Nick Bruining: How to use the system to cut your capital gains tax burden and top-up superannuation

The use of superannuation to quash or minimise capital gains tax is a popular strategy, but few proponents spell out the many tricks and traps that you need to be aware of.

These include critical contribution limits, hidden taxes and other rules once you reach the age of 67.

In simple terms, a person who makes a contribution to super can classify that contribution as a tax-deductible, concessional contribution.

The maximum concessional contribution for an individual this financial year is $30,000. That figure includes compulsory employer contributions, amounts you may have salary sacrificed and any previous personal concessional contributions.

However, if your total superannuation balance was less than $500,000 at the end of the previous financial year, you can access the carry-over concession. Even if you were only $100 under $500,000, you can access the full amount.

The carry-over rule says you can contribute the unused concessional contributions for the previous five financial years, plus the current year. All up for this financial year, you could contribute up to $167,500 less the concessional contributions already received over the period and claim the full amount as a tax deduction.

If you are aged over 67 when you make the payment into super, you must have satisfied the “work test” before the contribution is made. This requires you to work at least 40 hours in a consecutive 30-day period. Working one hour a week over a 40-week period won’t cut it, but working 10 hours a week over four weeks will.

Each financial year you hope to make a concessional contribution will require you to satisfy the work test again. You can do this up to the age of 75. After that, you can’t make a personal contribution to super with the exception of the $300,000 superannuation downsizer contribution. In any event, downsizer contributions cannot be claimed as a tax deduction.

If you are using the strategy to reduce the impact of capital gains tax, a few points to note.

Remember that it is the taxable income of the capital gain that we are seeking to reduce. In other words, it is the calculated amount after various deductions are applied, including the 50 per cent discount. It is not the gross profit we need to deal with.

All concessional contributions are subject to a 15 per cent contributions tax. If, however, your adjusted taxable income for the year is $250,000 or more, an extra 15 per cent “Division 293” tax applies. ATI is your before-tax income from all sources, plus any voluntary concessional contributions and any add-back of investment losses, such as those you might receive through negative gearing arrangements.

Remember that the CGT event itself might push you over the $250,000 ATI limit.

Lastly, be aware of the various tax offsets that apply. You could be wasting money on unnecessary contributions tax.

For those under 67, income below $22,575 is essentially tax-free, thanks to the Low Income Tax Offset. That means there’s no point in claiming tax deductions that bring you under this figure, because contributions tax will be payable on the concessional contribution amount anyway.

For those over 67, the seniors and pensioners tax offset also applies and lifts your tax-free income to $35,813 if you are single and $31,888 each if you are a member of a couple.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association