Written by Aaron Alston
As we are approaching the end of another financial year, I thought I would revisit a topic I have written about 3 times over the last 18 months ago and that is Capital Gains Tax. Capital Gains Tax (CGT) is not payable until you have disposed of an asset. You are required to pay CGT on any profits you make when you have acquired an asset after 19 September 1985. I have provided scenarios below on how you may be able to reduce your CGT bill. Remember everyone’s financial situation is different so depending on your own unique circumstances, these strategies may or may not be applicable to you.
CGT Exemption on your Family Home
The family home is exempt from CGT if it is held in your personal name. If the house is held in a company or trust however, you will lose the exemption. If you are unsure whether you should hold your home in your personal name or a trust, you should seek expert advice as this will have implications for people who are trying to protect their assets. You will have to decide whether you prioritise asset protection or paying no CGT.
Bob and Jill purchased a house to live in and decided to put it in the name of a family company and did not seek expert advice. The area they purchased in substantially rose in value and as a result their home $2 million to $3 million in 4 years. Bob and Jill decided to put the home on the market and sell and found themselves with a huge CGT bill!! Had Bob and Jill purchased the property in their personal name, they would have paid $0 CGT.
The 6 Year Rule
There is a provision that allows you to be absent from your house for up to 6 years without losing the CGT exemption. You cannot, however, move out of one home and into another and have both properties as your principal place of residence (PPR). It is possible though to own 2 houses and claim an exemption on the house you are renting out, whilst living in another.
Scenario 1 – You want to keep the original home and rent it out, whilst purchasing another one to live in. If the original residence was rented out after 20 August 1996, you are only liable for any increase in value that occurred from when it was first rented out. It would be wise to obtain a valuation before vacating.
Scenario 2 – You rent the property when you first buy it and then move into it. Upon sale, the gain is apportioned between the time you live in it and the time it was rented out. If you owned your PPR for 15 years and rented it out for 5, CGT would only apply 1/3 of the gain.
When you sell or dispose of an asset, you can qualify for the CGT discount and reduce your capital gain by 50% if either of the below apply:
- You owned the asset for at least 12 months
- You are an Australian resident for tax purposes
You purchased a unit for $600 000 on the 1st July and sold it the following year on the 1st June for $650 000. CGT would be payable on the $50 000 gain as you have held the asset for less than 12 months. If you wait until you have owned the asset for at least 12 months, CGT would only be payable on $25 000 as you would qualify for a CGT exemption under the 12-month ownership requirement.
You retire on the 30th of June and your taxable income for the financial year was $150 000. You hold some shares that you wish to sell so you can upgrade your vehicle. By selling the shares, you will trigger a capital gain of $30 000 (after allowing for the 50% discount). If you sell them whilst you are still working, CGT would be approximately $12 000 (https://paycalculator.com.au/). If you waited until you retired and progressively sold the shares when your taxable income is likely to be minimal (assuming your income is drawn from an account-based pension, which is tax-free), the entire capital gain would be tax-free, as it would be under the taxable threshold.
Superannuation and CGT
It is possible to reduce your capital gain by making a tax-deductible (concessional) contribution into superannuation.
Bob and Jill purchased an investment property in Brisbane, QLD for $650 000. They decide to liquidate their assets as they are in retirement and sell their property after 10 years for $850 000 (approx. capital growth of 5.5% pa). They will realise a gain of $200 000, however because they are retired and aged 64, both Bob and Jill are eligible to contribute to superannuation. They have a low taxable income (both are drawing from their superannuation). They qualify for the 50% discount and because the property is held in “joint names”, half the capital gain is apportioned to each of them. Bob and Jill have a net capital gain of $50 000 each which is added to their taxable income. Bob and Jill seek advice from their Accountant and Financial Adviser who both identify that they have unused contributions from previous years that they can now carry forward (see https://www.ato.gov.au/individuals/super/in-detail/growing-your-super/super-contributions—too-much-can-mean-extra-tax/?page=3#Carry_forward_unused_concessional_contributions. From the proceeds of sale, Bob and Jill both make concessional contributions into super, which reduces their taxable incomes under the tax-free threshold and reduces their CGT bill to $0. The only tax payable is the 15% contributions tax into super.
Taxes on Shares
Bob and Jill’s son, Larry aged 25 earns an income of $100 000 p/a. He invests $50K into a share trust after receiving advice from his financial adviser. The income totals 4% fully franked income and 4% capital gain. The dividend of $2,000 in year 1 would include franking credits of $860. Larry’s taxable income therefore increases from $100 000 to $102 860. When Medicare is included, the tax payable would be 34.5% or $987. The franking credits, however, can be deducted from tax payable reducing the tax payable to $127. As CGT is not payable until an asset has been sold, Larry has paid just $127 tax on a $8,000 return.
CGT on Bequests
This area can be an extremely complex topic, so it is best to seek expert legal or accounting advice. The important thing to understand is that there may be CGT implications on any assets you are receiving through a will. You may have an unnecessary CGT bill by simply cashing assets in before seeking expert advice.
- You are required to pay CGT on any profits you make when you have acquired an asset after 19 September 1985
- The family home is exempt from CGT if it is held in your personal name
- There is a provision that allows you to be absent from your house for up to 6 years without losing the CGT exemption
- When you sell or dispose of an asset, you can qualify for the CGT discount and reduce your capital gain by 50%
- It is possible to reduce your capital gain to NIL by making a tax-deductible (concessional) contribution into superannuation.
- Franking Credits can make Australian shares a tax-effective investment.
- There may be CGT implications on any assets you are receiving through a will. It is best to seek expert advice
CGT can be a complex topic, so it is recommended to seek expert advice before making any major financial decision.