Timely Advice Provides Massive Tax Savings
After a long career as a high school administrator, Jenny, who had spent the majority of her working life as a single mother, decided that it was time to retire.
As she was old enough to not only draw on her super, but also access the Age Pension, she wanted to restructure her affairs to collect a regular income.
Under our guidance, she decided to sell her home and the adjacent investment property that had been rented to her adult daughter and family, move to a less expensive home and invest the difference.
Under the super contribution rules, Jenny was able to make a $360,000 Non-Concessional Contribution (NCC) and a $300,000 “downsizer” contribution to her super using the proceeds of the sale of the two properties.
The idea was for her to draw the funds to buy her next home back from super once she decided where she wanted to buy.
The timing of her retirement meant she was not going to earn much taxable income in the tax year of the rental property sale, so Capital Gains Tax (CGT) on the gain on the rental property was a non-issue.
At least, that was the plan, until Jenny was offered a full-time employment position in another school, which she accepted.
As CGT is assessed at your marginal tax rate in the year the asset is sold, the tax went from almost nothing to tens of thousands.
Fortunately, Jenny had been indoctrinated with our instructions to ALWAYS inform us of any change in her financial circumstances.
She contacted us to tell us about the new job.
We told her how the significant change in income for the year would impact on the CGT bill.
The good news was we had a solution.
As Jenny told us of this before we changed her super back to paying a pension after making the $660,000 in contributions, we were able to advise the super fund in question that Jenny now wished to treat almost $50,000 of the $360,000 contribution as Concessional (ie tax deductible).
This meant that contributions tax of 15% (ie $7,500) had to be paid by the super fund on Jenny’s behalf.
However, this was significantly less than the $20,000 ( at 40%) that Jenny would have been forced to pay on the same $50,000 as a taxable capital gain.
At the end of the day, Jenny was $12,500 better off than she would have been had she not thought to “loop” us, as her advisers, in on her changed situation.
The moral of the story is it always pays to keep your adviser informed of what is happening with your finances.
Most of the time, it makes no difference, but the times that it does, it can be significant…………just ask Jenny!
For advice on tax planning around retirement, learn more about Wayne Leggett and his work in this area on his author page.
This article contains general information only and does not provide personal financial, investment, legal, tax or lending advice. Consider your circumstances and seek appropriately qualified professional advice before making investment decisions.