Hello Community,
Just wondering if anyone can recommend any resources for the (legal) reduction or elimination of Capital Gains Tax (CGT)?
Specific to the point;
Cheers all…
DBR
No
Yes. Depending on the extent of the renovation it's either a tax deduction against operating costs or a capital item.
Disclaimer - this is a not a financial advice but…
1.Can I transfer an asset before sale to a low-income partner…which they can then sell so as to reduce the overall taxable amount?
If we are talking about Real estate - you can only transfer it to them with no CGT event when there is a break-down
reduction or elimination of Capital Gains Tax (CGT)
Make a CGT loss. Problem solved.
Go live in a tax haven
Lol
I agree with Kobeduck. You need more information, but I'll try flesh the answer out a bit more.
1)
If it's a PPOR you're fine. No CGT.
If it's an investment property or shares, then the moment you transfer it to your partner, it triggers a CGT event.
ie. Purchase price of house was $500k. Current value is 700k. You have to pay tax on the 200k (or 100k if eligible for the 50% discount) upon transfer.
If you try to transfer to your partner for "cost", it's deemed below market value, and a tax law kicks and and deems you must take market value. Hit you with that CGT on 200k (or 100k).
2)
Again, if it's PPOR, do whatever you want. No CGT.
If you renovate an investment property, the cost is sorta capital. You only can't claim it all right away.
It goes into the depreciation schedule and you get whatever that comes out to for each year.
Finally, my advice would be to go see your tax accountant.
Perhaps you have some capital losses banked up somewhere which you could make use of.
Thank you cpho,
Gives me some direction.
DBR
Just wondering if anyone can recommend any resources for the (legal) reduction or elimination of Capital Gains Tax (CGT)?
Don't buy any investments will eliminate CGT.
Reduction: hold it for more than 12 months to get the 50% discount (only disclose 50% of the gain).
If you have a low income partner buy investments in their name.
Invest in liquid assets and don't sell when they appreciate in value. Use an ELOC or a CDP to take advantage of the equity to accumulate more assets or pay bills.
Move to a CGT-free country before cashing out.
you;re trying to find loopholes—-the gov actually spends millions prob closing these,…millions that are funded by your CGT events.
Fair Point!
I wasnt actually trying to find loopholes. More looking for strategies. In any case….I think I have gotten the question answered.
DBR
Can I transfer an asset before sale to a low-income partner…which they can then sell so as to reduce the overall taxable amount?
This will trigger a CGT event. Deemed sale will occur on the date of transfer at market value. It will also more than likely trigger stamp duty (in the state of Victoria for example it will).
If you do this too, you reset the clock on the 50% discount from the date of transfer. Something to keep in mind.
If I renovate a property and then sell…does the expense of renovation become a capital expense that subtracts from the capital gain to reduce the overall tax bill?
In simple terms. Yes.
All the above is assuming it’s not your PPOR. If it is then it all becomes redundant as selling your home is tax exempt (up to 5acres)
If you are looking for free advice, before you seek professional advice, it is still a good idea to do some further research and frame your question in a manner to get some good answers. Then you seek professional advice. Still I will try and answer, to the best I understand.
If you are asking about CGT, I am assuming it is investment property. Because, it is common knowledge that PPOR is exempt from CGT tax.
1. If you hold the investment for greater than 12 months, any gains will be entitled to 50% discount capital gain provisions. Again common knowledge.
2. You are talking about renovation expenses. If you are doing renovation to prepare the property to sell, that would form part of your cost base. But please consider which renovations will add to the selling price. For example, painting and preparing gardens for sale would add value. But, major renovations like kitchen and bathrooms may not return money in the short term.
3. Depreciation: Any unexpired depreciation for previous upgrades will be added to your cost base. But, any depreciation on the building (capital allowance) previously claimed in your annual tax returns will need to be removed from your cost base calculations (no double dipping).
4. Reducing your income: Can you reduce your income in legitimate ways, like pre-paying tax deductible expenses. If you have lower income, you will pay lower tax on the CGT. Because after all adjustments, the final amount is added to your income to calculate tax on your income in a financial year.
