On this page
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.
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.
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.
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.
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.
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.