Capital Gains Tax Question

Hi everyone,

Great forum and hope I can learn a lot from the many well informed here on accounting/tax and other issues.

I need some advice here apart from the obvious in terms of capital gains tax please. My history is that about 10 years ago, I purchased (along with a good friend) a run-down rural home on several acres for a modest sum, as an investment property. It was not purchased as a trust (under joint names). We did it tough paying it off as it never gave us much of a return till now and never thought in our wildest dreams that it would turn out to be such a dividend. The property has recently been re-zoned and we have sold it for a large seven figure sum. Yes, we do realize we are very fortunate and now we want to determine how we can minimize our capital gains tax. There are no major ongoing maintenance/holding costs we can use to offset our tax bill. Is there any way we can creatively further minimise our capital gains tax bill on 50% of the gain. Currently have an acountant who is not offering any further suggestions, other than commenting on our good fortune.
Surely there is other ways to go about it to further reduce the amount. Really would appreciate any advice. Thanks in advance.

 

The world works in mysterious ways... make a big capital gain... have to pay CGT. It really is that simple.

You can't get around the CGT, so what you need to consider is simply how you might legitimately reduce your income tax in general... this is where exotic schemes such as avocado plantations come in. I don't know a great deal about this, except that I wouldn't be investing in avocado plantations, since the ATO is iffy on non-forestry managed investment schemes.

If you want to see the cash from the investment property, then be prepared to pay some tax. I reckon a 50% discount is a good deal.

 

Thanks Rod. I realize that I have to pay CGT as the law stipulates that. However, the tax needs to be paid in the financial year the contract sale date falls on, not on settlement date, so it's a lot of $$ to pay in one go upfront prior to getting the balance and reducing my income tax for this year is not going to make much difference to the sum. Seems pretty stiff that CGT is not due on settlement.....another govt perk tax law as usually such amounts are not paid on short settlement times.
Anyway, you hear of creative CGTminimization schemes but as yet nothing of substance has been brought to my attention.

 

I was a tad abrupt, I know. But there are only a few legitimate ways to minimise tax, and I don't know them all. In fact, I know very little about various tax structures, and if your accountant has shrugged his shoulders, then I'd say he's probably a good accountant, not a bad one!

Consider how dramatic things might need to be to reduce your income tax (is CGT) as an individual:
* Invest a truckload into a MIS, but then you won't have the cash.
* Take out a massive margin loan and prepay the interest, eg say your share is $750k capital gain (50% discountable) then you will have to pay tax on your regular income plus effectively $375k, easily whacking you into the 46.5% tax bracket, so your tax bill will be around $170k (depends on your other income). So you could borrow $2 million at 78% LVR and invest $580k of your $750k, prepaying the $170k interest (at 8.5% ML rate). This way you'd get a tax deduction on the $170k, reducing your tax bill by about $79k. But you'd be rather exposed at a volatile time in the market.
Of course you'd just be deferring you capital gains bill, paying it on any gains the shares/MFs return rather than the property.
* Are you prepared to invest $2m in the share market right now??

Of course, if the CGT event was last financial year, there's absolutely nothing you can do now! But if it was this year (2007-08), you have about 8 months to work out what to do, and about 12.3 months before you have to pay your tax bill.

I can't offer any more on this. Believe me, paying CGT sucks (I had a $43k bill two years ago).

But also keep in mind that this is what investing is all about... surely you were aware that there would be CGT payable on the sale.

This also highlights one of the major issues with having a significant major direct property investment... you can't "sell down" direct property very easily! You just have to cop the CGT when you want to sell. (Sorry!)

 

Of course your Accountant would have asked you questions like these ?

The idea with a CGT asset is to claim immediate deductions for revenue expenses associated with gaining assessable income.

But if it is a purely passive inactive investment then pump up the cost base with all your associated expenses of owning and maintaining the property.

CGT is a long-term record keeping nightmare.

Cheers,

Rob

 

Hi Ruben,

You could make deductible contribution into superannuation if you meet the 10% rule. Depending on your age you could (this FY) contribute up to the new limits (ie, under 50 $50,000 including SGC or over 50 $100,000 including SGC).

Naturally this won't get rid of all of the CGT but may allievate it slightly. Like Rod_WA said, you make a gain you pay tax. You could also look at Perpetual Protected Investments Series 2 which lets you borrow 100% to invest with capital protection for 7yrs and 4 months.

Cheers,

Dan

PS This is general information. Speak to your FPA registered Financial Planner, Accountant or Tax adviser before making an investment decision.

 

Thanks again Rod, Rob and Dan. Was out last night and great to see the response already from the 3 of you so promptly.
All advice helps, and at this stage we have mailny looked at the points Rob covered with our accountant, especially as the CGT bill will be due before the full sale amount is received.
In answer to Rob's points, the property was never occupied by either of us, except at later stages, it was rented for agistment. Inspection, maintenance costs were minimal and we do have receipts for most of these. Largest costs were municipal rates and basic utilities costs. Property was not fully serviced and was purchased as a long term investment. As you put it Rob, 'a purely passive inactive investment.' We will be pumping up cost price with all associated maintenance costs, which does help, but in a small way, in the overall scheme of things.

Regards,
Ruben.

 

Hi Ruben

Sounds like the exchange of the contract was in the last financial year (06/07), and you have an extended settlement period. Because you coudl defer the lodgement of your tax return to say May 08, and pay tax in June 08.

If exchange is in (07/08), you still have a lot you can do to minimise the tax bill. Do you own your own business? As you could salary sacrafice all your income into super so you can lower your marginal tax rates.

Also, if you need to borrow money to pay the tax bill that interest is tax dedcutible.

The lesson for other people is to seek advice before undertaking such large transactions, as with some simple tax planning advice you could ease the burden of tax.

Let me know the year you exchanged and if you have a busienss and I can make some suggestions. If this is an extended settlement, how friendly is the purchaser?

Warren

 

Hi Warren,

Thanks for your input. The signing of the contract was in the latter stages of the 06/07 financial year and yes, I also have an extended settlement period because of the final sale price agreed on. Our accountant has deferred the lodgement of my tax return to May 08, and the CGT payment will be due in June 08. So, I will be borrowing some money to pay the CGT bill and claiming the interest. I don't have my own business and if the exchange was this current financial year, instead of late 06/07, I would have been able to salary sacrifice, as you pointed out, a large portion of my remaining employment income into super, so that I could lower my marginal tax rates. However, the sale had been drawn out for a while, fine tuning the final agreed sum/conditions, so waiting a couple extra months till July 07 was not going to happen by the now purchaser.