Author: Glenn Harris

“Buy Low, Sell High” – Every Investor Ever

“Buy Low, Sell High” may be the investor’s mantra, but what comes after selling high and you encounter capital gains?

Paying Capital Gains Tax (CGT) is a financial consideration that can take a significant bite out of your profits.

Therefore, understanding how to reduce capital gains tax in Australia is crucial for savvy investors looking to maximise their returns.

This guide dives into practical strategies for minimising CGT, with an emphasis on Australian regulations as outlined by the Australian Taxation Office (ATO).

Understanding Capital Gains Tax

Capital Gains Tax in Australia applies to the profit from the sale of an investment, such as real estate, shares, cryptocurrency, or even collectibles. If you sell an asset for more than you paid for it, the profit is considered a capital gain and may be subject to CGT.

However, the ATO provides various methods and concessions to legally reduce or defer your Capital Gains tax bill.

Detailed guidelines are available on the ATO’s website, offering a comprehensive resource for understanding CGT implications (ATO CGT Essentials).

Strategic CGT Planning

Reducing your Capital Gains Tax requires strategic planning, an understanding of ATO regulations, and timely execution of tax-saving strategies.

From leveraging the CGT discount for long-term holdings to making informed contributions to your superannuation, the opportunities for managing CGT are varied and potentially lucrative.

Strategies to Reduce CGT:

1. Hold Investments for Over a Year: Assets held for more than 12 months qualify for a 50% General CGT discount for individuals and trusts in Australia. This significant reduction can halve your tax burden, making it a cornerstone strategy for long-term investors (ATO CGT Discount).
2. Offset Gains with Capital Losses: The ATO allows investors to use capital losses to offset capital gains, potentially reducing capital gains taxes. If your capital loss exceeds your gains, you can carry over the loss to future years to offset against future gains. This strategy, known as tax-loss harvesting, requires careful planning and timing to ensure compliance with ATO regulations.
3. Invest in Tax-Advantaged Structures: Contributions to superannuation funds can be an effective way to reduce CGT by offsetting any personal concessional contributions against any Capital Gain and thereby reducing your tax on this gain. Super funds are taxed at a concessional rate of 15%, significantly lower than personal income tax rates. Capital Gains in a superannuation fund are effectively taxed even lower at 10%. By strategically contributing to your super and also choosing a portfolio of assets that target a high component of Capital Gains, you can lower your overall tax liability.
4. Structure and Timing: Holding the asset in the correct entity/entities and strategically considering the timing of the sale are critical in minimising the tax burden. Holding an asset in an individual name that is on the highest marginal tax rate may not be the ideal outcome than holding the asset in an individual in the family that is on a lower marginal rate.

Real Estate-Specific Strategies

1. ATO Rollover Provisions: Australia has provisions for deferring capital gains through the rollover relief option when properties are compulsorily acquired or in certain business restructures. It’s critical to consult a tax specialist like Bishop Collins on these matters to understand the eligibility and application of rollover provisions (ATO Rollover Provisions).
2. Main Residence Exemption: The ATO allows a full exemption from CGT for the sale of your main residence if you’ve lived in it for the entire period you’ve owned it. Partial exemptions may apply if the property was your main residence for only part of the ownership period or if it was used to produce income (ATO Main Residence Exemption).
3. Self-Managed Super Funds (SMSFs): These funds offer a unique opportunity for real estate investment under certain conditions. When an SMSF invests in property, the fund pays a concessional rate of 15% on rental income, and Capital Gains Tax liability may be reduced to 10% if the property is held for more than 12 months. Furthermore, properties held until retirement and disposed of in the pension phase can potentially be sold tax-free. It’s essential to adhere to the ATO’s regulations concerning SMSF property investments and ensure that the investment aligns with the fund’s strategy (ATO SMSF Property Investments).

Advanced Capital Gain Considerations

1. Charitable Contributions: Donating appreciated assets to a registered charity can provide a double benefit –
   a. Avoid Capital Gains Taxes on the appreciation
   b. Claim a tax deduction

This strategy requires adherence to specific ATO guidelines for charitable contributions.

1. Investing in Small Business Concessions: The ATO offers several CGT concessions for small business owners, including exemptions and deferrals. These concessions can significantly reduce or even eliminate CGT on business assets under certain conditions. Familiarise yourself with the ATO’s criteria for small business CGT concessions to take full advantage of these opportunities (ATO Small Business CGT Concessions) or consult with a tax professional like Bishop Collins to understand how to reduce Capital Gains Tax through concessions.
2. Utilising the ‘Six-Year Rule’ for Investment Properties: For property investors, the ATO’s ‘Six-Year Rule’ offers a valuable CGT exemption strategy. If you turn your main residence into an investment property, you may continue to treat it as your main residence for CGT purposes for up to six years after you move out, provided you don’t claim any other property as your main residence during this period. This rule can be particularly beneficial if you relocate temporarily for work or other reasons but plan to return to your home or sell it within six years (ATO Six-Year Rule). This strategy allows for significant tax savings and flexibility in managing investment properties.

