Tax Tip 278: Spousal Sale to push CGT over 2 Financial Years?

The other day I wrote a post about a common misconception that many have in that a spouse can be added to title before selling a property so as to split CGT. This doesn’t work as adding a spouse is a CGT event in itself.

Tax Tip 276: Transferring title between spouses before a sale to save CGT? Tax Tip 276: Transferring title between spouses before a sale to save CGT?

But can it save tax by pushing the sale over 2 years instead of 1?

It potentially can, but it will depend on the circumstances.


Example

Homer is on the top marginal tax rate and has an investment property with a $600,000 unrealised capital gain. He wants to sell this property.

If he does, he will pay tax on $300,000 in additional income which would be around $141,000.

But if he were to sell 50% to his wife Marge now and wait until July to sell the property what would happen?

This financial year would see Homer with a $300,000 capital gain which would be reduced to $150,000 after the 50% CGT discount. But as he is on the top marginal tax rate already, and will be next year too, it won’t make any difference spreading the income over 2 years, unless there is a tax rate change.


Example 2

But what if Marge had owned the property and had no other income?

If Marge sold it all in one year the taxable income would be $300,000 and she would this much pay tax on it:
$114,097

But if Marge sold half to Homer in this year and half in next year her income would drop to $150,000 each financial year and the tax on this would be:
$45,997

This would be $92,994 over 2 years so there would be a saving of about $22,103 in tax.

But the stamp duty and other costs would need to be considered.

These are likely to exceed the $22,103 saved in income tax.


But it might be possible to avoid duty if the transfer or contract between the spouses was done while the property was the principal place of residence.

There would also be loan and mortgage issues, but these could potentially be avoided by not transferring title.


Homer’s capital gain on this would be nil or very low, it could also be negative. Homer unlikely to have a gain where the time frame of ownership is short.


Also, the anti-avoidance laws must be considered too.


Tax and legal advice are needed.

 

Although not property, could Homer have sold 50% of some shares in a downturn to Marge (say recent events but he has likely missed the bottom now) if he expected them to recover?

Ie Homer sells 50% (or more) of his shares to Marge - little or no CG to Homer and then Marge enjoys the future CG on recovery.
With a justified reason other than tax, eg Homer may need some $ to repay some debts etc.

Would that work?

 

Yes

 

What about where there is no stamp duty exemption at all?

Such as Sell/Transfer 50% of IP Property to Spouse