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.
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 taxand 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 do other things such as:
- Start a business
Written by Terry Waugh of www.structuringlawyers.com.au