A good time to review your tax affairs – an upside to the current economic climate

Recouping losses from a personal wealth position and then not having to pay tax on a subsequent gain is a very common practice.

In general a capital gain arises where the sale proceeds from a CGT event exceed the taxpayer’s costs associated with that event, i.e. the cost of the relevant asset. A capital loss arises where the cost of the relevant asset exceeds the sale proceeds.

In light of the current economic climate and the downturn in world financial markets, the disposal or transfer of any assets would likely give rise to a capital loss rather that a capital gain.

Therefore the current economic climate provides an opportunity for a taxpayer to examine their tax affairs and consider disposing of certain underperforming assets or transferring assets into a new more tax efficient structure without being concerned with incurring capital gains. On the contrary, incurring capital losses has its advantages.

Subject to certain criteria and depending on the type of entity involved, capital losses can generally be carried forward indefinitely and offset against future capital gains. Capital losses must be carried forward one year at a time, until exhausted. Therefore, the taxpayer could find themselves in very favourable position, when the market eventually turns.

It should be noted that capital losses can only be offset against capital gains, and not against assessable income.

By way of example, an individual taxpayer could consider rolling some of their income producing business assets into a discretionary trust structure. Their family members could be the beneficiaries of this discretionary trust. On the basis that the transfer of the assets would yield a capital loss, the taxpayer would then have a capital loss in their personal name that they could carry forward indefinitely to offset against future personal capital gains. In addition, they would have greater flexibility over income distribution from income produced by the business assets in the discretionary trust. Thereby allowing the taxpayer to review the individual circumstances of each potential beneficiary to ascertain the most effective may the money could be distributed.

This information has been prepared in good faith, is in the nature of general comment only, and neither purports, nor is intended, to be advice on any particular matter.  You should not act or rely upon any matter or information contained in or implied without taking appropriate professional advice which relates specifically to your particular circumstances.  The authors and consultants expressly disclaim all and any liability to any person (whether a reader or not) who acts or fails to act as a consequence of reliance upon the whole or any part of this information.