Strategy: Potential Removal of the 50% CGT Discount in May Budget

Strategy: Potential Removal of the 50% CGT Discount in May Budget

There is a strong possibility that the 50% CGT discount could be changed or even removed when the May Budget is handed down in a few weeks. The Tax Institute is giving this a 8/10 chance of happening. (31 March 2017 newsletter).

But we do not know if the discount will be removed or changed – it is just a possibility.

If it is changed we don’t know if it will apply to existing assets already owned or new assets acquired after a certain date. The relevant date could be a date in the past, the date of the budge or a future date.

One strategy worth considering is to decide whether it is worthwhile triggering CGT now just in case.

Example
Someone sitting on shares with a $200,000 capital gain would be taxed on $100,000 of that gain now, but could be taxed on $200,000 of the gain if the CGT 50% reduction is removed completely (and it applies retrospectively). That could result in about $50,000 more tax being payable.


This could be incorporated into a plan for restructuring from one entity to a more tax efficient entity.

With property, there are also transaction costs to consider – stamp duty mainly, but also factor in the ability to qualify for the same loan amount again.

My crystal ball is broken so I do not know whether this gamble will pay off.

If the 50% discount is not touched, by selling you will be bringing forward CGT and have less capital going forward – but you would have had to pay CGT eventually anyway.

 

Hi Terry, this has been on my mind as we are currently marketing a property, which will attract a very large CGT bill. If the govt decides to remove the discount our bill could effectively double, and we would the seriously look at keeping the property (as it has excellent development potential).

In this instance is there a comparable strategy to lock in the discount? For example, possibly purchasing on option to related entity as we have considered moving it to family trust due to its increased potential?

 

I know two people in same jobs in law changes (thats all I can say) and I would rate it a lot more than 8 out 10.

My tips based on questions etc
- Removal for all residential property assets or indirect interests acquired post-CGT. Retained otherwise eg commercial property etc
- No change to pre-CGT assets
- Main residence exemption rules stripped back (foreign persons, foreign property, changed residency)
- Possible change to the absence rule so that no choice is given and only factual residency can be used
- As always effective for contracts made prior to budget time and for non-arms length contracts must have been exchanged prior to budget time. Part IVA always applies.
- Likely changes to clarify CGT v's income producing held property....This one keeps getting raised by several people. May not happen IMO. I think a removal of the 50% discount self corrects that issue

The other one that keeps getting mention too is a change to s8-1 that ties income to deductions. Addition of the words "to the extent of" would end all forms of negative gearing (maybe). I say maybe as matters such as Steele's principles refer to timing issues - So a deduction need not occur in same year etc....What non-property forms of neg gearing could be harmed by this ?? Not a lot IMO. Perhaps if this occurs a new ATO Ruling is then issues that says "deductions are limited to the extent of income earned from that investment in that same year"

I see that there may be a fundamental shift in how property investmnet operates if the above occurs. I dont think it ends property investment by a long way. I removes the tax driven purchaser and aggressive neg gearing. Neutrally geared and positively geared opportunities could expand. eg Reg 13.22C trusts, super, different forms of loans etc

All just fog on the crystal ball.

 

Yes. You could contract with different entities. Seek legal and tax advice.

 

Didn't politicians come out a few weeks ago saying there won't be any change to CGT? I know we are talking about politicians here, but that's still a big turnaround to what they just said.

If it comes true this would hurt quite badly, especially if they end up revoking the CGT concession on all post-CGT properties.

 

Perhaps they may remove the 50% discount for property but not shares

 

This is for PPOR's right? This hypothetical change wouldn't affect investment homes or shares?

 

Not for PPR. There's no cgt for PPR and this won't be changing.

It's the 50% discount on CGT for holding assets for 12 months.

 

Right. Stupid question. My head is all over the place after having made about 20 phone calls today after the APRA bomb dropped lol

 

Does this mean it is time to buy residential property in a Company instead of trust or in individual names?

 

Not quiet yet, but maybe soon, especially if company tax rates drop.

 

xenophon agreed. once senate passes it company tax rate willl come down to 25% foe those with turnover less than $50m.

companies for holding property may soon come back into vogue.

 

The Government has reached a deal with the Nick Xenophon Team to pass its proposed company tax cuts.

The amended legislation will lower the company tax rate from 30 to 25 per cent for businesses with an annual turnover of up to $50 million.
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Xenophon, Government strike company tax cut deal

If the 50% CGT discount for investment properties was abolished then the 25% Company Tax Rate looks attractive purchasing resi investment properties in a Company.

If anyone is thinking about this I would suggest personal legal and taxation advice from suitably qualified and experienced professionals.

 

You are on the right track Terry. Just follow the breadcrumbs to figure out where our supreme leader gets his riding instructions (Hint – possibly not the Liberal Party).

Hot property: negative gearing and capital gains tax | Grattan Institute

 

If a change was to occur...

• I highly, highly doubt it would be at a future date (especially if the change applied to all assets). As per your example, any change might lead to a mass sell off and crash - not so much with property; more so shares.
• I highly doubt it would be a date in the past. People hate 'retrospective' legislation and it would give the ALP ammunition to win the next election.
• Most likely budget night.That's the norm with CGT changes.
• I doubt the discount will be removed, but reduced. Ending it completely would give the ALP plenty of ammunition that the libs are taxing inflation.
• Get rid of the absence rule.

Then the govt has to get it through the senate. Greens love increasing taxation so they'd only require another couple of votes which could be achieved with pork barreling if necessary. Watch the stock market rocket if the change only applies to property.

 

This would really give weight to investing for dividend/yield.... i.e.. cashflow assets, and also tip the scales to buy/hold, which would also circle back to greater consideration of dividend/yield.

 

Make sure you thoroughly investigate the land tax implications before doing this. I've heard news of land tax thresholds for companies (including trusts) changing as well.

 

I would have thought state government intervention would be required here for this to be a possibility?

 

Land tax would be a state government think, so I guess it's not linked directly to the Federal budget.

It doesn't make it any less important though. I just love paying $2k+ per year in land tax on a $600k house in Brisbane. Between the land tax council & water rates, I loose 25% of the income from that property before the lease is even signed.

 

I haven't heard anything about land tax and companies, but certainly worth considering.

It is hard to play the game when they keep changing the rules.