Tax Tip 186: The effect of Taking a Year off Work to Save CGT

Discussion in 'Accounting & Tax' started by Terry_w, 19th Dec, 2018.

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  1. Terry_w

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

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    If someone sells a property and has a large capital gain is it worthwhile taking a whole year off work to save tax? In my view it is always great to take a year off work, but it might not actually save you that much tax.


    Example

    Richie Rich is about to sell an investment property with a $200,000 capital gain. He is sick of it under performing and draining him with land tax and has a low yield. Richie is toying with the idea of taking a whole year off work to save CGT. Is it worth it?

    Let’s assume Richie earns $100,000 in his job, and the sale will happen in the 2018-2019 financial year.

    If he sells the $200,000 gain will be reduced to $100,000 (due to holding it longer than 12 months) and added to his other income for the tax year. The result is an annual income of $200,000

    Tax on $100,000 $26,117 Net income $73,883

    Tax on $200,000 $67,097 Net income $132,903

    Difference $40,980 Difference $59,020


    The Capital Gain will mean $40,980 in extra tax payable for the year.

    This means by giving up a year’s income from work Richie would only earn $100,000 from the capital gain. Therefore, he will save $40,980 in tax by not working.

    But not working means he has less income, working the full year in which the sale occurs will net him only $59,020 as opposed to his normal $73,883 (a difference of $14,863).

    He would need to determine if the effort of working is worth the pay cut of $14,863 which is about $286 per week.

    He should also factor in transport costs to work and other work-related costs – clothing, lunches etc. and there are also heaps of non-financial things to consider. There would be time to:

    - Start a business
    - Travel
    - Study
    - relax

    Originally published at Tax Tip: The effect of Taking a Year off Work to Save CGT – The Structuring Blog
     
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  2. Kassy

    Kassy Well-Known Member

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    Sounds like a plan!
     
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  3. neK

    neK Well-Known Member

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    Ties in nicely with the "mini retirement" concept you've raised previously @Terry_w
     
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  4. Paul@PAS

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

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    The year off could even include a $25K contribution (tax deductible) to super. This would save a further $5300 or more. Where the person staying at work may only be capable of a further contribution of $15.5K saving around $4960 in taxes

    Its worth planning. I once encountered someone who took a year off on half pay LSL as a cashflow and loan servicing compromise.

    One concern to manage is job security. If the employer replaces you and then finds the newb does a great job what happens ??
     
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  5. Terry_w

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

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    Ritchie Rich must have been a public servant!
     
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  6. USC

    USC Active Member

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    This actually works really well with maternity/paternity leave. If you can manage the selling process whilst having a newborn that is!
     
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  7. Chris Au

    Chris Au Well-Known Member

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    That is some serious planning, as well as aligning of planets to bring good capital gains together with the timing of the birth of the baby! (Never know, the strain, or excitment of a good reno might bring the birth on a little quicker.....)
     
  8. Mike A

    Mike A Well-Known Member

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    If he is good he will find a new job.
     
  9. datto

    datto Well-Known Member

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    No good for me. Boss will chuck a party when I leave. Then I might have to go on Centrelink again. Hey, that’s not a bad idea after all.