Nick Bruining Q+A: Beware a massive tax whack without an avenue to offset proceeds of investment property sale

Question I am retired, and apart from superannuation I don’t have any other income. I recently sold an investment property for $880,000 which I purchased 30 years ago for $180,000. I have spent some time on the Australian Tax Office website trying to work out how much tax, if any, I will need to pay. My question is reasonably simple — how is my personal marginal tax rate worked out? Answer Your marginal tax rate is determined by your tax-assessable income minus allowable deductions to give you your taxable income. Based on that taxable income figure, the tiered tax tables then determine your tax liability. Finally, your tax liability is adjusted by any tax offsets or credits that might be available to you. In your case, and assuming you are over the age of 60, none of the money withdrawn from your superannuation forms part of your assessable income and can be ignored. That will leave the capital gains from the sale of the property as your only assessable income. The gross profit on the sale gives you a figure of $700,000, but because you held the asset for more than 12 months only half of that — or $350,000 — becomes part of your assessable income. Assuming no or minimal tax-deductible expenses, this figure will become your taxable income and will determine your marginal tax rate. In your case, unfortunately, this places you in the top tax bracket. Up to $180,000, the tiered tax rates will see you cop a tax liability of $51,667. In addition to this figure, we need to add the 45 per cent tax payable on the remaining $170,000 — or a further $76,500 — giving us a total tax liability of $128,167. And this is before we include the Medicare levy. If you have a suitable private health insurance policy, a Medicare levy of 2 per cent is payable — or an additional $7000. If not, you will be subject to the maximum Medicare levy surcharge of an additional 1.5 per cent — or $5250. In total, your tax bill for this financial year would be at least $135,167 — or could be $140,417. Unfortunately, there are few options available for you to reduce this tax. A concessional contribution to superannuation might be possible if you are aged under 67. If you’re over 67, you would need to satisfy the “work test” which requires you to work for at least 40 hours in a consecutive 30-day period. If your total superannuation account balance is more than $500,000, you would be limited to a tax-deductible concessional contribution of $27,500. A contributions tax of 30 per cent will apply. If the total balance of your superannuation funds is less than $500,000, you may be able to contribute up to $132,500. Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association