Strategy for 7.5% CGT on IP's

Hi everyone,

Just a strategy to share after some recent readings on this subject...

Say a husband and wife in their 50's own an IP in a family trust (with a trustee company, of which they are both directors) and have held the property for >12 months, and they sold the IP and this resulted in a total capital gain of 300k.

With the 50% CGT discount, this means only 150k of this capital gain is taxable.

Of this amount, say 75k is distributed to the husband and 75k is distributed to the wife, who are both beneficiaries of the family trust.

Also, say they are both still 'gainfully employed' and their 'adjusted taxable income' is such that a 'superannuation contributions surcharge' does not apply.

And, that the husband and wife together both have a self-managed superannuation fund (SMSF).

In this case, the 75k distributed to the husband and the 75k distributed to the wife could each be put into this SMSF as fully tax deductible contributions and incurr a 15% contributions tax each.

So, 15% x 150k = $22500 tax.

So, of the $300000 original capital gain, $22500 of tax has effectively been paid. ie, just 7.5%!!!

Is this correct???

Or, does the CGT exemption not apply here?

Thanks,

GSJ

GSJ said:

own an IP in a family trust (with a trustee company, of which they are both directors)

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GSJ

Your scenario sounds plausible, though that is not an area I am familiar with.

I wanted to comment more on the trust structure.

I heard recently that a trust structure such as you describe has a vlunerability- and that is, if both beneficiaries are directors, and something goes wrong and somebody finds their way to the trust's assets, then the private assets of both partners are at risk- whereas, if only one was a director, there's only half the assets.

That sounds like a far fetched scenario, though if it's even possible, it might be worth while thinking about.

Can any trust experts comment?

geoffw said:

private assets of both partners are at risk

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What private assets? What's in the trust wouldn't be considered 'private assets'. Your private assets could include say a PPOR in you and or your wife's name...this could be at risk, but there are ways of reducing this risk...

I'm not a trust expert though, so let's wait and see what someone else thinks...

GSJ

Hi GSJ
This is all beyond me but of the original $300k gain made on the IP, you are only distributing $150k. Where did the other $150k go?

ILoveProperty said:

Hi GSJ
This is all beyond me but of the original $300k gain made on the IP, you are only distributing $150k. Where did the other $150k go?

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I'm hoping this is the 50% CGT free bit?

GSJ

but the money is stuck in super. and if it is unleveraged why didn't they just buy it in the super fund in the first place? can't they just forget about selling the property and leverage it to invest in... presumably stocks?? the equity redraw could be margin loaned up.

BUMP...

Any other thoughts on this?

GSJ

Yes I have some but haven't had the time to put it together have a look at my newsflash 151 the current one on www.bantacs.com.au about ID2007/145 & 144 for starters. But yes if you can legitimately get the money into a super fund effectively 7.5% tax rate. Also need to consider age base limits and whether qualify to claim a deduction for super which is why the trust may have to make the contribution.

Thanks Julia.

I will have a look at the Newsflash.

There's probably more to it than I described of course.

When you have more time it will be interesting to hear more of your thoughts.

For me it points to the potential long-term advantages of trusts and SMSF used together.

And now, I'm going to post this on a thread in Invested and show 'handyandy' why I was wrong in suggesting one could potentially reduce CGT to just 15%, when I should have said 7.5%, and he suggested 25% ...

GSJ

Remember the 10% rule amongst other things or do the contribution from the Trust as per Julia's comment.

One way around the 10% rule for business owners is to take dividends if they are in a coy, or trust distributions if they are using a trust to operate their business.

Its quite a nice simple and effective strategy.

Thanks Matt, sounds good, will have to look into this strategy a bit more.

GSJ