Ease the pain

Annette Sampson explains what to do to minimise CGT

Annette Sampson

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CAN I AVOID A NASTY CAPITAL GAINS TAX BILL THIS YEAR?

Capital gains tax hasn’t been on most people’s radar in recent years, thanks to weak investment markets. But with markets up, if you’ve sold, or are selling, an investment this financial year it’s time to be think about ways to minimise your tax.

USING LOSSES

Did you sell any investments at a loss during the downturn? As losses can only be used to offset capital gains (not to reduce tax on your income), you may have unused losses stored up. Ipac’s head of financial services, Colin Lewis, says capital gains tax applies on your net gain – how much profit you’ve made after your losses are deducted from your gains. So if you sold shares at a loss of $10,000 last year, and you’ve made a $20,000 gain this year, that $10,000 loss can wipe out half your gain, leaving you with a net amount of $10,000.

DO: Take the time to understand how CGT is calculated as it’s easy to get it wrong if you do things in the wrong order. Lewis says working out your net gain comes first. You then apply the 50% CGT discount to any gains you’ve made on assets held for more than 12 months, and add the final amount to your income where you pay tax at your marginal rate.

If you’ve got a few dud investments still floating around in your portfolio (and who hasn’t?), you can also sell them before June 30 to generate losses to offset your gain. Just remember that the tax office regards assets as being sold on the contract date, not the settlement date, for tax purposes.

DON’T: Be tempted to do a “wash sale” – selling an investment to generate a capital loss and buying back again soon afterwards. Lewis says the tax office takes a dim view of this. He says a ruling a few years ago extended the definition of wash sales to include situations where an investor sells and buys back in their spouse’s name, or sells shares in one company and buys back into a similar stock. Lewis says selling NAB and buying CBA would be one example where this could apply. He says you could argue that the decision was based on investment considerations rather than tax – maybe your broker recommended switching to NAB to CBA – but you might be questioned on it.

SUPER

Another popular strategy is to use tax-deductible super contributions to offset tax on your capital gain. If you’re self-employed or earn less than 10% of your income from employment, you should be eligible to make personal deductible contributions. These generate a tax deduction that can be used to offset the tax on your capital gains.

How does it work? Take Mary, who is self-employed and earns $120,000 a year. She is sitting on a $40,000 capital gain.

If Mary contributes $25,000 to super before June 30, she will get a tax deduction of $9625 that she can use to reduce the tax on her gain. She’ll have to pay the 15% super contributions tax, but Lewis says she’ll still save $5875 in tax.

If you’re employed, Lewis says you can reduce some of the tax on your gain by increasing your salary sacrifice contributions for the rest of the financial year. But you need to get in quickly as you can only ask your employer to sacrifice income that you haven’t earned yet.

DON’T: Contribute so much to super that you exceed the contribution caps and get slugged with excess benefits tax. This year your total deductible contributions are limited to $25,000.

PAY LATER

If you’re thinking of selling an investment, it may also be worth waiting until the new financial year to do it. If nothing else, you’ll have another 12 months before you have to worry about paying tax. Lewis says deferring the sale works especially well if your circumstances are about to change – if you’re moving into retirement, for example, or cutting down your work hours – and will be on a lower tax rate.

INCOME LOSSES

If you have income losses carried forward from previous tax years, Lewis says you may also be able to use these to reduce your capital gain. He says this strategy is popular with expatriates who may have losses accumulated from a negatively geared investment property they can use when they sell the property. He says business operators may also have accumulated losses from the downturn they can use to reduce capital gains tax.

Annette Sampson has written extensively on personal finance in the Australian media. She was personal finance editor with The Sydney Morning Herald and a columnist for The Age and has written several books on managing money. She is also a former editor of the Herald’s Money section.

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