Capital gains tax

Discussion in 'Accounting & Tax' started by MSS87, 21st Dec, 2021.

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  1. MSS87

    MSS87 Active Member

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    Hi, just an accounting/tax question.

    For example: If I earned a salary of $200k a year however before the end of the financial year I quit my job. The next financial year I sold a property with a $200k capital gain. How much tax would I pay for the sale of the property considering the financial year I sold the property I had no income through employment?

    Thanks in advance.
     
  2. New Town

    New Town Well-Known Member

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    It would be an equal amount for each year. Roughly.
     
  3. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  4. datto

    datto Well-Known Member

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  5. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  6. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Capital gains are taxable at a taxpayers marginal rate. This means the whole of their taxable income that is subject to tax will include the taxable amount of the gain which may be $200K or could be $100k. So in its worst case with other income of $180K+ the marginal rate incl medicare in 47%. However without other income in that financial year the total tax may be far less. However this is not a saving on the gain as such. This reflects not working and not having that income being taxed.

    Tax scales (add 2% Medicare) : Individual income tax rates

    Example :
    Fred earns $200K pa. He considers not working in the 2022 year and wants to know what his average tax rate may be comparing two scenarios if he has a $200K taxable amount of a capital gain.

    If he works his TOTAL tax will be $64667 on his income plus 94,000 on the gain. In addition his employer super, assuming 10%, will face Div 293 tax of $3,000 but he may choose to have his fund pay this. A total of $161,667 is payable on income of $400K. His average rate of tax is 40.41675%

    If he chooses not to work so the only income is the gain the total tax is $64667. The average rate is 32.3333%. His overall saving on the CGT element is marginal and 8.08% or $16,167 due to the tax scale savings alone.

    The amount "saved"appears to be $97,000 however Fred has also lost his net income from his job of $135,333. So has he really cheated the taxman or not ?
     
    Last edited: 22nd Dec, 2021
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  7. MSS87

    MSS87 Active Member

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    Thanks for the advice everyone, really appreciate it. So basically no matter whether I am employed or not, if the capital gain is greater than the $180 000 I am still in the top tax bracket?
     
  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Well... $20K of it may be if you dont work and if you you do work all $200K will be taxed at 47%.
     
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  9. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Anything over $400k capital gain would be taxed at the top rate whether working or not - which is $200k after the 50% discount
     
  10. HiEquity

    HiEquity Well-Known Member

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    Good example for someone on the highest marginal tax rate. Round numbers, tax on the first $200k is $65k while tax on the next $200k is $94k. Fred saves $29k in tax on this transaction by not working. His net take home pay on his $200k income is normally $135k but this is reduced to $135k-$29k = $106k from this transaction if he works, as he loses this saving. Fred has to decide if his job is still worth his time and effort for his new after tax income of $106k (rather than $135k) if we assume this CGT event is a given regardless.

    The key lesson for me here is that Fred has made the capital gain either way by virtue of owning the property all this time - the only questions are whether, when and how he gets taxed on it. Deferring tax liabilities can make for huge savings. If a continuing investor, the anticipated, reliable upside of any new investment that Fred might contemplate would have to be greater than the $65k - $94k CGT range that Fred has to pay here. If that new investment is in property, Fred would also have to add the stamp duty and setup costs for the new property to that number and be able to find another investment opportunity that can reliably recover all those numbers and more to make it worth his time and effort.

    OTOH, he can avoid all these costs entirely by not selling at all... which is the path I inevitably end up taking in the face of numbers like this.
     
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  11. MSS87

    MSS87 Active Member

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    I probably should of explained earlier that I am planning on leaving the industry I am working in anyway. I understand the logic of keeping the property and use the equity to buy more however I have bought a small farm where I intend to use this money to build tiny homes and rent out as Airbnb.
     
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