SOME CAPITAL GAINS TAX STRATEGIES
CASE STUDY: You earn $70,000 per year and have an investment loan of $100,000 at 7% for property or shares. By prepaying 12 months interest of $7,000 you increase your tax refund by $3,395 and also give yourself a safety cushion because your next year’s interest is taken care of. Just make sure you don’t bank the tax refund cheque in your everyday cheque account where it will be frittered away – either pay it off your non deductible housing loan (if you have one) or put it in a term deposit where it will be available to pay almost half of next year’s interest bill when you repeat the strategy next June.
Next look at your records to see if you have sold assets in this financial year that will trigger a capital gain, and whether you have received distributions from managed funds that are likely to give rise to a taxable capital gain. If this is the case, you should examine your portfolio to decide if you have any assets that should be sold before June 30th to trigger a capital loss, because a realised capital loss can be used to offset a realised capital gain. Obviously, the stock that springs to mind is Telstra, the price of which has been in the doldrums.
Personally, I have faith in the long term potential of Telstra shares, and am not selling mine, but many Telstra shareholders could take the view that the recovery could be at least six months in coming and sell their shares at less than they paid for them. This will immediately crystallise a capital loss. Of course, if you really want to optimise your affairs for tax you could then use the proceeds to reduce your non-deductible home loan and when the time is right borrow back to buy more Telstra shares. The interest on the new loan would be tax deductible.
Another way to reduce your CGT bill is to try to reduce your taxable income this year. This can be done by prepaying interest as mentioned above, or by reducing your income by salary sacrificing into superannuation. Just be aware this won’t work unless it moves you down to a lower tax bracket.
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