Capital Gains Tax - can it be slashed by selling when unemployed etc?

A business owner told me recently that he could slash the CGT on his IP by selling in a year that he has little income, thereby only paying the lowest rate in the dollar (as the CGT is based on a person’s marginal tax rate when they sell).

Is that correct?

If so, does that mean I could sell my IP during an extended (and unpaid break) from work and reduce the CGT?

Or get the same result if I sell an IP once I am retired from work?

 

Yep. CGT is levied at your marginal rate - if you have no other income, then you can pay $0 CGT on the first $18200 of gains etc...

 

Yes but the savings will be minimal on a large gain.

Imagine you had an $100k income and a $500k gain.

$600k income v $500k income if you stopped work.

 

Tax on $500k income is $208,097 or 41.6% average tax rate.
Tax on $600k income is $255,097 or 42.5% average rate rate
Not much of a difference in %

Another way of looking at it though:
Reducing your income by $100k will save you $47,000 in tax

 

It’s not taxed at your marginal rate - it’s taxed as income and you pay tax on that income at the relevant rates of tax

Some erroneously think “I am on the 32% marginal rate - that’s what applies to all the gains”. Wrong - the gains are added to your income and if that pushes you into the next tax bracket, then you will pay tax on income over the marginal threshold at the higher marginal tax rates.
But yes there is a benefit of deferring gains to a year where your income is lower. Just not as much of a benefit as one might think.

 

Thanks everyone.

So, in summary, you pay tax at whatever tax rate applies once the income from the IP sale plus any other income from salary etc is taken into consideration.

 

This is a very confusing statement.

 

In what way confusing?

 

I think you mean profit or gain from the IP sale. Net proceeds less depreciated cost base, possibly after applying the 50% CGT discount assuming sold on capital account (not revenue account).

 

Any capital gain, after reducing it with cost base expenses and 50% discount etc, is just added to the taxpayers other taxable income for the year.

Here are some tips:
Tax Tip 119: How to Reduce CGT on Investment Property (Part I) Tax Tip 119: How to Reduce CGT on Investment Property (Part I)

 

I’m not sure what a capital account is.

Yes, I did mean ‘profit’.

I find it a bit confusing - is this correct?:

1. Sell IP.
2. Apply all costs - which reduces profit from sale.
3. Add up the profit from sale and other income from salary etc.
4. 50% of the profit from the IP sale (the capital gain) is then taxed at the tax rate determined by #3.

 

No

Sell house, work out the capital gain
Apply the 50% discount
Then add to other income

Capital account is when you are holding the house as an asset.
Revenue is when your are holding it as trading stock or short term profit making intentions = no 50% discounrt
Tax Tip 143: The sale of a property – Capital or Revenue account? Tax Tip 143: The sale of a property – Capital or Revenue account?

 

Thank you Terry.