And while we’re at it, let’s 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%. This means the maximum capital gains tax that can be paid by people in the top tax bracket is 23.25% provided they qualify for the 50% 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% discount. Therefore, it can be a good strategy to defer the triggering a capital gain until a year when you have a low taxable income.
When planning your affairs for tax purposes, keep in mind the relevant dates are the contract dates – not the settlement dates. If you sign a sales contract on 28 June 2013 for settlement in July 2013 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 trying to avoid signing a contract until after June 30. Of course, 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. This is why 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 – 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.
Just keep in mind that the maximum concessional contribution is $25,000 a year in total.
Therefore, 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 its Labor policy to rescind this rule if they regain office, so take that into account when doing your tax planning.
Case Study: A person earns $50,000 a year including $5000 employer super. They sell an investment which triggers a $40,000 capital gain. This will be reduced to $20,000 when the 50 percent discount is allowed for and CGT will be calculated by adding $20,000 to their taxable. They could contribute $20,000 to super as a concessional contribution which could create a tax deduction of $20,000 each which will wipe out the capital gain. The only tax is the 15% on the concessional contribution.
As always take advice – getting it wrong can be very costly.