Joan and John are retirees. As we do at every Progress Update Meeting with our clients, we examined their current position and considered potential strategies for improving their situation.
Superannuation re-contribution strategy
At our 2024 Progress Update Meeting, the first item we discussed was a superannuation re-contribution strategy. This would improve the tax treatment of their superannuation if/when any super benefits were paid to their children upon their passing.
Joan had $790,000 in her pension account, while John had $220,000 in his.
On our recommendation, Joan took $300,000 out of her pension account and added $110,000 into John’s before 30 June 2024. The remaining $190,000 was added to John’s pension account in July 2024.
Outcome: This converted $300,000 from being a taxable superannuation benefit to being tax-free. An outcome that could potentially save their children $45,000 in tax in the future.
Sale of investment properties
The second strategy involved the sale of their investment properties.
Joan and John had been considering selling their investment properties for some time, and with the property market running hot at the time, the properties would be very easy to sell. One of the main issues we face when clients want to sell investment properties is what to do with the proceeds.
One of the best strategies in this situation is adding these funds to your superannuation, where these funds can be invested in a tax-free environment, and a regular income can be paid.
In Joan and John’s case, their two investment properties were worth $800,000 each. This raised two issues that needed to be addressed:
- How do we fit $1.6 million into their superannuation?
- Given these properties initially cost $200,000 each, there would be a $600,000 gross capital gain (before general discount) on each property. That’s a $1.2m capital gain.
This is where the superannuation re-contribution strategy mentioned earlier comes into play. Because we had withdrawn $300,000 from Joan’s super pension and only added $110,000 back to John’s, both of them had less than $500k in their superannuation as of 30 June 2024. This allowed them to use carry-forward rules for concessional superannuation contributions for the previous five financial years (as they had been retired and not used these contributions for some time). In conjunction with the current $30,000 they were each allowed to make in 2025, this meant in the 2025 financial year, they would be allowed to contribute $162,500 each as concessional contributions. These contributions could then be used as a deduction against the capital gains tax on the property sales.
When we reviewed the tax returns for the rental properties, we noticed for one of the properties, the date it was first rented was three years after it was acquired. When we asked Joan and John about this, it was revealed that they’d actually lived in the property for the first three years while they were building their current house. This meant the cost base of that property for capital gains tax became the market value when they moved out of the property, not the original cost of $200k. We were able to get a valuation of the property to support the property being worth $500k when they moved out. This reduced the capital gain on that property to $300k.
The other benefit of this partial exemption was that the property now qualified for downsizer contributions. This meant they could add a further $300k each to superannuation from the sale of that property whilst still being allowed to make $530k in non-concessional contributions.
Outcomes:
- We were able to put $600k into Joan and John’s superannuation from downsizer contributions.
- This, in addition to $325k in concessional contributions and $530k in non-concessional contributions, meant a total of $1.455 million could be added to their superannuation.
- The gross capital gain on the properties reduced from $1.2 million to $900k, which, after the 50% general capital gains tax exemption, would mean a $450k taxable gain ($225k each) and then with the additional concessional superannuation contributions Joan and John each made of $162,500, they further reduced this to just $62,500 each. This meant Joan and John would ultimately pay $22,000 on a capital gain of $1.2 million.
- Finally, once all the above was actioned, Joan and John would receive an additional pension of approximately $73,000 per annum, which was much higher than the net rental they were getting on these properties in the first place.
All of the above made Joan very happy as she likes holidays. And we could even detect a slight smile from John, who is not given to smiling very much!