I just sold my investment property, how do I axe my tax?

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I have just sold out of my investment property. What can I do to reduce my capital gains tax (CGT)?

Our CGT regime is pretty generous. Provided you hold the asset for at least a year, the tax you pay is half what would be payable if this money came from employment income. Quite why we pay more tax on income earned through our work puzzles me, but these are the rules that we operate within.

The fact that you have capital gains tax to pay means you’ve made a profitable investment, a good thing. And the tax on that profit is already pretty low. Nevertheless, it’s understandable that you might want to see what opportunities exist to reduce this liability further.

The fact that you have capital gains tax to pay means you’ve made a profitable investment.Credit: Simon Letch

The starting point is to ensure all the costs associated with owning the property have been allowed for. Properties wear out, so over your ownership period you might have updated the kitchen or bathroom. These costs can be incorporated into the capital gains tax liability calculation, so ensure you have all your receipts in order for your accountant.

The next port of call should be superannuation contributions. You have a maximum annual tax-deductible superannuation contribution limit of $27,500. Employer contributions are included within this limit. Let’s say your employer contributions total $15,000 for the year. That would mean you have $12,500 of headroom for you to make a one-off tax-deductible super contribution.

You can take this a step further and consider whether you have unused caps from prior years. To check this, go to your myGov account, then the ATO page, and under Superannuation/Information you will see an option for “carry-forward concessional contributions”.

Making use of these unused prior year caps is the number one strategy for minimising capital gains tax. And as a handy side benefit, it increases your retirement savings, which will eventually become a tax-free income stream, so winning on all fronts.

I am a widower, in my late 70s with approximately $200,000 in my super. Almost all was from my own contributions, very little if anything from my employers. I will be leaving it to my daughter and granddaughter. I believe the government will take 17 per cent. To avoid this, should I withdraw everything and put it into a term deposit?

As your question highlights, tax is payable on superannuation death benefits when paid to non-dependants, such as adult children. This tax is only payable on the taxable portion of your superannuation balance, which emanates from employer contributions, contributions where you’ve claimed a tax deduction, and investment earnings.

It’s not clear from your question whether the contributions you made were claimed as a tax deduction, however, if they were not, then these would not attract any death benefits tax.

For the portion of your superannuation balance that is taxable, the applicable tax rate is 15 per cent plus Medicare. You could withdraw the funds from super now, and that would avoid this tax.

Given the sum involved it’s unlikely this would have any negative age pension consequences, but there is the possibility that withdrawing from super will adversely impact your income test if the super pension was created many years ago.

In withdrawing your funds from superannuation and placing them in a term deposit, you should consider whether you are sacrificing your investment returns and therefore harming the longevity of your savings. Term deposit rates are rarely above the rate of inflation, which means the purchasing power of your savings will be eroded over time.

Paul Benson is a Certified Financial Planner, and host of the Financial Autonomy podcast. Send your questions to: [email protected]

• Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.

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