Nick Bruining, a leading personal finance expert, has addressed a reader's query about whether it is wise to sell an investment unit to sidestep proposed changes to capital gains tax (CGT) and then channel the proceeds into superannuation. The question comes amid ongoing discussions about potential reforms to the tax treatment of capital gains, which could significantly impact property investors.
Understanding the proposed changes
The Australian government has been considering adjustments to the capital gains tax regime, including reducing the discount for assets held longer than 12 months. Currently, individuals can claim a 50% discount on capital gains from assets held for more than a year. Proposed changes might lower this discount, increasing the tax payable on property sales.
This has prompted many investors to evaluate their options, including selling properties sooner rather than later to lock in the current discount. However, Bruining advises caution, as selling a property incurs transaction costs, potential market timing risks, and may trigger immediate tax liabilities.
Superannuation contribution strategies
If a property is sold, the proceeds could be contributed to superannuation, which offers tax advantages. Contributions up to the concessional cap (currently $27,500 per year including employer contributions) are taxed at just 15%, while non-concessional contributions (up to $110,000 per year or $330,000 over three years under the bring-forward rule) are not taxed upon entry.
However, Bruining emphasises that individuals must consider their overall financial situation, including retirement goals, existing super balances, and the impact of contribution caps. For those aged 60 and over, withdrawals from super are tax-free, making it an attractive vehicle for retirement savings.
Key considerations before selling
- Capital gains tax liability: Selling now may still result in a significant CGT bill, even with the current discount. It is essential to calculate the net proceeds after tax.
- Transaction costs: Real estate agent fees, legal costs, and stamp duty on a new purchase can eat into profits.
- Market conditions: Property values may rise further, potentially offsetting any tax savings from selling early.
- Super contribution limits: Exceeding contribution caps can result in penalties, so careful planning is required.
Expert advice from Nick Bruining
Bruining recommends that readers consult with a qualified financial adviser or tax professional before making any decisions. He notes that the proposed changes are not yet law, and investors should not act solely on speculation. Instead, they should focus on long-term strategies aligned with their personal financial circumstances.
In his response, Bruining also highlights that superannuation remains a powerful tool for retirement savings, but it is not suitable for all funds. For example, individuals with large super balances may face restrictions on additional contributions. Furthermore, accessing super before retirement is generally not possible, so liquidity needs must be considered.
Alternative strategies
Instead of selling, investors could consider holding the property and using other tax-effective strategies, such as negative gearing or depreciation claims. Alternatively, they could sell gradually to manage CGT liabilities or invest in other assets with favourable tax treatment.
Bruining concludes that while the proposed CGT changes warrant attention, panic selling is rarely advisable. A well-thought-out plan that considers all aspects of personal finance is crucial.
