Tackling my first CGT this FY 04-05

[gemedical]

Hi everyone,

I would appreciate your collective advise on a CGT matter and options available to offset CGT.

Sold Property in Dec 04
Assessable Capital Gain = $84,500 for 04-05 ... (A)
(Have held asset over 12 months and applied the 50% assessable Cap Gain Rule)

Sold Management Share Funds in Dec 04
Assessable Capital Loss = $35,000 for 04-05 ... (B) ouch! - invested in BT TIME Fund - Lost heaps of hard earned $$ since the tech bubble burst)
(Have held asset over 12 months)

Total Assessable Cap Gain for FY 04-05 = A - B = $49,500 :eek:

This is my first time triggering a CGT event, assuming the above Ca Gain offset calculations are correct, what are my options as far as further minimising my assessable Cap Gain ? :confused:

I have been searching this forum high and low for previous post on this matter so far I have picked up these tips :-

1. Create cap loss (somehow) and further offset the cap gains this 04-05 FY - I have no other investment that would create a cap loss this FY. No Ca Los from previous years either (DOH!)

2. Contribute into Super Fund (First State Super) to offset Cap Gain this 04-05 FY
Pls explain how this can be done and what is the max amount I can offset against my assessable Cap Gain this FY ? :confused:

3. Any other options ?

My background :-

All assests are held in my own name.
1. I have no other Cap Loss from previous FY to carry forward to offset this year's Cap Gains. (DOH!)
2. I am an employee. ie PAYE as far as tax collection is concerned.
3. I have substantial holdings in residential property - $2MIL in value, Owe the bank $1MIL ie. LVR = $50%. :D
4. My Cashflow maxed out after taking into account my rate increase buffer.
5. I am in early 30s, have made ZERO personal contribution anything extra into my employer's super I have will make personal contribution into super later in life (perhaps when I am 40s) and currently have invested extra money into shares or property now.

Would appreciate your advise! :confused:

[DaleGG]

Hi

Firstly, the capital loss is deducted from your capital gain before taking out the 50% general exemption. I was not sure whether you had realised this from the above so I thought it worthwhile to mention.

There is very little you can do to minimise the amount of tax that you pay in CGT other than:

selling another asset for a loss (which does not make sense to do just for reducing tax)
reducing your normal income so that the rate of tax applied to the CG is lower.

Many people in your situation consider prepaying next year's interest bill in this financial year and drawing down on their equity to do so given that your cashflow is tight.

Another strategy along the same lines (ie, reducing your other income) is to undertake maintenance on your existing properties so that you increase their appeal and value, and, get a tax deduction for doing so. Again, given that cashflow is tight, the funds may need to come from a drawdown on equity to achieve this.

Making super contributions will not help your tax situation at all, I am afraid.

Have fun

Dale

[Mry]

Wow. That would be $84,500x2 -$35,000 = $134,000. Then halve that applying the discount and you get $67,000.

Well, nothing has been solved yet but at least you know what you are up for in advance.

You could set up a trust and sell assets to it that may generate a capital loss in that year if you want to keep the assets. That would generate some capital losses, but you would need a total of $134,000 in capital losses to eliminate that gain altogether, but as you said, no capital losses available.

Superannuation salary sacrifice does lower your overall tax bill, but it really wouldn't help you situation much.

I guess you would be left with trying to find another source of income to make some big deductions against. Well, you have 3 months.

[Apocalypse]

Can't see how cash can be tight as a few months ago a property was cashed out for about 170K and a share fund was redeemed - I'm guessing maybe at 50% down - so a 35K loss still means a 35K cash out. So gemedical should have about 200K lying around - admittedly a third of that to yet be taxed but still leaves maybe 170K free to play with...

[gemedical]

DaleGG and Mry

Thanks for correcting my Cap Gain Calculation Error. Looks like I am up for a a huge tax bill this FY, based on a cap gain of $67,000 on top of my salary This situation is much worst than I had orignally thought :eek: :eek:

I am ignorant of how trusts work and not sure selling my assets to a trust would help - Hence all my assets are held in my name currently. I guess I need professional advise and help in this area to show me the benefits in my situation.

Apocalypse

Yes you guessed it right. I cashed out one of my properties and managed funds in Dec 04 to fund for a 25acre rural land investment in the South Coast of NSW. Banks only lend to 50% of the property Value when buying land only with no improvements so I had to cash up and fund for 50% of the sale.

I am asset rich and cash flow poor is what I am indicating in my original post. I have built a large interest rate increase buffer in my cahsflow calculation because I have substantial borrowings from my bank (owe them $1MIL) and being on the conservative side means I will not tap into this cash flow buffer for other investment.

My main focus for the next three months (before 30 June) is to look at options to minimise my Assessable Income/Cap Gain for FY 04-05.

Your ideas will be most welcome - If anyone can recommend someone to me for professional advise I will definately take it on. :)

[Kennethkohsg]

Dear gemedical,

1. Have you also considered using your accumulated tax losses from your present and other property investments to partially the amount of your taxable capital gains? Based on the basis on this factor alone, I was able to pay zero capital gain tax, having realised the profits and offsetted all the taxable capital gains agiainst the accumulated (paper) tax losses, when selling off 2 of my properties in FY 2002/2003 and 2003/FY 2004/2005 respectively.

