Managing Capital Gains

Reducing your capital gains tax bill can be difficult. That is because capital gains can only be directly offset by capital losses.

Please note, we are only discussing personal capital gains in this article not company, trust or any other structure.

Balancing out your capital gains by offsetting capital losses doesn’t make any sense. The whole point of investing is to make money, not to break even from a tax perspective.

That doesn’t mean you cannot reduce you tax bill for capital gains though, it just means you have to focus on your taxable income.

So let’s break down taxable income:

Assessable income − Allowable deductions = Taxable income

How do capital gains tax enter this calculation?

The tax effect depends upon how long you have owned the asset. If you have owned it for less than 12 months then the entire gain is added to your taxable income.

As an example, you buy some equities for $10,000 on 1st January and sell it on the 31st December (same year) for $12,000. In this case $2,000 is added to your assessable income.

However, if you hold the same equites for longer than 12 months you can apply the capital gains tax discount of 50% (note there are some exemptions and you should always consult an accountant to confirm your tax position). In this case applying the capital gains discount would result in only $1,000 being added to your assessable income.

The common large capital gains we see are for sales of an investment property, noting that the sale of your residence is generally capital gains tax free.

If we now look at the calculation of taxable income – there are two ways to reduce taxable income. The first is to reduce assessable income.

For most people one the largest components of assessable income is your salary. One of the ways to reduce your capital gains tax bill can be to sell your investment during a period your salary is lower. This could include selling your assets the year after retirement when you don’t have a wage. It could include taking some unpaid leave, or selling in a year when your bonus is lower than normal.

The other option is to try and maximise your deductions in a year where you have capital gains. One way to do this is to contribute additional contributions to super. There is a limit though currently you can only contribute $27,500 per annum in concessional (pre tax) contributions. This amount includes you employer contributions. So if you are earning $100,000 and your employer pays $11,000 per annum in super you could add an additional $16,500 in your own personal contributions. You should note that when contributed to super as concessional contribution the super fund does pay 15% tax on the received contributions. You should also note that once you pay funds into super there are restriction on when and how you can access the funds.

Importantly though, legislation is now in place that allows for catch up contributions. This means that you can use the last five years allowance if you have not maximised those years. In the above example, you might be able to make $82,500 in super contributions in the year of a large capital gain if you had not used the $16,500 in each of the last five years. You should check myGov to find out what amounts you are eligible to contribute. You must also notify your super fund so as to ensure the extra contributions are treated correctly and not classified as non-concessional (after tax) contributions.

Let’s look at an example here:

Jack and Jill sell their investment property for $1million. They have costs of $500,000 so their net capital gain is $500,000.

Assuming they have held the property for longer than 12 months the gain can be halved to $250,000. In this case both Jack and Jill would each have $125,000 added to their assessable.

Lets assume that both Jack and Jill have $60,000  available to contribute to concessionally to super, and have a small amount of deductions to make without any additional contributions.

First the tax they would pay if they did nothing.

	Jack	Jill
Salary	$100,000	$200,000
Net Capital Gain	$125,000	$125,000
Deductions	($5,000)	($5,000)
Taxable Income	$220,000	$320,000
Income Tax *	$69,667	$114,667
Medicare Levy	$4,400	$6,400
Total Tax Inc Medicare Levy	$74,067	$121,067

*As taken from moneysmart.gov.au for the 2024 tax year.

Now lets look at the difference if they both put $60,000 in to their super accounts.

*As taken from moneysmart.gov.au for the 2024 tax year.

Salary	$100,000	$200,000
Net Capital Gain	$125,000	$125,000
Deductions	($65,000)	($65,000)
Taxable Income	$160,000	$260,000
Income Tax *	$44,267	$87,667
Medicare Levy	$3,200	$5,200
	Jack	Jill
Total Tax Inc Medicare Levy	$47,467	$92,867

The reduction in personal income tax for the couple is $54,800. This is a huge saving.

It’s important to remember than any decision should not be based solely on tax outcomes and you should get advice before proceeding down this route, but the savings speak for themselves if you decide this is the right strategy. You should also note that the super fund would pay tax on the contributions of $18,000 in total. So the net savings for the couple would be $36,800.

There are of course other deductions you can use. The first is to prepay expenses in the current year. You can talk to your bank and prepay interest on any debts you have where the funds are used for investment purposes. You might prepay some insurance expenses such as income protection. If you are feeling in a charitable mood then charitable contributions are also deductible.

Of course, if you have any assets that have fallen in value you might also consider whether now is the time to sell those assets. A capital loss directly offsets a capital gain. Again, though the decision to sell should not just be based on taxation outcomes. You don’t want to sell an asset that might recover well next year, just for a tax saving this year. The other thing to bear in mind here is you can’t sell an asset that has lost money and buy it straight back, the tax office looks down on this practice and you might find your deduction is dismissed by the tax office.

In summary, the introduction of the catch up concessional contributions has added some flexibility for tax planning. You can save a large amount of tax whilst at the same time boosting your retirement savings.

For more professional retirement planning advice, call 02 9634 6698 or book a free consultation online with our expert financial advisors at our office in Sydney's Norwest.

*Please note that this is not investment advice and does not take into account your personal circumstances. You should not make and decisions without first receiving accounting or financial advice for your personal situation. There are limits and restrictions with superannuation contributions and it is important to understand them fully before making a decision.