Financial adviser Ben Nash said taking advantage of unused super contributions could be a strategy worth considering if you’re expecting a big gain. (Source: Ben Nash\/Getty) <\/p>\n
Troy and Trish were a couple who had done most things right<\/a>. They\u2019d held an investment property<\/a> for years, looked after it well, and watched the value climb. Selling the property<\/a> felt like a win, but then the tax bill estimate came back at almost $200,000, and they started questioning whether they\u2019d made the right move.<\/p>\n This couple wanted to pay what they owed, but the thought of seeing six figures disappear seemed like a miss. The good news is that with a little planning, being smart with their timing, and by leveraging one strategy that most people overlook, they were able to cut their personal tax bill<\/a> by more than $100,000 and kept more money working for their future.<\/p>\n RELATED<\/p>\n When you sell an investment property<\/a>, the \u2018capital gain\u2019 is the difference between the amount you sell for and what you paid for the property. For this couple, their capital gain was $800,000.<\/p>\n There\u2019s a capital gains discount<\/a> of 50 per cent that applies when you hold an asset for longer than 12 months. For this couple, because they\u2019d held the property for a number of years, this rule was in play, which reduced their taxable gain down to $400,000.<\/p>\n One thing many people don\u2019t realise about selling property is that your capital gain is added to your other income and taxed at your personal marginal tax rate<\/a>. For Troy and Trish, because their property was jointly owned, this meant that half of the gain ($200,000) would be added on top of their work salary and taxed accordingly.<\/p>\n Because Troy and Trish were already on high tax rates, having this full $200,000 each of income taxed on top of their salaries was what led to their initial tax estimate of almost $200,000.<\/p>\n When you contribute money to your super fund<\/a>, you\u2019re able to claim the full amount as a tax deduction in that year. There\u2019s a $30,000 limit on the amount of these tax-deductible contributions each year, and the limit includes any money that\u2019s put into super by your employer under the compulsory super rules<\/a>.<\/p>\n And there\u2019s another rule that allows you to \u2018catch up\u2019 on contributions<\/a> from the last five years, so long as your super balance is under $500,000.<\/p>\n In this case, Troy was self-employed and hadn\u2019t been contributing much to super in recent years, and so had $130,000 of unused super cap available. And Trish had gone through maternity leave with their second child along with some part-time work, so had an amount of $90,000 she could put into her super fund.<\/p>\n Story Continues <\/p>\n This meant that between Troy and Trish combined, they could make tax-deductible super contributions<\/a> of $220,000, leaving only $180k of the original $400k in gains that needed to be taxed personally.<\/p>\n The end result was a reduction in their personal tax of $103,400, and while there was also some tax on their super contributions, the net result was still tens of thousands of dollars better than writing a six-figure cheque to the ATO.<\/p>\n The Australian tax law cares about purpose and timing. Gains are assessed in the year of the sale, and super contributions made in the same year reduce taxable income. Matching these two is what can shift the outcome.<\/p>\n This isn\u2019t a trick and it\u2019s all within the ATO\u2019s rules. Troy and Trish funded super contributions from property sale proceeds they didn\u2019t need today, were dialled in with their strategy, and kept their paperwork tight.<\/p>\n This strategy isn\u2019t for everyone, but if you\u2019re selling an asset with a large gain, have unused super contributions, and can afford to move a chunk of money into the super environment<\/a> where you can\u2019t touch it until years in the future, it can work well.<\/p>\n It won\u2019t be a fit where you need all of your property sale proceeds for your next purchase, if your super balance is above $500,000, or if you\u2019re not comfortable investing money inside superannuation. Your strategy should serve your goals, not the other way around.<\/p>\n But for Troy and Trish, they didn\u2019t just save tax. They moved $220,000 into the lower tax super environment in one year, meaning more of their investments will be compounding faster into the years ahead.<\/p>\n They also did this in a way that didn\u2019t impact the moves they had coming up outside of super. They cut their personal tax bill from almost $200,000 to under $90,000, and their feelings shifted away from the regret of seeing a large chunk of their gain disappear to feeling like they\u2019d set themselves up for the decade ahead<\/a>.<\/p>\n Selling an investment property with a big gain doesn\u2019t have to mean an automatic six-figure tax bill. If you\u2019re smart with your timing, understand the rules you have available, and execute your plan effectively, you can shift the outcome in your favour.<\/p>\n The pattern with the most successful people is clear: smart plan, tight structure, and admin done right. Follow this approach and you\u2019ll level up your results faster than you might think.<\/p>\n Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth<\/a>. Ben\u2019s new book, Virgin Millionaire; the step-by-step guide to your first million and beyond is out now on Amazon<\/a> | Audiobook<\/a>.<\/p>\n If you want some help with your money and investing, Ben has created a free seven-day challenge<\/a> you can use to get more out of your money you can join here<\/a>.<\/p>\n Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.<\/p>\n Get the latest Yahoo Finance news – follow us on Facebook<\/a>, LinkedIn<\/a> and Instagram<\/a>.<\/p>\n