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- Reducing your CGT: Offsetting your tax liability with super contributions
- What assets can be used?
- What contributions can you use to offset CGT?
- Contribution options: Using ‘carry-forward’ concessional contributions
- Examples of reducing your CGT liability
- Tips and traps when using super to reduce your CGT bill
Super contributions can be used in many different ways when it comes to planning your finances and saving for your retirement. In the right circumstances, they can also be a very useful tool for minimising your tax bill.
It’s often overlooked that your super contributions can be used to reduce the amount of capital gains tax (CGT) you pay when you sell an asset, while at the same time increasing the amount you have in your super account.
If you are considering using any super strategy to reduce your tax bill, you should always speak to a registered tax agent or accountant before taking any action.
CGT is a very complex area of taxation law and a qualified tax professional will be able to help you successfully navigate the rules and may also be able to determine if you can use any other tax minimisation strategies.
This information is of a general nature only and cannot be considered financial advice.
Reducing your CGT: Offsetting your tax liability with super contributions
When you sell a non-super investment asset, you normally pay CGT on the capital gain you have made since purchasing the asset.
One way to reduce your tax bill is to make a super contribution. If you meet certain conditions, you can claim the contribution as a tax deduction to offset some (or all) of the taxable gain. (For an example of how this works, see the case studies later in this article.)
It’s important to note CGT is calculated by adding a taxable profit from an asset sale (like an investment property) to your other taxable income (such as salary, investment income and capital gains) in the year the sales contract is signed.
Making a super contribution minimises the impact of CGT by reducing your taxable income through a concessional contribution. In this situation your CGT is reduced because any tax deductible concessional contributions you make into super reduce your overall taxable income, which may keep you in a lower tax bracket.
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Note: Your super contribution will generally be taxed at 15% when it is received by your super fund.
What assets can be used?
Although this strategy is mainly used to reduce the CGT when an investment property is sold, it’s important to note it can be used with any asset sale that creates a capital gain.
This includes the capital gain on shares or other investment assets like art works or coin collections.
Note: There are special CGT concession rules that apply when it comes to the capital gain from the sale of an active small business asset. These rules may allow you to contribute the proceeds into your super account without affecting your contribution caps. For more information see SuperGuide article SMSFs and the Small Business Retirement Exemption, or speak to your accountant or the ATO.
What contributions can you use to offset CGT?
The short answer is any concessional (before-tax) contributions. Concessional contributions include:
- employer contributions (including contributions made under a salary sacrifice arrangement), and
- personal contributions claimed as a tax deduction.
If you make a personal contribution and plan to claim a tax deduction, you need to submit a valid Notice of Intent to Claim or Vary a Deduction for Personal Super Contributions form from the ATO.
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Before lodging your tax return, you also need to receive an acknowledgement from your super fund that it has received the completed form.
For more information about concessional contributions, see SuperGuide article Concessional super contributions guide (2020/21).
Contribution options: Using ‘carry-forward’ concessional contributions
In certain situations another type of super contribution can also be used to offset a CGT liability.
From 1 July 2018, anyone with a Total Superannuation Balance of under $500,000 can access their unused concessional (before-tax) contribution caps to make additional or carry-forward concessional contributions.
Note: These carry-forward contributions were originally called ‘catch-up contributions’ when first announced by the Australian Government in the 2016 Federal Budget. However, they are now generally referred to as carry-forward concessional contributions.
The introduction of carry-forward concessional contributions means super fund members can use any unused concessional contributions cap amounts on a rolling basis for five years. Amounts carried forward that are not used after five years expire.
The contributions calculated on a rolling basis over five years can be a useful way to offset a CGT liability.
The first year in which you will be able to access unused concessional contributions is the 2019/2020 financial year. This means the effective starting date for making the additional contributions needed to offset a CGT bill will be 1 July 2019.
For more information about carry-forward contributions, see SuperGuide article Super opportunity: Catch-up concessional contributions from July 2018
Examples of reducing your CGT liability
Case study 1
A retired couple aged 64 sell a portfolio of investment shares they have held for many years. This sale results in a capital gain of $100,000.
The couple use the normal 50% discount rule for CGT that applies to assets held for over 12 months, reducing their CGT bill to $50,000.
They then each make a tax deductible super contribution of $25,000 into their super accounts. This eliminates their capital gain entirely.
Case study 2
George is self-employed and owns an investment property he plans to sell in several years. He expects to create a taxable capital gain of $75,000.
If George did not make a concessional contribution into his super for three years starting 1 July 2018, he will have accrued the right to make a $75,000 concessional contribution at the end of three years.
George’s Total Superannuation Balance is under $500,000, so he is entitled to make a tax-deductible super contribution of $75,000. This can then be offset against his $75,000 CGT bill.
Tips and traps when using super to reduce your CGT bill
- Ensure you do not go over the annual concessional (before-tax) contribution cap ($25,000 in 2018/2019), as tax penalties apply.
- Remember all concessional super contributions incur a 15% tax when entering the super system.
- Super contributions made by your employer on your behalf (including salary sacrifice amounts) are counted towards your concessional contributions cap for the financial year.
- Carry-forward contributions can only be made if your Total Superannuation Balance is under $500,000.
- Ensure any extra concessional contributions you make are in the same financial year as the asset sale and CGT liability. The date for triggering CGT is the contract date for the asset sale – not the date of settlement – and these can be very different for property sales.
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