Capital Gains Tax: planning, advice crucial

There is currently no special rate of tax on capital gains. The taxable capital gain, after applying the discount, is simply added to your taxable income in the year the contract was signed. The tax you pay then depends on your total taxable income. That's why this column is timely, with 30 June now only about a month away.

One way to reduce CGT is to sell in a year when your taxable income is likely to be lower. A common example is selling an investment property in the year after retirement. Another strategy is to make tax-deductible superannuation contributions, including catch-up concessional contributions where available.

Jack and Jill are in their early 70s and do not receive the age pension because their investment property, worth $1.2 million, takes them over the assets test cut-off. Jack has $700,000 in super and Jill has $200,000. Given their ages and the latest kerfuffle about CGT changes, they are considering selling the property now. Their main concern is the CGT bill.

But they get a pleasant surprise when their financial adviser tells them they may be eligible to make tax-deductible catch-up superannuation contributions. These are designed to compensate people for concessional contributions not made by their employer, or by themselves, in previous years. Neither has made deductible contributions since retiring at 65, so each may be eligible to contribute up to $175,000 next financial year. This comprises $142,500 in catch-up contributions plus the standard concessional contribution cap of $32,500.

There are two important criteria. Their total superannuation balance at the previous 30 June must be under $500,000, and they must pass the work test to make deductible contributions between ages 67 and 75. This requires working 40 hours in 30 consecutive days during the financial year in which the contribution is made.

This is where planning and advice come in. On their adviser's recommendation, Jack withdraws $250,000 from his super before 30 June 2026 and contributes it to Jill's super as a non-concessional contribution. Neither transaction has any tax consequences. As a result, their super balances at 30 June become $450,000 each, meaning they have passed the first test. Some people get a bit shy about the work test. But Jack and Jill feel there would be no trouble getting some part-time work to qualify.

Let's do the calculations. The property cost $500,000, so the capital gain will be about $700,000 if they achieve close to $1.2 million for it. They qualify for the 50 per cent CGT discount, reducing the taxable capital gain to $350,000. That means $175,000 will be added to each of their taxable incomes in the year the contract is signed. They then make tax-deductible super contributions of up to $175,000 each, taxed at 15 per cent within their super funds. Their taxable income falls to zero and the CGT liability effectively disappears. All they need to do is notify their super fund that they intend to claim a tax deduction. Their adviser will help with the fine-tuning. The purpose of this example is to show what is possible and the importance of planning early.

Over the next two years, many people with investment assets will be reviewing their affairs and deciding whether to sell before 30 June 2027, when the CGT rules are proposed to change. But tax is only part of the equation. The bigger question is what you would do with the proceeds and whether the asset still has strong long-term potential.

The proposed changes also make superannuation even more attractive from a tax perspective. If access before age 60 is not an issue, super may become one of the best long-term homes for investment money. Just remember that your balance at each 30 June affects your ability to make future after-tax contributions. If you have owned an asset for a long time, keeping it after 30 June 2027 may still make good sense if it is a quality asset. The capital gain is apportioned across the entire ownership period, so the portion caught by the new rules may not be significant. Once again, expert advice and careful planning could save you a fortune.

Question: For the age pension assets test, are assets assessed on a net basis? For example, if you have an investment property with an outstanding mortgage, is the loan deducted from the property's current value?

Answer: Provided the loan is secured by a mortgage over the investment property, the value of the property for assets-test purposes is reduced by the amount of the outstanding loan. This would not apply if the loan was secured against an exempt asset test, such as your home.