Ways to minimise cgt

[CHAOS]

We are thinking of selling an underperforming IP. I am interested in strategies to enable us to keep as much as we can in our pocket.

If we sell in July and settle soon after - do we get to keep profits until the EOFY when tax return is done? This means we get to save on interest by offsetting ppor.

Is it a good idea to prepay interest and other bills for the following year (but before June 30)?

Interested in feedback on this and other suggestions

 

[Terry_w]

Basic strategies

1. Delay triggering the gain by timing the sale unti after july
2. Delay paying the tax as long as possible by holding off on lodging tax returns as long as possible
3. Minimise income as much as possible
a) earn less
b) deduct more

4. Ask for an extension on paying the debt

You can bring deductions up by prepaying interest, contributing to super by salary sacrifice, deductible contribution if self employed, pay other bills quickly etc.

Also
5. Consider selling any assets with losses - so the losses can be used to offset the gains.

 

[wylie]

We are thinking of selling an underperforming IP. I am interested in strategies to enable us to keep as much as we can in our pocket.

If we sell in July and settle soon after - do we get to keep profits until the EOFY when tax return is done? This means we get to save on interest by offsetting ppor.

Is it a good idea to prepay interest and other bills for the following year (but before June 30)?

Interested in feedback on this and other suggestions

If you sell in July 2014, you would be looking to bring forward any expenses into the financial year that you will be making the gain. That would mean in early May 2015 you organise with your bank or broker to fix and prepay some interest for the year starting 1 July 2015 (and pay it in June 2015 to offset the gain made on the sale with a contacted signed after July 2014).

I realise this is what you have already suggested, but I wasn't sure if you were asking if you should prepay before June 30 this year (no).

 

[Paul@PFI]

I'm assuming your question about bring fwd expenses relates to another IP ?
- Prepay interest is one of the better ones if your loan is IO. However it does come with a catch. The next year there is no interest deduction unless you repeat process. If the bank end the IO you can take a hit. But it does defer the issue.
- Bringing fwd expenses would be trivial otherwise and impact the flliwuing tax year.

Important issue is knowing EXACTLY how much "CGT" impact there will be. Most clients over estimate the impact. They also fail to consider some issues that affect cost base etc. Its worth passing the real numbers past your tax agent and getting a solid estimate and actual $$ in mind then consider the value of any strategy.

The use of a tax agent is a great deferral strategy. Esp when you know the excat $$ owing. Just park in an offset against PPOR loan and leave it there. Tax agents can lodge 2015 returns up to around 15 May 2016 if your cap gain occurs in the 2015 tax year based on a sales contract dated early July 2014. Assuming settlement is Aug14 then the tax is deferred for 22 months. This also defers any PAYG Instalments (which would probably be varied down in any case)

Other costs you can consider which can offset a cap gain:
- Selling other CGT assets at a loss (eg shares)
- Breaking a fixed rate IP loan and taking a break cost

Things to watch for:
* Private health insurance medicare levy
* Proposed deficit levy if taxable income > $300K in that year

One strategy some overlook is a personal deduction to super. Normally where a person earns more than 10% of total income from salary and wages they cant make this contribution. The cap gain can change that and allow a lower income spouse for example to make a contribution BUT IT NEEDS CAREFUL ADVICE. A contribution cant create a tax loss so if you get it wrong it will smack you.

 

[CHAOS]

Thanks terry and Wylie for the replies.
Wylie - yes that is what I meant.
Terry do the ATo charge interest on a payment plan? Would you have to prove you don't have the money to pay?
Yes I have a share loss I can use to offset.
Was planning to increase work hours and income next year - that may need revisiting.
Cheers

 

[CHAOS]

Hi Paul thank you for your feedback as well. Yes prepaying refers to other IPs.

I am not a fan of ss into super because we can't access it for 30+ years. I would rather pay the tax, invest it and then draw on it at a time that suits us.

 

[Paul@PFI]

Hi Paul thank you for your feedback as well. Yes prepaying refers to other IPs.

I am not a fan of ss into super because we can't access it for 30+ years. I would rather pay the tax, invest it and then draw on it at a time that suits us.

Agree with you that its a strategy that suits those in 50s+ more. It can suit younger people with large super balances if they use a SMSF and it becomes a joint investor in property too. The preservation doesnt mean it cant invest in same property. Definately restrctions on it though.

 

[Paul@PFI]

do the ATo charge interest on a payment plan?

If you owe $$ to the ATO they do charge interest at a high rate (9.69%) and it is deductible as a tax expense. You cant prepay their interest if you have such a debt !

If you are thinking of neg gearing your potential tax debt think again. Their debt can be enforced so you cant negative gear your tax debt on the unpaid tax as one day they will just sieze a bank account, garnishee or take court action. Also would harm your credit history since they contract out to D&B and others to collect.

