Q. My question is about using superannuation contributions to reduce capital gains tax. We have an investment property in joint names that we would like sell in a few years to assist our children to buy a house of their own, and also 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 full-time 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. What could we do?
A. There is a lot of misinformation about the strategy of using contributions to superannuation to minimise and/or reduce capital gains tax. Basically, 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. If the owners were earning say $89,000 a year most of the gain could be taxed at 37 percent – a higher rate than their normal marginal rate. However, if they were earning say $100,000 a year their marginal rate would already be 37 percent and the gain would also be taxed at 37 percent.
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 at $25,000 a year and that includes the compulsory employer contribution. Furthermore, deductible contributions incur a 15 percent entry tax. Obviously, a deductible contribution to super would not do much to alleviate a capital gain if you were still working, but could be useful if you were retired, in a low or zero tax bracket, and still eligible to contribute to super.
It’s really a matter of working with your accountant and financial adviser to do the numbers.
IMPORTANT LEGAL INFO This article is of a general nature and FYI only, because it doesn’t take into account your financial situation, objectives or needs. That means it’s not financial product advice and shouldn’t be relied upon as if it is. Before making a financial decision, you should work out if the info is appropriate for your situation and get independent, licensed financial services advice.