Written by Hudson adviser Ivan Fletcher
As Financial Planners, it is our role to look for advantages for our clients based on the circumstances presented. Circumstances could be based on changes in legislation, personal circumstances and/or broader economic circumstances. Today I look at what COVID-19 may have provided.
In Brief - This strategy involves selling personally owned growth assets such as shares or managed funds with nil to low CGT impact (on the back of recent market losses as a result of the COVID-19 Pandemic) and use those funds to make deductible personal super contributions and boost your tax refund.
- You have unused capacity in your $25,000 Concessional Contribution CAP.
- You have positive equity (net of debt) in shares or managed funds (or similar liquid assets) sitting in an unrealised Capital loss (or at least minimal Capital gain) position.
1. Concessional Contribution Capacity
Hopefully, you are all now aware that you can give yourself a tax deduction by making a personal contribution to your own super. This is well documented in past Hudson Reports - please click the link below to read the article:Refer to this article from March 2018
Provided you are within the qualifying criteria, you can make personal contributions within the regular $25,000 CAP for personal contributions and claim a tax deduction against your Marginal Tax Bracket.
Sean expects to earn $105,000 for the financial year and receive a total of $10,000 in employer (SG) contributions. This means Sean has a further $15,000 available in unused Concessional contributions for the 2019/20 tax year.
Sean can therefore make a personal contribution (from his own bank account) to his super fund and claim a tax deduction in his personal tax return.
In this example, however, Sean has 2 children in private schooling and there is no spare cash from the household income to cover a $15,000 contribution to super.
2. Unrealised Capital Loss Position
Sean and his wife Melissa have a $50,000 portfolio of managed funds and direct shares (with nil debt). Whilst the overall portfolio has a net unrealised Gain position, some of the investments are in an unrealised Loss position.
$20,000 of investments have an unrealised LOSS of $1,500
$30,000 of investments have an unrealised GAIN of $3,000
$50,000 Total Investments with net Gain of $1,500
If they were to sell $15,000 of select investments from the unrealised Loss part of the portfolio, there would be no CGT to pay and the sale proceeds could be used to fund a personal super contribution.
Warning - If your portfolio is originally funded by debt, then the effectiveness of this strategy may be significantly reduced or not viable. If your loan value is higher than your investments valuation then this strategy is likely unviable. You will need to consult with a tax agent on whether part of your portfolio could qualify for this transaction without compromising the tax deductible interest on the loan.
ORDER OF EVENTS FOR A SUCCESSFUL STRATEGY
- Assess the unrealised gain / loss position of your existing portfolio. Broker Reports of Managed fund reports may make this task considerably easier where available.
- Hand pick investments that you know will collectively avoid a Capital Gain overall and then sell to cash.
- Consult with your tax agent if you have borrowings involved in your existing portfolio.
You will need to have investments of greater value than your associated borrowings.
- Make a personal contribution to your super before 30 June.
- Lodge a Notice of Intent (to claim a tax deduction) with your Super Fund.
- Provide the Confirmation of your Personal Concessional contribution (which will come from your super fund) to your tax agent to ensure you claim the deduction in your tax return. THE MOST IMPORTANT STEP.
$5,850 Additional Tax Refund ($15,000 x 39% Marginal tax Rate inclusive of Medicare Levy)
($2,250) Less Contributions tax Paid by Super Fund ($15,000 x 15%)
$3,600 Net Tax Saving
This is the equivalent of a 24% net return on the strategy.
In addition you will continue to benefit from future investment returns on the funds now in super where a lower tax rate (15% compared to Sean's personal tax rate of 39%) is applied to the investment earnings.
Alternative use of funds - The funds will not be accessible in super until age 60 for most people, so if the shares are designed to fund a personal goal such as a child's wedding, car upgrade, renovation or once in a life time holiday - then this may be a show stopper for this strategy - or maybe you have enough to do both.