And you cant borrow from a bank and claim that interest either.

 

[Paul@PFI]

Strategy to defer tax on capital gains

There is a emerging strategy I have considered that can be used by a taxpayer that faces a large CGT tax shortfall assessment. It involves making excessive super contributions.

Now I will expect most people would argue "I dont want it stuck in super" and on that point I cant disagree on that view for younger taxpayers. However this strategy merely uses a superfund as the vehicle to defer the tax for around 18-22 months AND also bypass the PAYG Instalments for a year. The excess concessional contribution merely parks in the super fund until it is later released. This strategy may be confined to those who are self employed etc as its unlikely a employer would deliberately over pay concession contributions. However deliberate salary sacrifice of the bulk of income could be considered for those employed by unrelated parties. The recipient fund needn't be a SMSF either.

The key to this strategy is making an excess concessional contribution that will ultimately be released. This defers the taxing point (15% after one year but the balance a year after that) and ultimately sees the $$ returned to the taxpayer long after the tax was due and in doing so it bypasses the expected PAYG Instalment concern for around a year. The superfund will pass on a excess contributions charge which is intended to neutralise the earnings in the fund so the excess contribution and earnings are both returned. However it is based on a rate around 5.6% so if you can earn above this rate there can be a earnings benefit to such a strategy. And that benefit is "banked" to super and taxed at just 15%.

This is area requiring personal advice from a super / tax adviser. Not for everyone but something some taxpayers may consider. It has some additional issues:
- estate planning (death could occur)
- self employed "concessional contributions" should also consider the rule preventing a personal tax deduction creating a tax loss. This can deem a CC to become a NCC for the amount that creates the loss. So self-employed shouldcarefully consider their projected taxable income. The arrangemnet works best for those who CANNOT claim a personal tax deduction.
- ensuring non-concessional caps are also within limits. Note that the decision to release the excess amount means the concessional breach is canceled so the old 93% tax problem is avoided.

 

[CHAOS]

If you owe $$ to the ATO they do charge interest at a high rate (9.69%) and it is deductible as a tax expense. You cant prepay their interest if you have such a debt !

If you are thinking of neg gearing your potential tax debt think again. Their debt can be enforced so you cant negative gear your tax debt on the unpaid tax as one day they will just sieze a bank account, garnishee or take court action. Also would harm your credit history since they contract out to D&B and others to collect.

And you cant borrow from a bank and claim that interest either.

Paul from what date does the ATo apply interest? Eh if we did our return in May 2016 and are advised we owe 20k in cgt does the ATo add interest to that amount dating back to July 1 of 2015? Or are you charged interest if you don't meet the pay by due date.
Paying it will not be an issue - just like the 55 days on the credit card - was looking at how long the free period is with the ATo.

 

[sprightly]

Sorry CHOAS for taking your forum.....

but this is a quations for Paul.

I was reading an article that if your IP was iniitally a PPOR and then rental later and sell it within the 6 years period then it will have CGT free.

No need to pay any capital gain tax.

But may add this as additional as taxable income tax though.



for example.

If you sell your property and made a profit of $250K

Your current income is $150K

then your taxable income is $400K taxed at 48.5%

Is this correct?

 

[datto]

Chaos, the ATO charges intetest from the due date as shown on the notice of assessment

 

[CHAOS]

Time to get the backside in gear and get this IP ready for market.
Now do I go with agent A or Agent B?

 

[Paul@PFI]

I was reading an article that if your IP was iniitally a PPOR and then rental later and sell it within the 6 years period then it will have CGT free.
No need to pay any capital gain tax.
But may add this as additional as taxable income tax though.

for example.

If you sell your property and made a profit of $250K
Your current income is $150K
then your taxable income is $400K taxed at 48.5%

Is this correct?

Sprightly you are Spwrong....Lots of wrong information you have read.

The issue you refer to is the MR absence rule. If you occupied as your main residence since acquisition move out then rent it then dont acquire or have another MR during that period you may be eligible to continue the MR exemption for up to 6 years. So if you move back to Mum & Dads OK, If you move interstate or oseas and rent OK etc. If you buy elsewhere you may fail. There may be a choice at that time.

If it was sold after 5 years then its an exempt capital gain. No affect whatsoever on income. If its a CGT loss its also exempt and cant be claimed.

If you sell after six years and its rented then you have to use a different method to work out the CGT. You dont actually get the first six years tax free then pay tax on the last years for example. Read about it here.

Your maths is wrong anyway. Tax scales are progressive. Income is taxed at each scale at a progressively higher rate. On the gap between $150K an $180K the rate is 38.5% then all income above $180K is thereafter taxed at 46.5%