In the world of personal finance, few topics are as vexing as capital gains tax (CGT). However, with careful planning, you can legally reduce your CGT burden and simultaneously boost your superannuation savings. Financial expert Nick Bruining explains how to use the system to your advantage.
Understanding Capital Gains Tax
Capital gains tax is applied to the profit you make from selling an asset, such as shares, property, or collectibles. The tax is calculated on the difference between the purchase price (cost base) and the sale price. For assets held longer than 12 months, individuals generally receive a 50% discount on the capital gain. This means only half of the gain is included in your taxable income.
Strategies to Reduce CGT
One effective strategy is to time the sale of assets to coincide with a year when your income is lower. For example, if you take a career break or retire, your marginal tax rate may drop, resulting in less tax on the gain. Another approach is to use the 'carry forward' rule for capital losses. If you have made a capital loss in a previous year, you can offset it against current year gains, reducing your tax liability.
Additionally, consider the 'small business CGT concessions' if you own a business. These concessions can reduce or eliminate CGT on the sale of a business asset, provided you meet certain conditions. For instance, the '15-year exemption' allows you to disregard a capital gain if you have owned the asset for at least 15 years and are aged 55 or over, and retiring.
Topping Up Your Superannuation
Superannuation remains one of the most tax-effective ways to save for retirement. Contributions to super are taxed at a concessional rate of up to 15%, compared to your marginal tax rate which could be as high as 45% (plus Medicare levy). By making extra contributions, you can reduce your taxable income and boost your retirement savings.
Using Capital Gains to Fund Super
If you sell an asset and realise a capital gain, you can use the proceeds to make a personal deductible contribution to super. This is known as a 'salary sacrifice' arrangement, but you can also claim a tax deduction for personal contributions if you meet the requirements. The key is to ensure you do not exceed the concessional contributions cap, which is $27,500 per annum for the 2024-25 financial year.
Another option is to use the 'downsizer contribution' if you are aged 55 or over and sell your home. You can contribute up to $300,000 from the sale proceeds into super, even if you have exceeded the contribution caps. This amount is treated as a non-concessional contribution, meaning no tax is payable on the way in.
Case Study: John's Strategy
John, aged 60, sold an investment property he had owned for 10 years, making a capital gain of $200,000. After applying the 50% CGT discount, his taxable gain was $100,000. John's marginal tax rate is 37%, so he would normally pay $37,000 in tax. However, John decides to make a personal deductible contribution of $27,500 to super. This reduces his taxable income to $72,500, and the tax on the gain drops to $26,825. He also saves $4,125 in tax on the contribution (since the super fund pays only 15% tax on the contribution). Overall, John reduces his tax bill by over $10,000 and adds $27,500 to his super.
Important Considerations
Before implementing any strategy, it's crucial to seek professional advice tailored to your circumstances. The rules around CGT and super are complex and subject to change. For example, the 50% CGT discount is not available for foreign residents, and there are limits on how much you can contribute to super based on your total super balance.
Additionally, be aware of the 'work test' if you are aged 67 to 75, which requires you to have been gainfully employed for at least 40 hours in a 30-day period to make voluntary contributions. From July 1, 2024, the work test is removed for those aged 67 to 74, making it easier to contribute.
Conclusion
By understanding the tax system and using strategies like timing asset sales, offsetting losses, and making super contributions, you can significantly reduce your capital gains tax burden and build a healthier retirement nest egg. As always, consult a qualified financial advisor to ensure you make the most of these opportunities.
