A key issue for investors is to manage their capital gains tax efficiently in order to maximise the retirement benefits they are able to receive from their investment portfolios.
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Background
Consider an investment that is sold generating a capital gain of $70,000. After allowing for the 50% capital gains tax discount, $35,000 is required to be included in the investor’s taxable income.
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This is the outcome for the investor:
These calculations assume that the taxpayer has private health insurance and is not entitled to any allowances or rebates. Any entitlement to the low income rebate is not factored into these calculations.
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Strategy
The first option available for the investor is to pay the capital gains tax, in this case $16,275.
The second option could be to invest $35,000 in FEA Plantations Project 2008 (Project). This would eliminate the taxable capital gain and enhance the investment portfolio through diversification and the negative correlation which forestry investment has with some other investment classes.
An investment in the Project can be financed using one of the flexible loan options offered by Forest Enterprises Australia Limited. For instance, investors may finance their forestry investment using a three year principal & interest loan at a rate of 8.5% per annum, using the forestry investment as security.
The following table provides a summary of an investment in the Project using the three year finance option offered by Forest Enterprises Australia Limited.
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*
This summary assumes the investment in the Project comprises Option 1, Option 2 or Option 3 Woodlots (or a combination of these), however, the investment may partly consist of Option 4 Woodlots which are offered at an approximate 5% discount. It is assumed the grower is registered for GST.
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**
This interest rate is indicative only. Finance is subject to approval by Forest Enterprises Australia Limited in its sole discretion.
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The total of the GST refund and capital gains tax saving are equal to more than the first 15 months of principal and interest payments on the investment loan. The interest on the investment loan is tax deductible.
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Results
The capital gains tax has been eliminated
A cost-effective loan is created with 8.5% per annum deductible interest;
A forestry investment is made that provides potential harvest income during the term of the Project;
No assets other than the forestry investment is tied up as collateral;
The investor’s portfolio may benefit from diversification into forestry and the negative correlation generally associated with forestry investments compared with other asset classes.
Continuum Financial Planner is a privately owned financial services company. The company is a Corporate Authorised Representative of Securitor Financial Group Ltd | ABN 48 009 189 495 | AFSL 240687
