor would have another year before having to pay the tax. That should be worth another percentage point or two.

Of course, there are many more factors involved in the timing of a major real estate disposal than a 2 percentage point change in the marginal tax rate. Right now, it's a reported shortage of stock in key markets.

For individual share investors, scrapping the levy can be played on both sides of July 1. Selling a dog with a capital loss is worth more on June 30 than July 1, while the profit on a winner is worth a little more after June 30.

Given Australians' love of minimising tax, many will have an eye for the 2 per cent, even though it's small beer for most of the top 3 percenters. An individual who delays invoicing $10,000 for a few weeks might be $200 better off after tax, but those whose job it is to collect money might find the well-off are more willing payers this financial year.

It's the old "bring forward expenses, delay income" trick.