Q: I am about to make a capital gain of about $200,000 on an investment property I have owned for several years. My marginal tax rate is 32.5% and I am an employee, and 43 years old. I want to contribute the equivalent of the capital gain to my super (which is not a self-managed fund), so I can save some money for the long run? Is this a non-concessional super contribution and thus I can claim it all as a tax deduction, or do I need to contribute an amount that when 15% is taxed and charges taken out, it is the same as the capital gain tax?
I have split your question into two parts. First, I will explain the general rules relating to super contributions, and second, I will explore the strategy of making super contributions to reduce the income tax payable on a capital gain.
Note that anyone considering ways to minimise tax via pro-active strategies, such as the strategy you are suggesting, should chat to a registered tax agent, usually an accountant. An accountant can also assist you in determining if you have access to any other tax-minimisation strategies.
What are the super rules relating to making concessional contributions?
Note that the type of super contribution that can help an individual reduce income tax payable on personal income is a concessional (before-tax) contribution, rather than a non-concessional (after-tax) contribution.
Concessional contributions are subject to 15% tax upon entry into a super fund (and 30% tax if an individual has an adjusted taxable income of more than $250,000 a year).
In contrast, non-concessional contributions (up to a limit) are not subject to tax upon entry into a super fund, because they are sourced from an individual’s after-tax personal income.
Note: Since 1 July 2017, a single annual concessional contributions cap of $25,000 applies to all ages. For the 2016/2017 year, an individual who was under 50 (that is, 48 years or younger on the 30 June 2016) had an annual concessional contributions cap of $30,000, while an individual who was aged 50 years or over (that is, aged 49 years or older on the 30 June 2016), had a concessional cap of $35,000 (for the 2016/2017 year).
Important: The tax payable on super contributions by a super fund is not directly linked to the tax that an individual pays on personal income. The full concessional contribution, if claimed as a tax deduction, would appear in an individual’s income tax return. An individual can only claim deductions for super contributions against assessable income, such as salary, investment income and capital gains.
Important: If an individual is an employee, then their employer is making super contributions on your behalf (Superannuation Guarantee) which also count towards the individual’s annual $25,000 concessional cap (for the 2017/2018 year). If the individual also has a salary sacrifice arrangement in place with their employer, then the individual also needs to take into account those additional concessional contributions when considering any further contributions strategies. For more information about tax-deductible super contributions, see the SuperGuide article Who can now make tax-deductible super contributions?
Managing capital gains tax using concessional contributions
The following comments regarding tax on capital gains are of a general nature only and cannot be considered as financial advice: any reader dealing with capital gains should speak to a registered tax agent (typically an accountant).
Individuals who sell investments that they have owned for more than 12 months generally are eligible for the capital gains tax (CGT) discount which means only half of the capital gain is included in an individual’s assessable income. For example, in the case of a $200,000 capital gain on the sale of an asset owned for more than 12 months, only $100,000 of a $200,000 capital gain would then be included in a person’s assessable income.
Making concessional contributions can reduce an individual’s taxable income, which then, in effect, reduces the impact of the capital gain on any tax payable.
For the 2017/2018 year, a single annual concessional contributions cap of $25,000 applies to all ages, and likewise, for the 2017/2018 year, an individual could make no more than $25,000 in concessional contributions, which means fully using the concessional contributions cap only partially offsets a personal taxable capital gain of $100,000.
Note: Making concessional super contributions can be tax-effective if you pay more than 15 cents in the dollar tax on your personal income, although note that contributions tax on super contributions is refunded if your adjusted taxable income is less than $37,000 (see SuperGuide article Superannuation tax refund: 10 things to know about LISTO).