The strategy To minimise capital gains tax.
How do I do that? Don't "forget" to declare your
gains in your tax return. In a recent speech, the Australian Taxation Office's second commissioner, Jennie Granger, highlighted CGT as a major focus of the regulator. She said it will be stepping up its efforts to match information in tax returns with records on property and share sales.
However, investors can control when they incur CGT and plan to keep it as low as possible. This late in the year, for example, it may be worth deferring any asset sales until the new financial year - thus getting yourself an extra 12 months before you have to pay CGT. (However, NSW property investors will have to weigh this up against selling before June 30 to avoid the new vendor transfer tax.) As CGT is calculated at marginal tax
rates, it can also pay to time sales for years when your income is low - such as after retirement or when you're taking parental leave.
Paul Maddock, the general manager for investments and technical services at MLC, says spreading the sale over several years can also help. This obviously won't work with an investment property, but if you want to sell share or managed fund investments it may be worthwhile selling part now, and part after July 1 to spread your CGT over two years. This works especially well if you are on less than the top marginal tax rate.
Maddock says you can also save by holding your investments for at least 12 months. If you do, only half the gain is taxed at your marginal tax rate - giving someone on the top tax rate a CGT rate of 24.25 per cent versus 48.5 per cent on other income and short-term gains.
What else can I do? Maddock says one popular strategy at this time of year is to sell poorly performing assets and use the capital losses to offset capital gains. Let's say Bob has sold some managed fund units and made a $6000 capital gain. As Bob is on the top marginal tax rate, he faces paying $1455 CGT on his profits (after applying the CGT discount for holding the units more than 12 months). But Bob also has some dud shares in his portfolio that he can sell to crystallise a $5000 loss. If he does this, his net gain falls from $6000 to $1000. After applying the discount, he pays CGT of $243 - a $1212 saving.
If you have gains on assets held for less than 12 months, Maddock says, you should use your losses to offset these first as you'd be taxed at double the rate on these gains. With shares and managed fund units, if you sell part of your investment, Maddock says you may also be able to elect which part of your portfolio has been sold to minimise CGT. He says switching to a different class of units within managed funds can also crystallise losses for CGT.
Can I buy the investment back again after I sell?
The ATO frowns on transactions made purely to obtain a tax benefit, so you may run into problems if you sell and immediately reinvest. This doesn't, however, mean you can't reinvest in the company or fund later.
If I have a big gain, will it all be taxed at the maximum rate? To calculate CGT, you effectively add the taxable part of the gain to your other taxable income. This means at least part of the gain may be taxed at more than your normal marginal tax rate. Even someone on a low income would be pushed into the top tax bracket by, say, a $150,000 capital gain. Unfortunately there's not a lot you can do about that.
Can I use tax deductions to reduce CGT?
Tax deductions reduce your taxable income and as such may reduce CGT. Maddock says a useful strategy for people who can make a tax deductible contribution to super is to put part of the proceeds of the investment sale into super to minimise CGT and boost your retirement savings.
As with other types of deductions, good record keeping is also important with CGT. Costs incurred in buying and selling your investment - as well as other capital costs - can reduce the capital gain you have to declare.