5. Super: Only real legitimate strategy that I can think off, is to roll over the taxable amounts of the CGT (after 50% discount) into your and your spouses super. You will pay 15% tax on these contributions up to the annual limit of about $25000. This limit includes your employer contributions too. But, you can make contributions for the unclaimed thresholds from the previous years since the scheme was introduce. https://www.superguide.com.au/how-super-works/capital-gains-…
Hope this helps. But please don't take my word, do your own research and seek financial advise. A competent professional advice might make a huge difference. Even if it doesn't at least you will have the satisfaction that you got the best outcome, and you are complying with the tax laws.
Thank you Spal,
I am at the research stage before I seek professional advice. The points you have made are helpful.
DBR
It use to be $25,000 pre tax prior to 30 June 2021. The pre tax cap has increased 1 July 2021 been indexed up to $27,500. Just be aware this covers pre tax contributions into super which includes employer and salary sacrifice contributions.
IF i am not wrong, one and only way to pay 0% taxes is have property transferred to your son or daughter (from you as a parent) after your death, and that son/daughter pays no capital gains taxes? because it appears as if the son/daughter got the property at the market price.
source https://www.ato.gov.au/Individuals/Capital-gains-tax/Inherit…
BUT THAT's after a death (aka not a desirable event)
So other than that only way are to reduce CGT is
Read that page more carefully. The only exemption is if the property was purchased before 1986 or if it was the principle place of residence. Basically if there was an exemption to the parent before they died, it passes down to the child, there's no magic new exemption created.
If I renovate a property and then sell…does the expense of renovation become a capital expense that subtracts from the capital gain to reduce the overall tax bill?
Yes, but presumably renovating increases the value of the house as well, increasing the tax bill. If it doesn't, you're just making less money on the house in order to decrease your tax bill. You could achieve that just as easily by selling it under market price.
This raises one of my questions. I live in a rental unit. From day one of me buying a house, my son moved into it rent free. The insurance company treats the property as owner occupied. It would be nice if the Tax Laws also treat it as owner occupied and exempt CGT. However I would not want to do anything dodgy.
Problem with that example is that it was a residence at some stage.
Ah yeah good point. op's exact situation is unknown so just thought it was worth mentioning.
¯\_(ツ)_/¯
1) yes if you divorce
get a fake divorce
Spal mentioned it above - 50% CGT discount and making concessional superannuation contributions as well as making use of carry-forward unused concessional contribution availability from prior years to top up your super.
It's the easiest way to reduce your tax liability significantly. You need to lodge a notice of intent to claim a deduction for personal super contributions.
I'll be doing the same this year since I sold some stock, and will get hit with a tax bill.
To illustrate - I made a $75k capital gain, of which $37.5k is taxable because of the 50% CGT discount for holding stock over a year.
At the marginal tax rate of 47%, I'd ordinarily pay tax of $35.2k. However, the CGT discount reduces my tax bill to $17.6k (47% on $37.5k).
I will then contribute $27.5k into my super and claim a deduction. This means I pay ($37.5k-$27.5k) x 0.47 + ($27.5k x 0.15)=$8.8k tax instead.
Ultimately, I pay $8.8k tax on $75k profit which is an effective tax rate of 11.8%. I could get the effective rate all the way down to 7.5% if I contributed $37.5k into my super but I don't want to contribute that much.
This only works if your super balance is less than $500k and you have sufficient concessional contribution capacity.
Most people don't take advantage of the carry forward rule and it's a real shame because that limit is only available on a 5-year rolling basis, and if you don't use it you lose it.
Contributing money into super at a young age will significantly boost your super balance when you retire. I started salary sacrificing a couple years ago and investing in only high growth options and now have just under 4x the average super balance for my age.
Thanks for your explaination.
Unfortunately, non of those points apply to me…but I understand the general direction you are taking.
DBR
Too vague
Here's my answer
1. No
2. No