UNFORTUNATELY there is a general misconception about the relationship between capital gains tax and superannuation. There is still a common belief that you can minimise capital gains tax by rolling the proceeds of the sale of an asset into super.
This is a half truth, and getting it wrong could be very costly.
There is no special rate of capital gains tax – when you sell an asset the CGT is calculated by simply adding the net proceeds after adjustment to your taxable income. Obviously, if you can reduce the extent of your taxable income it may be possible to pay CGT at a lower marginal tax rate.
Think about a couple who are aged 62 and retired. As they are both under 65 they are eligible to contribute to superannuation without a work test. Because no employer is paying superannuation for them they are also entitled to claim a tax deduction for their superannuation contributions. However this is limited to $50,000 in a financial year for people aged 50 and over and $25,000 a year for younger people.
The couple sell jointly owned shares for $300,000 and so trigger a CGT bill of $100,000 after the 50% discount has been taken into account. As the shares are held in joint names this means that $50,000 will be added to the taxable incomes of both of them in the year the shares were sold. If they contributed $150,000 each to super and apportioned the contribution so that $100,000 was non concessional and $50,000 was concessional (tax deductible) they could claim a tax deduction of $50,000 each. This would have the effect of wiping out the CGT bill.
It is important to take advice and do the numbers before adopting this strategy because concessional contributions to super lose 15%. This means in the above example it would have cost them $15,000 in contributions tax to eliminate the capital gains tax. The amount of CGT they would have paid depends on their other incomes – if these were small the exercise might not be worth doing.
Noel Whittaker is a director of Whittaker Macnaught Pty Ltd. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. His email is email@example.com
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