Capital gains and super: Using super contributions to reduce your CGT bill

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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.

Important

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.

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.

Super tip

A tax deduction of any kind can be used to reduce or offset your taxable income. This includes any net capital gain liability you have incurred during the financial year.

Case study 1

Ayumi and Takashi are both working and decide to sell the portfolio of investment shares they have held for many years. This sale results in a capital gain of $150,000, on which they will be required to pay CGT.

The couple uses the normal 50% discount rule for CGT that applies to assets held for over 12 months, reducing their capital gain to $75,000.

Both Ayumi and Takashi’s employers have made concessional (before-tax) contributions into their super accounts of $5,000 during the year. This means they both still have $20,000 left under their annual concessional contributions cap.

After receiving tax advice from their registered tax agent, they both decide to make a concessional super contribution of $20,000 each into their super accounts from their profit on selling the shares. Ayumi and Takashi both claim their $20,000 contribution as a personal tax deduction.

This reduces the capital gain on which they must pay tax from $75,000 to only $35,000 ($75,000 – [$20,000 x 2] = $35,000).

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.

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.

Need to know

To make a super contribution after age 67, you must pass the work test. This means if you are aged 67 to 74, you must be gainfully employed before your super fund will accept your contribution.

If you can’t meet the conditions of the work test, from 1 July 2019 there is a one-off work test exemption that applies to recent retirees if your total superannuation balance (TSB) is less than $300,000.

For more information, read SuperGuide article Work test: Super contributions over 67.

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.

Need to know

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 of the sale into your super account without affecting your annual contribution caps.

For more information, read 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 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.

For more about concessional contributions, read SuperGuide article Concessional super contributions guide (2020-21).

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.

For more information about carry-forward contributions, read SuperGuide article How carry-forward (catch-up) super contributions work.

Good to know: Background

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.

Reducing your CGT liability with a carry-forward contribution

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 the three financial years starting 1 July 2018, he will have accrued the right to make a $75,000 carry-forward concessional contribution over that period.

George’s Total Superannuation Balance is under $500,000, so he is entitled to make a tax-deductible super contribution of $75,000 in 2020-21 if he chooses. This contribution can then be claimed as a tax deduction and offset against his $75,000 capital gains to eliminate his CGT liability.

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.