Selling down IPs each year step by step

another hypothetical

Fred has a decent sized portfolio that has seen reasonable gains in preceding years. He has no super, and wants to retire very early. He is looking to sell one or possibly two properties each year to fund his retirement lifestyle.

Would selling costs and CGT be his only obligations?

 

Yes, this is a fairly common strategy for minimizing the cgt component.

 

Would also depend on if he was married,that would double the tax free part if they both did not work,but if the properties are held for a long time the CGT can be very costly,unless you have had a bad run in the share markets..

 

He would also have to pay off loans that are secured by the properties being sold. This may or may not be loan associated with the purchase of that property. He would also have to stop claiming interest on a loan associated with the property that is sold, unless he sold at a loss.

 

If he's married. He and his wife can still put in 500k each into super .

Cliff

 

Are you saying that Fred could sell a property for a $200k profit and put the entirety into super 'tax free' and completely avoid CGT on the sale of the IP?

 

I would like to know this as well.

 

Based on the proposed new super changes (if they do get legislated). I believe as long as your super balance is less than $500K then you can make after tax contributions (counts towards your $500K lifetime limit) and claim a tax deduction on that amount.

So there are few conditions you need to tick to be able to claim tax deduction.

(PS: This is my understanding which could be wrong)

Cheers,
Oracle.

 

Last financial year our accountant advised us to place I think it was $35,000 each as this was the limit at the time (partner and I) into our SMSF to reduce our tax.

CGT - I can not see how you can funnel profits from sales directly into SMSF to avoid this tax, if this were the case then we would all be doing it surely?? and no one would be paying CGT which makes no sense.

 

No , but the income from that money when he does go into retirement is tax free.

Depending on the income bracket and the structure the IP is in , the CGT may be less than expected.

Cliff

 

This is wrong. The $500k lifetime cap is for non-concessional contributions (aka non-deductible contributions), contributions like this are purely to shift the assets and income they will generate in the future from higher tax environments into the lowest tax environment in Australia.

What they will be able to do from July 1 2017 is make concessional contributions (up to 25k each) regardless of what sources their income comes from. If their super balance is below 500k they will also be able to make "catch up" contributions and use up any unused concessional contribution cap from up to the 5 previous years though I believe this is moving forward and will start from that date rather than being able to be accessed immediately from that date (waiting on legislation to know for sure on this).

They may be able to make concessional contributions under the current regime if they're not earning more than 10% of their income from a wage anyway and depending on age that may allow them to put up to 35k each in to offset some of the gain.

 

I would recommend seeing a savvy accountant that can help strategise. Selling in stages will help with CGT, however I am there will be other ways of tweaking to reduce tax.

 

May be my post wasn't clear enough. I was specifically addressing non-concessional contributions only ($200K capital gain) for which the OP would be liable to pay tax. So under the new super changes they could provided they haven't yet capped their $500K lifetime after tax non-concessional contribution and their super balance is below $500K could put that $200K into their super fund as non-concessional contribution and claim a tax deduction on that amount. Effectively avoiding paying personal tax on it. They would still be liable to pay 15% super tax.

This is my understanding anyways.

Cheers,
Oracle.

 

Maybe not if the Coalition win the election. That is a lifetime non-concessional cap and prior contributions need to reduce this. Mum and Dad may also want to make a concessional contribution of up to $25K to reduce taxable income attributable to the CGT

 

No. The non-concessional cap means no deduction is claimed. A deduction may only be claimed on a concessional contribution. Important to consider the marginal tax rate - If taxable income is bought under $18,200 its not worthwhile and a tax loss cannot be created by super deductions.

 

That cap of $500K is per person. So mom and dad together will be $1million. Is that correct?

Do we know if labour are supporting these changes? If not, have they released their policy on super changes? I know they proposed changes in the past but that was under different leader and treasurer.

Cheers,
Oracle.

 

How is that different from current rules where I make extra concessional contributions upto the permitted limit. Current limit being $30K? So say @ 9.5% my yearly contributions are $15K and I decide to make further $15K contributions (pre-tax) to reduce my tax. Are you saying under the new rules I could then further claim $15K as tax deduction?

Cheers,
Oracle.

 

Non concessional lump sum - up to 500 K , per person ( total life time including previous lump sum payments , so a retrospective change .... ) is on top of 25 K / year which is what the annual concessional contribution is being cut back to , BUT , now everyone can contribute up to 75 years old with no work test and you can average that 25 k per year over five years ( check details ) ie if you pay in only 10 k one year , you can catch up to 25 k / year over a rolling five year period.

It isn't as good for those with LARGE balances over 1.6 mil , but is probably better for the average person and is aimed to give ( IMHO ) a better retirement for more , while trimming the VERY GOOD retirement that some get .

eg I talked to someone two weeks ago who was going to put 4 mil into his super and the income on that would have been tax free . He won't get the same benefit now which I think is reasonable ......

Cliff

 

All subject to coalition making a govt

 

I don't think so from my reading...

The $200k gross profit (capital gain) gets added to the person's income for that year of sale - or $100k if the 50% CGT rule is still around by then. Let's pretend CGT discount is still around, and the person had left the workforce and that was their sole income for the year - they would still have a tax liability of $25k (on $100k income; 2015 tax tables).

The rest of the profit $200k-$25k = $175k could in part possibly be put into super under the new non-concessional $25k max per year for 5 previous years, IF the actual rules permit the catchup (as per @wogitalia ) and the person is still under the $500k for non-concessional.

If that's ok, then they could add $25k * 5 = $125k of the $175k to super. They'll pay 15% of the $125k in tax, so will increase their super balance by $106k. After, in pension phase, that money and how much it has grown in the super account will be available tax-free.

The person still has $175k-$125k=$50k in profit. Maybe they could wait a year and add another $25k to the super account (depending on the actual rules by then). But in essence the person has done all they can with super on the sale of the property and the remaining profit can be invested/spent outside super in all the usual ways.

Question: is this the same for a SMSF, or are there differences?