Timing When You Pay Capital Gains Tax and Structure

The timing of recognising capital gains or losses and the structure through which assets are held can significantly impact your CGT obligations.

Strategic Timing

• Year-End Planning: Assess potential capital gains and losses as the financial year-end approaches. If you have already realised gains during the year, consider selling underperforming assets to realise a loss and offset these gains.
• Event-based Planning: Major life events, such as retirement, can change your income level and tax rate. Planning asset sales around these events may result in a more favourable tax treatment.

Choosing the Right Structure

• Individual Ownership tends to be straightforward but might not offer the best tax efficiency for high-income earners due to the lack of income-splitting opportunities.
• Trust Structures allow for the distribution of capital gains among beneficiaries, potentially reducing the overall tax burden by utilising lower tax brackets available to beneficiaries. Warning – some costs are higher under this structure such as Land Tax in some states.
• Companies pay a flat rate of tax on capital gains, which can be advantageous or disadvantageous depending on individual circumstances. However, companies do not have access to the 50% CGT discount.
• Partnerships attribute gains and losses directly to partners who pay tax at their individual rates, similar to individual ownership but allowing for income splitting between partners.
• Self-Managed Super Funds (SMSFs) offer tax rates lower than personal tax rates and can be an efficient vehicle for holding certain investments. However, SMSFs have strict rules about the types of assets they can invest in and conditions under which they can borrow to invest.

Common Mistakes in Managing Capital Gains Tax (CGT) and Solutions

Capital Gains Tax (CGT) can be a complex area where errors can lead to unnecessary tax payments or compliance issues with the Australian Taxation Office (ATO).

Understanding these common mistakes and implementing strategic solutions can optimise your tax position.

Mistake 1: Ignoring Timing for Selling Assets

One frequent oversight when learning how to reduce Capital Gains Tax, is not considering the timing of asset sales. Selling an asset before holding it for 12 months means missing out on the 50% CGT discount available to individuals and trusts.

Solution: Plan your asset sales strategically. If possible, delay selling assets until you’ve held them for over 12 months to qualify for the CGT discount. This requires monitoring the purchase dates and considering the tax implications in your selling strategy.

Example: If you sell a property after 11 months with a capital gain of $100,000, the entire gain is taxable. If sold after 12 months, only $50,000 of the gain is taxable, potentially saving thousands of dollars in taxes.

Mistake 2: Failing to Offset Capital Gains with Losses

Investors sometimes forget they can offset their capital gains with any capital losses incurred during the year or carried forward from previous years.

Solution: Regularly review your investment portfolio to identify loss-making assets that could be sold to offset gains. This strategy, known as tax-loss harvesting, requires careful planning to align with your long-term investment goals and tax planning strategy.

Example: If you have a capital gain of $50,000 from selling an investment property but also sell a poorly performing stock at a $20,000 loss, you can reduce your taxable capital gain to $30,000.

Mistake 3: Misunderstanding Asset Ownership Structures

Choosing the wrong asset ownership structure can lead to inefficiencies in how CGT and income taxes are managed.

Solution: Before purchasing significant assets, consider the most effective ownership structure (individual, trust, company, or partnership) for tax purposes. Consult with a tax advisor, like a Bishop Collins Accountant, to understand the benefits and limitations of each structure.

Example: Holding investment properties within a trust might provide better tax outcomes through income distribution than owning them directly depending on your taxable income and investment goals.

You’re Not Alone In Navigating CGT

Avoiding common CGT mistakes involves careful planning, a solid understanding of ATO rules, and the strategic timing and structure of asset sales and ownership.

Each decision should align with your immediate tax implications and your broader financial and investment strategy.

For personalised advice and to learn how to reduce your Capital Gains Tax with confidence, consider consulting with an expert member of the Bishop Collins team.

“To achieve great things, two things are needed: a plan and not quite enough time.” – Leonard Bernstein

Facing the inevitable aspects of life – death and taxes – can be daunting, especially for high-net worth individuals with complex assets.

Planning for end-of-life taxation is essential to ensure your wealth is preserved and transferred according to your wishes while minimising financial stress on your loved ones.

This guide is designed to simplify the process and provide valuable insights for both those nearing the end of their lives and their loved ones assisting with planning.

Why End-of-Life Tax Planning Matters

End-of-life tax planning is essential to ensure your wealth is preserved and transferred according to your wishes while minimising tax liabilities. Effective planning can ease the burden on your loved ones during a challenging time and ensure your legacy is protected.

