Nick Bruining Q+A: Should I sell my unit to dodge capital gains tax changes and park proceeds in super?

Question

I am in my 30s and was interested to read your Budget overview in The West Australian last Wednesday.

I am now weighing up my options on whether I should sell an East Perth investment unit I have owned for the past six years.

I paid $800,000 for it in 2020 and estimate that, if sold in the near future, I should end up with about $1.2 million — or a $400,000 profit.

I understand with the 50 per cent discount, $200,000 gets added to my other income, which includes my salary of $115,000 — and that was reduced by $8500 of negative gearing losses.

I checked my superannuation contributions on myGov and it says I have about $134,000 of available carry-over concessional contributions.

Am I right in assuming that if I pay $134,000 into super, I’ll only pay the 15 per cent contributions tax, or $20,100 on that $134,000, instead of about $67,000 in extra tax on the profit?

Answer

While not checked, your calculation appears to be correct, except for the contributions tax.

There is a special additional tax known as a Division 293 tax, which relates to that section of the Income Tax Assessment Act setting out its application.

Division 293 tax is an extra 15 per cent contributions tax which is applied when adjusted taxable income exceeds $250,000. The key is the definition of what’s included in the ATI calculation.

It includes your net employment income — which is your salary of $115,000 plus an add-back of the investment losses, or $8500, plus the assumed voluntary concessional contribution of the full $134,000 carry-over amount.

This equates to a grand total of $257,500, which triggers the Division 293 tax, or an extra $20,100, lifting total contributions tax to $40,200.

This still reduces total tax paid by about $27,000.

There are a couple of things to be aware of. To reduce your income tax, the superannuation contribution must occur in the same financial year as the sale. The sale date is the contract signing date, not the settlement date. It may be too late for this financial year.

Question

In your recent article, Death tax: how to sidestep the super tax, you explained the steps required to reduce the tax deducted from my superannuation when I die.

While I think I understand the basics, I am confused about the tax deducted when the super is paid into my estate.

If paid directly to my children there is a 15 per cent tax and Medicare levy on the taxable component.

You then said “the only way to avoid the cost is to pay the proceeds to your estate because it isn’t an identity that’s liable for the levy”.

Does that mean the 15 per cent tax is still payable, and only the Medicare levy is avoided? If so, that seems a lot less complex than recontribution.

Answer

You are correct in your interpretation of the difference between the benefit being paid directly to a natural person and your estate.

Only a natural person is liable for the Medicare levy, not the estate, which is technically a form of trust.

Nonetheless, the explanation of the effects of the recontribution strategy may have been missed.

The recontribution trick — where money is withdrawn from superannuation and then re-contributed back into super — serves one important purpose. It reduces the total amount of the taxable portion that is subject to the 15 per cent tax.

By boosting the tax-exempt portion of the total death benefit, the 15 per cent tax and Medicare levy, if paid to a natural person, is applied to a smaller portion of the total death benefit.

Each $10,000 you can shift from the taxable component to the tax-exempt component though recontribution saves your children at least $1500. If you can shift $100,000, that’s a saving of $15,000 if paid to the estate, or $17,000 if the super fund pays it to your children — because the $17,000 figure includes the Medicare component.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association