Taking a smart approach to the sale of particular assets can have a big impact on the amount of tax you pay on the profit. In this week’s tax planning tip I’m looking at how Capital Gains Tax can be managed by carefully selecting the date on which you sell.

A bit of Capital Gains background information

When you sell a Capital Gains Tax asset (e.g. shares or an investment property) any profit you make on the sale of that asset is subject to tax. More specifically, Capital Gains Tax.

In Australia, individuals who hold their Capital Gain Tax assets for more than tweleve (12) months receive a 50% discount on the gain before we calculate the amount of tax payable.

Lets have a quick look at a sample Scenario and run the numbers.

Example – Scenario

You purchased a parcel of shares worth $100,000 on the 30 June 2017. During the 2018 financial year the ASX has seen significant gains and today (3rd May 2018) those shares are now worth $150,000. You are keen to sell out and pocket the profit….cha ching!

For simplicity, I’m going to assume that you have no other sources of income. The only taxable income you will have this year or next year is the sale of these shares. I will also ignore the effect of the low income tax offset.

Option 1 – Sell them today

You make a $50,000 profit on the sale of the shares. The whole $50,000 is taxable this year and must be reported in your 2018 tax return.

Based on the current marginal income tax rates you will pay $8,797.00 in tax for the 2018 year.

Option 2 – Hold the shares and sell after 30 June 2018

You still make a $50,000 profit on the sale of the shares (assuming the market remained stable). The difference here is that you’ve now held the shares for more than 12 months. After applying the 50% discount we now only pay tax on $25,000 when the gain is reported in next year’s tax return.

Based on the current marginal income tax rates you will pay $1,792.00 in tax for the 2019 year.

The net result is a $7,005.00 tax saving just by holding the shares for an extra 8 week before selling them.

Expanding on the example

Lets be honest, the example was incredibly simple. Rarely would anyone find themselves in a situation where they were looking to sell $150,000 parcel of shares while also having no other sources of income during two full financial years. In fact, that in itself is really the point of the article. During the tax planning process at the end of each year you will need to consider all the moving parts and determine how to achieve the best outcome for yourself overall.

  • If you were desperate for the money or expecting a considerable market downturn between today and 30 June 2018 you may choose to sell them early and tax the tax hit;
  • Should you have very little taxable income this year but you were starting a new, well paid job on 1 July 2018 you may find that the tax savings from holding the shares until next year fall considerably (or disappear completely);
  • If you have a lot of taxable income this year but are expecting a considerable drop next year that may be further motivation to wait.

Our aim is to be smart about the timing of Capital gains. We usually get to choose the day on which we sell our assets, so why not pick the one that works best? During my career I’ve had clients achieve 6-figure tax savings as a result of carefully timing the sale of particular assets.

What should you do next?

If you have any assets you’re looking to sell which may attract capital gains tax the best advice i can give you is to call your accountant. Chat through the pros and cons of selling now against holding until a future date. Especially at this time of year when you should already be engaged in tax planning discussions with them anyway.