Key Components of End-of-Life Tax Planning

Estate Planning

Estate planning involves structuring your assets to minimise taxes and ensure they are distributed according to your wishes. This includes:

• Creating a Will: A legally binding document that outlines how your assets should be distributed.
• Establishing Trusts: Trusts can help manage and protect assets, providing specific instructions on how and when beneficiaries receive their inheritance.
• Appointing an Executor: The executor administers your estate, ensuring your wishes are carried out.

Understanding Inheritance Tax and Capital Gains Tax

Australia does not impose an inheritance tax, but there are other tax considerations, such as Capital Gains Tax (CGT). When assets are transferred upon death, the recipient may face CGT when they eventually sell the inherited assets.

Superannuation and Taxation

Superannuation is a critical component of retirement planning. It’s essential to understand the tax implications of superannuation benefits upon death. Generally, lump-sum superannuation death benefits paid to dependents are tax-free, while those paid to non-dependents may be subject to taxation.

Real-Life Case Study: Judith’s Estate Planning

Case Study: Judith’s Estate Plan

Judith, a successful business owner with significant assets, including a boutique valued at $2 million, several investment properties, and substantial superannuation funds, needs to plan her estate.

Judith’s Goals:

• Ensure her daughter, Mia, inherits her business without significant tax burdens.
• Provide for her son, Tom, through her investment properties.
• Minimise taxes on her superannuation benefits.

Judith’s Strategy:

1. Establishing a Trust: Judith sets up a family trust to manage her investment properties. This helps in distributing income efficiently and minimising taxes.
2. Creating a Will: Judith drafts a will outlining her wishes, appointing Mia as the executor.
3. Superannuation Binding Death Nomination: Judith makes a binding death nomination to ensure her superannuation benefits are paid to Mia and Tom. To ensure the taxed element to her non-dependent children is managed, Judith  plans to have her superannuation paid out in full when she is closer to her end of life or if she becomes unwell. As this is a tricky and difficult timing issue, it requires much planning and thorough communication between all parties.

By implementing these strategies, Judith ensures her wealth is preserved and transferred smoothly, with minimal tax liabilities.

Tax Implications of End-of-Life Planning

Capital Gains Tax (CGT)

When assets are transferred to beneficiaries, they may inherit the original cost base of the asset or the market value of the asset if the original purchase was “pre-CGT”. This means if the beneficiaries sell the asset in the future, they may incur CGT on any capital gains made since the original purchase.

Small Business CGT Concessions

For business owners, the Australian Tax Legislation offers small business CGT concessions that can significantly reduce the tax payable on the sale of business assets. These concessions include:

• 15-Year Exemption: No CGT on assets held for at least 15 years if the owner is 55 or older and retiring.
• 50% Active Asset Reduction: A 50% reduction in the capital gain on active business assets.
• Retirement Exemption: CGT exemption on capital gains up to a lifetime limit of $500,000.
• Rollover: Deferring CGT by reinvesting the proceeds into a new business asset.

For more details, refer to the ATO’s guide on small business CGT concessions or reach out to one of the Bishop Collins team for personal advice.

Avoiding Common Mistakes in End-of-Life Tax Planning

Failing to Update Your Will

Ensure your will is current and reflects your wishes. Regularly update it to account for changes in your financial situation or family circumstances.

Overlooking Superannuation Nominations

Make sure your superannuation death nominations are up-to-date and reflect your current wishes. This ensures your superannuation benefits are distributed according to your plan.

Seek Professional Advice

End-of-life tax planning can be complex. Seek advice from tax professionals to navigate the intricacies and optimise your estate planning strategy.

Timing and Structure

Timing the transfer of assets and structuring your estate efficiently is crucial for minimising tax liabilities. Consider the following:

• Gifting Assets: You may choose to gift assets during your lifetime to reduce the size of your estate and potentially lower tax liabilities to the recipients. You may however still need to pay tax if a gain arises on those assets which are taken to have been gifted at market value.
• Family Trusts: Establishing trusts can help manage and distribute your assets tax-efficiently while providing asset protection to those assets.
• Superannuation Strategies: Start early with a Self-Managed Super Fund (SMSF) to optimise tax and enhance retirement savings.

Start Planning Early

To effectively plan for end-of-life taxes, it’s important to carefully consider and take action early. By starting early, you can make informed financial and legal decisions to protect your assets, fulfil your wishes, and minimise the financial burden on your loved ones.

Connect with Bishop Collins

At Bishop Collins, we specialise in helping high net worth individuals navigate the complexities of end-of-life tax planning. Our team of experts is dedicated to ensuring your estate is managed efficiently, and your legacy is protected.

By understanding the key components and implementing strategic tax planning, you can minimise tax liabilities and safeguard your legacy.

Reach out to the team at Bishop Collins for expert advice tailored to your specific needs. Let us help you secure your financial future and achieve peace of mind.