No one enjoys paying taxes, and Capital Gains Tax (CGT) often tops the list of least favourite taxes. However, CGT has some redeeming features: it’s only payable when you dispose of an asset, and if you’ve held it for at least a year, you get a 50% discount to account for inflation. Additionally, death doesn’t trigger CGT; instead, the tax liability is transferred to the beneficiaries, who will only pay CGT when they dispose of the asset.
The only real catch is that realised capital losses expire upon death. Therefore, if you have capital losses, it can be advantageous to sell some assets with a capital gain before death to offset those losses and reduce the overall tax payable.
Fortunately, there are straightforward strategies to minimise CGT liabilities with some careful planning. One effective approach is making tax-deductible (concessional) contributions to your superannuation.
Here’s a perfect case study demonstrating how this can be achieved:
Case Study: Jack and Jill
Jack and Jill are both 66 years old and retired for five years. They have super balances of $800,000 and $300,000, respectively. They plan to sell a property with a capital gain of approximately $600,000.
Step-by-Step Strategy:
- Timing the Sale: Jack and Jill decide to delay signing the contract until after June 30 to take advantage of the lower personal tax rates for the new financial year.
- Utilising Catch-Up Concessional Contributions (CCs): They discover they can use catch-up CCs, as they haven’t made any contributions since retirement. From July 1, the concessional contributions cap will rise from $27,500 to $30,000.
- Eligibility for Catch-Up CCs: They need to ensure their super balances are below $500,000 at June 30, 2024. To achieve this, Jack withdraws $360,000 from his super before June 30, reducing his balance to $440,000. This adjustment makes both Jack and Jill eligible for catch-up CCs starting July 1, 2024.
- Calculating the Catch-Up CCs: For the period from 2019-20 to 2023-24, the maximum catch-up CC amount is $132,500. This is in addition to the $30,000 CC cap for the 2024-25 financial year. Thus, they can contribute up to $162,500 each and claim it as a tax deduction. Note that in any given year, you must use the standard CC cap first before applying catch-up CCs.
- Selling the Property: They sell their property, purchased in 2018 for $700,000, for $1.3 million in the 2024-25 financial year. This results in a taxable capital gain of $600,000, divided equally between them ($300,000 each). With the 50% discount, only $150,000 is added to each person’s taxable income.
- Minimising CGT Liability: They utilise the standard CC cap of $30,000 each and $120,000 in catch-up CCs to offset the taxable gain. This effectively reduces their taxable income to $0. The total tax payable is merely $45,000, which is the 15% contribution tax.
Key Takeaway: Not everyone may have access to catch-up CCs, but most retired individuals can still reduce CGT by making a $30,000 concessional contribution for the year ending June 30, 2025.
As always, it’s essential to seek advice tailored to your personal circumstances—good advice doesn’t cost; it saves.
For personalised advice on minimising your capital gains tax liabilities and making the most of concessional contributions, contact BOA & Co. Financial Group at 1300 952 286, email info@boanco.com.au, or visit our website at www.boanco.com.au.