To maximise the cash in your pocket from the sale of an asset, it is important that you seek professional advice from your trusted accountant. A great accountant will be able to advise you on how to minimise the amount of tax you pay on the sale of your assets.
When you sell an investment asset, you'll make either a capital gain or a capital loss, calculated as the difference between the purchase price of the asset (cost base) and how much you sell it for. If you make a capital gain, and you bought the asset on or after 20 September 1985, this value is added to your taxable income, which can considerably increase the tax you have to pay in your end of year return. If you make a capital loss, you can use it to offset a capital gain but not against employment or investment income.
Should you sell your home, the capital gains on this will typically be exempt from tax, unless:
● You used it to earn rent or run a business.
● It's on more than two hectares of land.
If you used part of your home to run a business or earn rent - such as listing a room on Airbnb - a portion of the capital gains based on the floor area and length of time it was rented out won't be covered by this exemption.
Capital gains tax can make selling an asset seem less attractive. Fortunately, there are a number of strategies that can reduce the taxable value of your capital gains to maximise your wealth.
Let's take a look at the key strategies an accountant might suggest for minimising capital gains tax (CGT) on the sale of your assets.
Don't miss out on getting back the time and money you've sunken into your investments - work with an accountant to minimise capital gains tax.
1. Utilise the six-year rule
If the asset in question is real estate, you may be able to take advantage of the six-year rule. This can apply if you move out of your primary place of residence and decide to rent it out.
Using this rule, you can continue to classify the property as your home for up to six years after you move out, and it will be exempt from any capital gains tax should you decide to sell in that period.
Note that only one property can be considered your primary residence at a time under this rule.
2. Revalue before you lease
If you are not eligible to use the six-year rule, you might be able to reduce your capital gains by having your property valued before renting it out.
For rental homes, the cost base is calculated using the market value of the property at the time it is first rented, rather than the price it was purchased for. If your property has appreciated since you first purchased it, you will only pay capital gains tax on the value earned over this amount.
For example, say you bought a property for $500,000 and later had it valued before renting it, to find the market value had increased to $600,000. If you later decide to sell your investment property, and fetch a sale price of $700,000, your capital gains would be the difference between the sale price and the market value at the time of first rental. This means you'd make a taxable capital gain of $100,000, rather than $200,000.
You may also be able to apply further discounts to this, as we'll explain below.
3. Use the 12-month ownership discount
If you've owned your asset for at least 12 months, you will automatically receive a 50 per cent discount on any capital gains from the sale.
So, using the above example, if you have owned your property for at least 12 months before selling, you would be eligible for the CGT discount and only make taxable capital gains of $50,000.
The full 50 per cent discount applies to individuals and trusts only. Complying super funds are eligible for a 33.3 per cent discount, and companies are generally ineligible but may receive other similar tax concessions.
The same tax exemptions you enjoy on the sale of your home don't apply to your investment property. Don't get stung!
4. Sell in July
Selling your asset at the start of the financial year gives you a further 12 months to implement any capital gains reduction strategies before your next return is due. This generally also means you can hold on to the money and invest it before you need to pay tax on it.
5. Consider your investment structures
Different tax concessions are available according to the structure you hold your assets in. While the above examples apply generally to an individual's assets, you might consider purchasing assets in a discretionary trust or self-managed superannuation fund (SMSF) to access other tax benefits.
In an SMSF, any income is taxed at a flat rate of 15 per cent, including returns on assets such as rental income. For capital gains, a 33.3 per cent discount applies, meaning the effective tax rate is only 10 per cent. The downside is that this money is tied up in your SMSF until retirement.
A family trust can distribute the capital gains made in the sale of assets across its beneficiaries. This means you can effectively spread the capital gains across multiple family members, making the most of individual tax rates. For example, if your existing income for that year was already $85,000, but your partner's was $30,000, and you made a capital gain of $25,000, you could distribute $20,000 of the capital gains to your partner and only $5,000 to you to keep the tax rates within the 32.5 per cent bracket.
6. Take advantage of super contributions
If you're interested in growing your retirement savings, but do not hold your assets in an SMSF, you might like to make additional superannuation contributions to your superannuation fund. You can contribute up to $25,000 each year into your super fund as a concessional contribution, taxed at 15 per cent. Note that your salary-sacrifice and employer contributions count towards this cap, so you may not be able to contribute as much as $25,000. Check with your superannuation fund and accountant prior to making the contribution to determine how much you can contribute and claim against your income.
From 1 July 2018, anyone with a super balance less than $500,000 will be able to carry forward their unused concessional contributions caps, so if you're planning to sell assets in the future it's a good idea to investigate what your allowance for concessional contributions is likely to be.
For more information about maximising your profit from a capital sale, reach out to the experts at VBA today.