Reducing tax on capital gains with super contributions

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 at least 18 and have not yet turned 67, you can make personal deductible contributions.

If you will be under 18 on 30 June at the end of the financial year, deductible contributions are permitted during the year if you earn income as an employee or business operator. 

If you’re aged 67 or more on the day of your contribution, you can claim a deduction if you meet the work test in that financial year and you contributed either before your 75^th birthday or within 28 days after the end of the month you turned 75.