End of Year Tax Planning

2 Mar 2011 |

Too often investors undertake tax planning as the financial year is about to finish. This is often akin to closing the tax door after the investment horse has already bolted. Tax planning is best done as part of a detailed financial plan taking account of all of your investments and liabilities, sources of income and living expenses, and the investment and retirement goals.

If you are one of the rare people that have a tax problem this year, or want to avoid one occurring in June, there is an important tax fact you should be aware of. It relates to when a capital gain is made.

Under tax law a capital gain is not made when the sale proceeds are received, it occurs when a contract is entered into to sell the investment. This means if a sales contract for a property is signed in May or June of a tax year, but the proceeds are not received at settlement until July or August in the following tax year; any capital gain will be assessed in the earlier tax year.

If an offer is received in the last two weeks of June for an investment property, and you will not jeopardise the sale, it makes sense to accept the offer after 30 June. The same principle applies to shares. If the price of a share will not be adversely affected it makes sense to not place the share with your broker to sell until after the end of the financial year.

By having the capital gain made in the next financial year it enables you to take more long term tax planning measures, such as maximising salary sacrifice super contributions, over the coming year.

Where a capital gain has been made during the a year there are several actions that can be taken. If you have not received any employer SGC contributions during the year you should consider making a self employed tax deductible super contribution.  The maximum contribution currently is $25,000 for anyone under 50 and is $50,000 for those 50 and over.

If you have received employer SGC contributions you still may be eligible to make a self employed super contribution. To do this your employment income must be less than 10 per cent of your total taxable income. Employment income includes salary sacrificed as superannuation and the value of any fringe benefits received. Total taxable income does not include gross rent received but the net rent produced after all expenses.

If you are 65 or older you will need to pass the work test of having worked at least 40 hours in a continuous 30 day period during the financial year you make the contribution.

Another way to reduce a capital gain is by making a capital loss. With the recent drop in share values you may have unrealised losses included in your portfolio. A prudent investor would review their portfolio, identify those companies with losses that should be sold due to poor management or trading results, and then sell those shares to produce a capital loss.

This action cannot be taken purely for the purpose of creating a loss. The Commissioner of taxation can regard this as tax avoidance. Instead if this is done as part of a regular rebalancing of a share portfolio, with sales and repurchases occurring over a reasonable time frame, the capital loss should be safe.

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