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BACKGROUND

Client was aged 55 and employed, with a view to retire in about 5 years. Salary was $85,000, had in excess of $400,000 in superannuation and debt free. Client advised she had $30,000 savings that could be used for investment and had approximately $1000 per month savings capacity. She was considering purchasing an investment property, approximating $330,000 that could be used as an alternative home to live in “for retirement” if she decided to down size from her existing home. Client was also looking to reduce her tax position.

REVIEW AND RECOMMENDATION

In reviewing the client position, we recommended scope to purchase the property using $30,000 as a deposit, and consider entering into an arrangement with her employer to salary sacrifice into superannuation by $5000 pa.

OUTCOME

Cash Flow was reduced by $12,555 ($1046 per month). PAYG tax saving was $2909 pa, super contributions tax was $750 giving an overall tax saving of $2159 pa Net proceeds to super was increased by $4,250 pa. Client has achieved tax saving within her savings target and provided enhancement to her retirement position. Capital gains tax management will be required leading up to retirement.

BACKGROUND

Capital Gains Tax (CGT) introduced 19/09/1985

No CGT even if family home used to produced income during ownership period, if home was purchased pre 19/09/1985.

1. If family home purchased post 19/09/1985, and home used to produce income pre 20/08/1996-‘Proportional Rule’ applies.
2. If family home purchased post 19/09/1985 , live in family home first, then rent out post 20/08/1996 and still your main or “family home” AND your rental period is less than six years NO CGT applies.
3. If scenario 2 above applies and your rental period is more than six years , your cost base is taken to be the market value of your home on the      date it was first used to produce income.
4. If scenario 3 above applies and you do not treat the home as your main residence, “cost base is taken to be the market value of your home on the date it was first used to produce income” rule may still apply.

Note. If property is rented for a period of six years, still claimed as prime residence then left vacant prior to selling, NO CGT applies for an unlimited period –as long as property is left vacant 

A CLIENT PROFILE CAN BE CLASSIFIED IN 3 WAYS:

1. 1. PROPERTY INVESTOR -long term buy/build and hold to gain rental income
2. 2. PROFIT MAKING ACTIVITY* - to buy/build and sell
3. 3. BUSINESS OF PROPERTY DEVELOPMENT – to buy/build and sell

The one client may have a different profile in relation to each venture, for example a client may purchase a property for long term rental income and undertake a “profit making activity” on another property leading to a different tax outcome.

CLIENT PROFILE 1

NORMALLY ASSOCIATED WITH CAPITAL ACCOUNT TAX TREATMENT AND SUBJECT TO CAPITAL GAINS TAX RULES, ie. a concession for holding the asset for more than 12 months.

CLIENT PROFILE 2 & 3

SUBJECT TO REVENUE ACCOUNT TAX TREATMENT AND SUBJECT TO PROFIT AND LOSS ASSESSMENT

ie. the full amount of the profit as assessable.

FOR STRUCTURING PURPOSE, AN ASSET HELD PERSONALLY, WILL BE SUBJECT TO TAX AT THE CLIENTS PERSONAL MARGINAL TAX RATE (MTR)–WORSE CASE FOR A PROFIT MAKING ACTIVITY BEING THE FULL PROFIT TAXED AT A MTR OF 49%.

CONTRAST THE ABOVE PROFIT MAKING ACTIVITY HELD UNDER A COMPANY STRUCTURE WHERE THE PROFIT IS TAXED AT 30% (or lower 28.5% for small companies).

Note. A “PROFIT MAKING ACTIVITY” AND THEREFORE A TAXABLE EVENT MAY EVEN ARISE IN RELATION TO A PRINCIPAL PLACE OF RESIDENCE IF THE FACTS LEAD TO A “PROFIT MAKING ACTIVITY” IS SHOWN TO EXIST.

Note. The above summary is general tax advice and information only and should not be used a basis of making tax or investment decisions. Clients should seek specific tax advice before acting on information provided in the above summary.