The insider tip that funded an early retirement and saved $55,000 in CGT
A property investor has saved on capital gains tax and boosted his superannuation by $100,000 using a little-known strategy, before retiring in his early 50s.
When long-term property investor Frank Raiti and his wife set about retiring in their early 50s, part of their plan hinged on a superannuation window that was about to shut.
It was a financial adviser he saw on social media who showed him how to make the most of the catch-up concessional contribution rule, before his assets grew too large.
“I remember saying to my wife, I’ve seen this guy on Instagram, and I showed her his reels, and I think we should meet with him to help us retire as soon as possible,” Mr Raiti recalls.
They did just that, meeting with First Financial principal financial adviser James Wrigley, who helped set up a strategy that delivered a $100,000 boost to his superannuation fund, and a $55,000 saving in capital gains tax (CGT).
Mr Raiti, a former certified practising accountant and seasoned investor, recognised his strengths lay in tax but his weakness was in superannuation.
“I knew financially we would be able to do it. My wife and I had nine properties, including one principal place of residence, between us,” he said, adding that their plan was to always borrow to invest in property, and then sell assets as they needed them to self-fund their retirement.
“I know there’s people out there on Instagram saying you should have no debt.
“But I’m in the camp where without borrowing and taking on more debt, it’s basically impossible to get wealthy,” Mr Raiti said.
Mr Wrigley opened his eyes to the concept of selling an investment property in a year where personal income is low to reduce the tax applied to the capital gain.
“This strategy is most powerful for someone that hasn’t contributed to superannuation for the last five years,” Mr Wrigley said.
“You can get maximum bang for your buck … in that you can use up all of the last five year’s worth of concessional contributions. Plus you can use up this year’s concessional contributions to actually get six years worth in one go.”
Financial adviser and founder of Fierra Wealth, Nicole Gardner, whose videos are also popular on Instagram, said she was seeing a “huge influx of people” coming to her after she posted a similar video on minimising CGT and contributing to super.
“The people who are contacting me in response to it are mostly mid to late 40s and older.
“They are people who are starting to think about retirement, perhaps they’re people who have over borrowed, they have kids going through private schooling, they’re on good incomes, but they’re feeling the pressure of mortgage repayments.
“The idea that you can improve their cashflow and save on some capital gains tax is very interesting to many people,” she said.
She added that it’s not uncommon for people to save between $50,000 to $100,000 in CGT by using the catch-up concessional contributions rule.
How it works
The strategy can be used when a person’s total super balance is under $500,000.
“The advice I received was that with these catch-up contributions, I could actually go back five years and top up my super, which was about $480,000 at the time,” Mr Raiti said.
“But I was warned that by the way my super was growing, it was probably going to tip over $500,000 very soon. So, I had this limited time where I could do this.”
To ensure he didn’t miss the narrow superannuation window, a highly defensive move was made to switch his investment approach from high growth to cash.
“I was advised to move it all into cash to stop my super balance from driving over $500,000. “We switched it back to high growth after it was all done,” he said.
The strategy works by allowing you to make a large, tax-deductible contribution, directly offsetting the capital gain, and lowering your tax rate on that profit from up to 47 per cent to the concessional 15 per cent rate.
Mr Raiti’s initial taxable capital gain from the sale of his investment property was $455,000 but after applying the 50 per cent CGT discount, that reduced to approximately $228,000.
His maximum deductible super contribution was $117,000, determined by tallying his unused concessional caps from the previous five financial years.
By deducting the $117,000 catch-up contribution from his taxable capital gain of $228,000, that left him with about $111,000 that he would be taxed on.
“I’ve topped up my super by $100,000 after paying 15 per cent tax ($17,000) and I was also able to save $55,000 in CGT. I was very pleased,” he said. “It’s a very simple strategy that I don’t think a lot of people know about.”
But the strategy won’t work for everyone, warned Ms Gardner.
“Strategies like the catch-up contribution are powerful,” she said.
“The biggest thing people forget is preservation age. You might save tax today, but you are locking that money away until you are 60,” she said, adding that people in their 40s and 50s are best suited to using it.
The other consideration is a person’s income. Once a person earns over $250,000 the tax benefits in super aren’t as great.
“You need to check you haven’t triggered the Division 293 tax threshold where your contributions are taxed at 30 per cent instead of 15 per cent. That said, 30 per cent is still a saving compared to 47 per cent, but the math changes,” Ms Gardner said.
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