2. Do you plan to invest again? If so, you may want to consider generating have some new "paper" tax losses from this new investment proeprty, to offset the amount of your taxable capital gains for your property sale.

3. Have you considered also loan re-financing to draw out the equity as an option to the property sale, so that in effect you are not required to pay capital gain tax at all and still can have access to some funds for your own intended purposes?

4. Thanks

regards,
Kenneth KOH

[gemedical]

Kenneth koh sg

Thanks for your ideas!

I will take DaleGG and your advise to bring my tax deductions forward to this FY. This will be in the form of pre-paying my next year's interest bills for my Loan. I have $1MIL in bank loans which is split into 80% variable and 20% fixed rate loans.

I am thinking out loud here - pls correct me if I am wrong.

If I prepay interest to $800k of variable rate loans at 7% interest rate, my interest bill will be $56,000. This amount can offset my Assessable Income this financial year which is my salary plus Cap Gain of $67,000. Hence reducing my tax bill.

Does the above look correct ? If the answer is yes then you all have solved my problem. :)

How do I go about prepaying my interest bill ? Again I have not done this before, Do I need to talk to the ATO to proof that I have made a pre-payment in bulk now and talk to my bank to give them the extra interest payment.

Now thinking ahead for FY 05-06
Because I have pre-paid interest for FY 05-06 , does it mean I will have very little tax deductions to offset my income ie back to the same high taxing state ? :confused:

In hindsight I should have re-financed INSTEAD of selling the property in Dec 04 to fund for the rural land purchase. I would not be in a high Cap Gain position if I had done that and I would have some spare cash to fund for my next investment Funny how I did not even consider the option of refinancing last year ! (kicking myself!!) :mad:

I definately want to keep investing perhaps into shares as my portfolio is so property heavy at the moment or if I find the right property - I have a 200acre rural property in mind right now I want to get my hands on. This is not really an investment choice rather a lifestyle choice :p

[dtraeger2k]

Hi Gemedical,

Regarding pre-paying your interest bill.

Banks will normally only let you do this with fixed interest rate loans. Give them a call and let them know you want to do it and they'll offer you a slight discount for doing so. This satisfy's the ATO's requirement of being for a commercially beneficial purpose.

[Mry]

Does the above look correct ? If the answer is yes then you all have solved my problem. :)
.......
Now thinking ahead for FY 05-06
Because I have pre-paid interest for FY 05-06 , does it mean I will have very little tax deductions to offset my income ie back to the same high taxing state ? :confused:

Hehe, you have discovered the problem of prepaying interest. It just pushes the problem to next year. It is effective in bringing deductions back into high income years where tax threshold changes may make a difference, otherwise its like when a man gets home and he can tell my wife is angry and as soon as she opens her mouth he says "Honey, can we have this argument later?"

[Kennethkohsg]

Kenneth koh sg

If I prepay interest to $800k of variable rate loans at 7% interest rate, my interest bill will be $56,000. This amount can offset my Assessable Income this financial year which is my salary plus Cap Gain of $67,000. Hence reducing my tax bill.

Does the above look correct ? If the answer is yes then you all have solved my problem. :)

How do I go about prepaying my interest bill ? Again I have not done this before, Do I need to talk to the ATO to proof that I have made a pre-payment in bulk now and talk to my bank to give them the extra interest payment.

:p

Dear Gemedical,

1. Your line of thinking is generally correct. However, as I currently understand, in order to prepay your interest effectively, there must first be a commercial interest consideration of some interest rate discount given by your lending bank and that the loan is again used to produce income, in order to be qualify as fully tax-deductible by ATO.

2. Both Dale and Rolf and the other more experienced members can probably confirm it better for you than myself, as I have only read and heard about such a option being used but have not done it myself yet.

3. Cheers

regards,
Kenneth KOH

[Kennethkohsg]

Hehe, you have discovered the problem of prepaying interest. It just pushes the problem to next year. It is effective in bringing deductions back into high income years where tax threshold changes may make a difference, otherwise its like when a man gets home and he can tell my wife is angry and as soon as she opens her mouth he says "Honey, can we have this argument later?"

Dear Gemedical and Mry,

1. I think this is going to be an one-off option that can be used by Gemedical, given his specific circumstances this time.

2. Based on his post earlier, Gemedical is likely to re-finance his loan to draw out his cash equity to reinvest in future rather than to cash out on his existing property.

3. So, I do not think that your purported problem of prepaying the loan interest, will surface in tis context.

4. Thank you.

regards,
Kenneth KOH

[Mry]

Based on his post earlier, Gemedical is likely to re-finance his loan to draw out his cash equity to reinvest in future rather than to cash out on his existing property.

3. So, I do not think that your purported problem of prepaying the loan interest, will surface in tis context.

I can see that you made the suggestion, but I don't see that he/she plans on acting on that, only that there is a plan to prepay interest. Unless Gemedical expresses that they plan on acting on your advice, we cannot assume that he/she will do so.

All I was doing was pointing out that he/she hasn't eliminated a capital gain of $67,000, just that it will become (assuming a prepaid interest amount of $56,000 for 2005 that is 100% deductible) that he/she will have $11,000 in extra taxable income for the 2005 year, and $56,000 to deal with in the 2006 year, on top of normal salaried income.

As long as you have a written agreement with the bank stating that the amount being paid to the bank is for interest, and not a capital amount, you should be fine. Hopefully you have an accountant who can guide you through this process, and a helpful banker.