Noel Whittaker's Blog I continue to receive questions about using contributions to superannuation to reduce capital gains tax. The following is typical.
“We have an investment property in joint names that we would like sell in a few years to fund our retirement. The capital gain should be approximately $250,000 and we are keen to consider strategies to minimise capital gains tax.
At the time of sale, I anticipate I will be working fulltime with an income of $65,000 a year and my wife will be working part-time with an income of about $15,000. I am now 50, my wife is 47 and we will both continue to work until our respective retirement age.”
I pointed out to the enquirer that capital gains tax is assessed by adding the net capital gain to the taxable income of the owner of the asset in the year the sales contract is signed. Depending on their tax bracket this may see the gain taxed at a higher rate than their existing marginal rate, or even at their current marginal rate if the gain when added to taxable income does not push them into a higher tax bracket.
A tax-deductible contribution to superannuation can reduce total taxable income, which may even allow the taxpayer to have the gain assessed in a lower tax bracket. But, there is a challenge. The maximum deductible contributions are capped $25,000 a year and that includes the compulsory employer contribution. Furthermore, deductible contributions incur a 15 % entry tax.
Obviously, a deductible contribution to super would not do much to alleviate a capital gain if they were still working, but could be useful for anybody who is retired, in a low or zero tax bracket, and still eligible to contribute to super. From 1 July 2018, eligible members who contribute less than the cap will be able to ‘carry-forward’ any unused amounts for up to five years. This may allow them to make additional pre-tax contributions that would have otherwise exceeded the cap. Unfortunately, Labor intends to abolish catch-up contributions, so the position right now is unclear.
It’s really a matter of working with your accountant and financial adviser to do the numbers.