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- How to offset capital gains outside super with super contributions
- Does the asset with the capital gain matter?
- What contributions can you use to offset CGT?
- Another contribution option: Use carry-forward concessional contributions
- Reducing your CGT liability with a carry-forward contribution
- 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, your contributions can even be a useful tool to help reduce your tax bill and increase your retirement savings.
One of the more interesting tax strategies you can use is to make a super contribution to reduce your capital gains tax (CGT) liability when you sell an asset outside the super system, while at the same time increasing the amount you have in your super account.
How to offset capital gains outside super with super contributions
When you sell a non-super investment asset, you are normally required to pay some tax on any capital gain you may 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.
It’s important to note CGT is calculated by adding the taxable profit from an asset sale (like an investment property) to your other taxable income (such as salary and investment income) in the year the sales contract for the asset is signed.
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Making a super contribution minimises the impact of CGT by reducing your taxable income through the tax offsets provided for concessional (before-tax) contributions. In this situation your CGT is reduced because your tax-deductible concessional super contributions reduce your overall taxable income, which may keep you in a lower tax bracket.
Does the asset with the capital gain matter?
Although this super 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 for you.
This includes the capital gain on shares or other investment assets like art works or coin collections.
What contributions can you use to offset CGT?
The short answer is any personal concessional contributions you make to super on which you claim a tax deduction.
If you plan to use a super contribution to offset a capital gain, in most situations you are limited to claiming a $25,000 tax deduction each financial year. This is because your maximum deductible contributions are limited by your annual concessional contributions cap ($25,000 in 2020/21 and increasing to $27,500 from 1 July 2021).
The exception to this is carry-forward contributions, which are discussed in a later section.
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.
Before lodging your tax return, you also need to receive an acknowledgement from your super fund that it has received the completed form.
Another contribution option: Use carry-forward concessional contributions
In certain situations, there is another super contribution option you can consider to reduce a CGT liability.
From 1 July 2018, anyone with a Total Superannuation Balance of under $500,000 can access their unused concessional contributions caps to make carry-forward concessional contributions.
This strategy again involves claiming a portion of your super contributions as a tax deduction, which is then used to offset some of your taxable capital gain. This can reduce (or even eliminate) any CGT liability you may have in that particular financial year.
If you have not used all your concessional contributions caps over several years, the available unused cap amount can add up and could make a significant dent in a large CGT liability.
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Reducing your CGT liability with a carry-forward contribution
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 2020/21 and increasing to $27,500 from 1 July 2021), as tax penalties apply.
- Remember, all concessional super contributions are taxed at 15% (or 30% if your income is greater than $250,000) when it’s received by your super fund.
- 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 – as these can be very different for property sales.