The capital gains tax imposes a fairly considerable tax obligation and requires that you take a hard look at how you will manage and structure out your investments. If you have banked some significant capital gains in an income year, of course the most direct measure is to pay up. However, there are various legitimate strategies that can be used in offsetting your CGT tax obligations. Here are some tips on how you can manage your CGT windfall.
Disposing Off the Loss Makers
Do you have any loss-making investments? If you have had a capital loss, you can use the losses to reduce the capital gain for an income year. However, losses can’t be claimed against an income. You are only allowed to use them to offset a capital gain.
Go through your investments and determine if there are some loss-makers that can be disposed of so as to lower what will be paid on your better performing investments. This can be easy given that the S&P/ASX 200 has been having a bad run. If your portfolio is a mixed bag of profitable and loss-making investments, you can sell off the loss-making assets to realize capital losses and then offset this against the gains that you have made in other profitable assets that you are selling off in a financial year.
When disposing off a loss-making asset to offset your capital gains, watch out on a “wash sale”. This refers to a situation whereby you buy back a loss-making asset soon after disposing of it. The ATO will penalize you for this.
Defer your losses
Another strategy that you can use if you don’t have significant capital gains in a financial year is deferring your losses to the subsequent financial years. You can carry forward capital losses until such a time when you will have a capital gains event and then you can use these losses to offset your capital gains and reduce your tax obligation. When carrying forward your capital losses, ensure that you keep good records of all the losses incurred as you will need these in later financial years for tax purposes. If you are not in a hurry, you can even hold off the sale of your CGT-attracting assets until after the end of the financial year (EOFY) when the sale of the asset will help offset some burden of a capital gains event.
Use the superannuation to your advantage
One effective strategy that you could use for the financial years when you expect to receive capital gains is salary sacrificing so as to meet your annual pre-tax (concessional) contribution limits of $25,000 which will have the effect of reducing your taxable income as well as taxes on your capital gains. However, keep in mind that there is a 15% entry tax on your concessional contributions and the $25,000 limit applies to all your super contributions including the super guarantee and salary sacrifice contributions.
Consider using a mortgage offset account
Instead of leaving your money in a bank savings account to accrue a 1% or 2% that is subject to taxes, you are better off putting the money in a mortgage offset account where it will earn you the same effective rate that you are paying on your mortgage. This is typically 4% to 5%.
When it comes to managing your capital gains, consider having an investment-oriented approach rather than a tax-minimization approach in order to make the most of all the opportunities for growing your income. Also, avoid misrepresenting your gains as the Australian Taxation Office will pour over the detail to substantiate all your claims. An accounting Melbourne will help you make sense of this and optimize your capital gains to your advantage.