March 16, 2023 UFinancial

Crystalising capital losses

It’s been a particularly challenging 12 months for investors.

On the superannuation front, we now have two major reports assessing how super accounts fared in the  2022 calendar year. SuperRatings issued its average balanced return recently and found it was minus 4.8%. Late last year, ChantWest undertook a similar exercise – reporting a figure of minus 4.6%. There have been four negative years since 2000. In 2002, there was an identical return of minus 4.8%, and in the horror 2008 GFC year, the average super fund fell 20%.

Regarding property, CoreLogic’s capital city index declined 8.8% from its May 2022 peak to December, down 7.1% in calendar year terms, being the worst calendar year results in 42 years.

It’s important however to be mindful that these losses are merely paper losses. That is, these losses are only realised, and locked in, if:

  • in the case of property or shares, you sell the asset, or

  • in the case of superannuation, by selling assets or withdrawing super when investment balances are down.

If you retain the asset, there is a possibility that you could weather the storm and wait for the market to bounce back. For example, the average return for the average balanced fund since 2000 is 6.1% (a period that takes into account the aforementioned 20% downturn during the GFC) – that’s $30,500 a year for every $500,000 you can get into super. Things should improve!

 

The silver lining

If you sell an asset that you believe has limited growth potential, and end up making a capital loss, there is a potential tax benefit to consider. You can offset your capital losses against your capital gains, thus reducing your Capital Gains Tax (CGT) liability. It is important to note that you must utilize your capital losses at the earliest opportunity. This means that if you have any capital losses from the current or previous years, you should use them to offset any capital gains in the current year, starting with the earliest losses first.

 

Talk to an expert

Of course, tax is not the only consideration when weighing up whether to retain or dispose of a CGT asset. Talk to your accountant or financial advisor to determine which option is best for you and your business.

Our in-house accountants and financial advisors offer proactive solutions to your individual and business accounting and taxation needs. Book a free chat today.

Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced, or republished without prior written consent. Content developed in partnership with IFPA.
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