It is not often that you use the words ‘pleasure’ and ‘tax’ in the same sentence, but if you had a choice of income tax or Capital Gains Tax (CGT) it would be more pleasurable to pay CGT.
1. CGT Tax is only payable at the end so greater compounding during the life of the investment
2 investments of $100,000:
A. one returning 0% income with 10% capital gains, or
B. One returning 10% income with 0% capital gains.
Same overall return but different tax consequences.
In year 1
A will be worth $110,000 but no tax payable yet,
B will be worth $100,000 with income of $10,000 so up to nearly $5,000 lost in tax.
In year 2
A will be worth $121,000
B will be worth $105,00
Each returning the same 10% again.
If this continues the gap between A and B will widen each year.
2. Can be avoided completely on at least one and possibly 2 properties
The main residence exemption means one asset can be completely tax free. Careful planning can allow for 2 properties to be totally exempt for the whole ownership period.
3. The 50% CGT discount
Once the tax is payable most taxpayers will actually get a 50% reduction in the tax payable because of the 50% CGT discount. This applies for assets held longer than 12 months. It doesn’t apply to income received more than 12 months!
4. Personal expenses can reduce it
Move into an investment property and costs incurred while living in the property can be used to reduce the eventual CGT – potentially to nil. These are the 3rd element cost base expenses and include interest, rates, repairs, insurances etc. You can’t do this with income.
5. Time to Plan
CGT can be minimised by careful planning. This can involve timing strategies, bringing forward other expenses and other strategies some of which I have outlined at: Tax Tip 119: How to Reduce CGT on Investment Property (Part I) https://propertychat.com.au/community/threads/tax-tip-119-how-to-reduce-cgt-on-investment-property-part-i.10681/
Written by Terry Waugh, solicitor at www.structuringlawyers.com.au