Reducing tax on capital gains with super contributions

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How capital gains are taxed
Reducing CGT with personal deductible contributions
What’s the catch?
The bottom line

We all love making a profit on our investments, but no one enjoys the tax liability that comes with a windfall.

The good news is that making a super contribution could reduce your tax bill and give your retirement savings a welcome boost at the same time.

How capital gains are taxed

When you sell an asset for more than you paid for it, the profit is called a capital gain. If the asset was held for longer than 12 months, discount rules mean that only 50% of the gain needs to be declared on your tax return.

Taxable capital gains are added to your income and taxed along with the rest of your earnings at normal marginal income tax rates.

We often call this Capital Gains Tax (CGT), even though it is not a separate tax.

Example: Wan

Wan invested $40,000 in an exchange-traded fund (ETF) in January 2018. She sold her holdings in October 2023 for $50,000 – a gain of $10,000.

As she held the investment for longer than 12 months, Wan needs to declare a capital gain of $5,000 (50% of the profit) in her 2023–24 tax return.

Reducing CGT with personal deductible contributions

Making a tax-deductible super contribution reduces your taxable income and can assist to minimise the impact of tax on capital gains if you contribute to super in the same financial year that you make a capital gain.

It is important to remember that deductible contributions to super are taxed at the rate of 15%, or 30% if your income plus low-tax super contributions is above $250,000 for the year (Division 293 tax). To make a saving, the tax rate you pay on super contributions must be below the rate of income tax you would otherwise pay on the capital gain.

If you’re between 18 and 67, you can make personal deductible contributions. If you’re under 18, deductible contributions are permitted if you also earned income as an employee or business operator during the year. If you’re aged 67–75 they are permitted if you meet the work test.

Learn more about Division 293 tax and tax-deductible super contributions.

Personal deductible contributions are counted towards your concessional contribution cap. If you contribute more than the cap (currently $27,500 per financial year), the excess amount will be taxed at your marginal rate, so only deductible contributions that are under your cap can save you tax. If your total super balance was below $500,000 on 30 June the previous financial year, you may have unused concessional cap space from prior years that allows you to contribute more than the standard annual cap.

Read more about concessional contributions and the cap and carry-forward contributions.

Example: Josef

Josef earns an annual salary of $125,000. He withdrew from a managed fund investment and made a capital gain of $25,000 in August 2023.

He held the investment for 10 years, so qualifies for the 50% CGT discount. Josef needs to declare $12,500 in capital gain on his 2023–24 tax return.

If he does not make a super contribution, Josef will pay 39% tax including Medicare Levy on the $12,500 taxable gain ($4,875) – his marginal rate.

Josef instead decides to contribute $12,500 to super as a deductible contribution. This reduces his taxable income by the same amount, eliminating the $4,875 income tax he would otherwise pay. Instead, the contribution is taxed at 15% ($1,875) on entry to his super fund – a saving of $3,000.

Josef has ensured his contribution will not cause him to exceed the concessional contribution cap of $27,500 for 2023–24 when his employer’s super guarantee contributions are added.

Example: Renata using carry-forward contributions

Renata earns a salary of $90,000 and has recently sold an investment property she held for many years, making a capital gain of $150,000. She must declare half of this ($75,000) in her 2023–24 tax return.

Renata’s total super balance was below $500,000 on 30 June 2023 and she has unused concessional contribution cap space of $80,000 accumulated over the last five years that she is eligible to use. This means she can have total concessional contributions of up to $107,500 ($80,000 unused from prior years plus the annual cap of $27,500) in 2023–24 without exceeding her contribution cap.

The table below compares the outcome for Renata if she contributes $75,000 to super and claims a tax deduction versus making no super contribution.

	No voluntary super contribution	Personal deductible contribution
Salary	$90,000	$90,000
Taxable capital gain	$75,000	$75,000
Deductible contribution	$0	$75,000
Taxable income	$165,000	$90,000
Income tax (inc. Medicare)	$49,417	$21,517
Employer super contribution	$9,900	$9,900
Super contribution tax	$1,485	$12,735
Net super contribution	$8,415	$72,165
After-tax income	$115,583	$68,483
Net super + net income	$123,998	$140,648

After taxes, Renata is $16,650 better off if she makes a $75,000 deductible contribution to super.

Renata can make this contribution without exceeding the contribution cap thanks to her eligibility for the carry forward of previously unused cap space. Her total concessional contribution in 2023–24 will be $84,900, made up of her $75,000 deductible contribution and her employer’s $9,900 super guarantee contribution.

What’s the catch?

Although a super contribution could reduce your tax bill when you have incurred a capital gain, it does mean your money is locked up in super until you retire after your preservation age or meet another condition of release.

It is important to consider whether this is a trade-off you’re willing to accept or if your money could be better used for other goals outside super, even if it means paying extra tax.

There are of course other ways to manage capital gains including offsetting with capital losses, so it is important to seek financial advice for your personal circumstances.

The ATO also has anti-avoidance provisions for income tax, so you need to ensure that you’re not only pursuing this (or any) strategy purely to minimise tax. Generally, the other purpose of making a super contribution is to save for retirement, and in this case anti-avoidance shouldn’t be a problem. However, if you were to make a contribution and quickly withdraw it again – perhaps you’re over 65 or have met another condition to access your super – the ATO may make a case that the contribution was purely to avoid tax. Significant penalties apply for this.

The bottom line

Making deductible contributions to super can help to reduce tax on capital gains in the right circumstances.

If you’re using this strategy, it is important to keep an eye on your concessional contribution cap and remember that contributions are invested for your retirement.

Keep in mind that it doesn’t have to be all or nothing – part of your taxable gain could be contributed to super, and the rest used for something else, particularly if you don’t have space under your cap to contribute the whole amount.

If you’re a small business owner, there are other capital gains concessions that can apply when you sell your business.

Learn about the small business CGT retirement exemption and 15-year small business CGT exemption