Important to know capital gains tax rules
As 30 June comes closer, it’s time to turn our minds to capital gains tax. Just bear in mind that it’s the date of the contract – whether for purchase or sale – that determines the timing of CGT. Therefore, if you’re thinking of a signing a sales contract in the next few weeks, the date June 30 should be prominent in your thinking. Furthermore, to be eligible for the 50 per cent discount, which halves how much CGT you have to pay, the asset must have been held for over a year. CGT is calculated by adding the net gain (that is, after costs have been accounted for) to your taxable income in the year the sales contract is signed. Therefore, if you have had, or expect to make, a capital gain in the current financial year you should be trying to find ways to minimise your taxable income in this year.
The best way to do this is by tax-deductible superannuation contributions, if they are appropriate for your situation.
Since July 1, 2018, anybody with a superannuation balance of less than $500,000 at June 30 in the previous financial year has been able to use their unused concessional contributions caps to make additional concessional contributions – these are known as catch-up contributions.
The amount that can be contributed is calculated on a rolling basis for a period of five years, but that have not been used after five years will expire. So in the 2022 financial year, three years of unused amounts can be carried forward, as well as this year’s cap: the total amount varies depending on your personal circumstances.
CASE STUDY
Jack and Jill are both aged 65 and have been retired for five years. Jack’s superannuation is $700,000 and Jill’s is minimal. They expect to sell a jointly owned investment property next year that will trigger a taxable capital gain of $400,000, and they will only have to pay tax on $200,000 of that after the 50 per cent discount. Because it is jointly owned, the gain will be split again, giving them $100,000 each. Because neither has made any concessional contributions since they retired, they have the right to “catch up” for those three years with contributions of up to $75,000 in the 2023 financial year, provided their super balances are less than $500,000 at 30 June 2022. To achieve this, Jack withdraws $330,000 tax free from his super, and contributes $330,000 to Jill’s. Now both balances are under $500,000. They then make catch-up contributions to super of $80,000 each, which takes them below the tax-free threshold, and wipes out the entire CGT on the investment property. Their only cost is a 15 per cent contribution tax into super, or $12,000 each. Anybody thinking of using this strategy should be aware of the changes to the rules that take place on July 1. Right now anybody can contribute up to age 67, but after July 1 it’s possible to contribute taxdeductible contributions to super till 75 as long as you can pass the work test. This is not hard to do – all you need to do is work for 40 hours in 30 consecutive days in the financial year you make the contribution.
Given the state of employment in the economy right now, I don’t think too many older people find that too difficult.
Just make sure you involve your financial adviser every step of the way.