Capital Gains Tax Gets Ugly

Posted On: Tuesday, December 12th, 2017  In: Blog

CGT started on the 18th September 1985. Any asset (a very wide definition) acquired after that date is subject to tax on the capital gain when disposed of. After 32 years we are now seeing some interesting things happening.

One client purchased a factory for $1 million and sold it for $5 million. Capital gain $4 million. If it is in an individual or trust name then you get a 50% discount and thus $2 million is added to your taxable income. The top tax rate starts at $180,000. If we assume that your other income is already at that level then the tax on the $2 million is at 47% or $940,000. Ouch! As long as you have no borrowings to repay you still walk away with $4.06 million.

In another case we had a property purchased again for $1 million and valued at $7 million. Capital Gain $6 million. After 50% discount $3 million and the tax is $1.41 million leaving $5.59 million after tax. However they owed $3 million on the property and thus only walk away with $2.59 million.

These types of commercial property are earning up to 5%. By selling the property you forgo income of $47,000 and $70,500 per annum. Or you can look at it another way. You are earning the same amount from funds borrowed from the government at zero interest. Not a bad deal. No wonder people become reluctant sellers.

And what happens when you die? If the property goes to your beneficiaries, usually your children, this is not considered a “disposal” and thus no CGT is payable at that time. However your children will pay the CGT when they sell the property based on your original cost base.

We informed one of our clients that his home was not exempt from CGT as the principal place of residence exemption was lost by having it owned by his company. We suggested it might be wise to solve the issue now. After giving it considerable thought he came back to us and said the CGT was not his problem. It was his children’s problem and they will have to deal with it, which they did at a later time.

 

 

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