Capital gains tax and superannuation

Taxes… they are one of the two certainties of life.

You can’t avoid them, but there are ways to reduce your liability… especially when it comes to capital gains tax (CGT).

We look at how you can utilise strategies within your superannuation to help minimise the amount of CGT you pay when you successfully sell your assets.

Whether you have already retired and are drawing a pension or your super is still in accumulation phase, there are tax options available to you.

CGT is a relatively straightforward form of tax. The ATO outlines it as:

“If you sell a capital asset, such as real estate or shares, you usually make a capital gain or a capital loss. This is the difference between what it cost you to acquire the asset and what you receive when you dispose of it.

You need to report capital gains and losses in your income tax return and pay tax on your capital gains. Although it’s referred to as capital gains tax (CGT), this is actually part of your income tax, not a separate tax.”

To expand on this, we can consider an example where a person buys shares worth $2,000.

They sell these shares for $3,000 – for a profit of $1,000. The $1,000 is the capital gain and is therefore taxable. But rather than being taxed at a specific CGT rate, the tax is calculated based on the person’s marginal income tax rate as set out by the ATO.

The $1,000 capital gain is included in their annual income and taxed according to the total amount they earn in that financial year. Continued from the ATO:

“When you make a capital gain, it is added to your assessable income and may significantly increase the tax you need to pay. As tax is not withheld for capital gains, you may want to work out how much tax you will owe and set aside sufficient funds to cover the relevant amount.”

However, capital gains are treated differently when they are associated with superannuation, and this is where there are some strategies you could consider.

CGT liability isn’t only applicable to everyday taxpayers… superannuation funds are also required to pay the tax on profits made through the sale of their assets.

If you have your superannuation with a standard retail or industry fund, it’s unlikely that you will actually see the payment of CGT as a transaction within your account.

This is because your returns are deposited upon the completion of all relevant administration, including any tax paid to the ATO.

It is more likely that you will be familiar with CGT transactions if you have a self managed super fund (SMSF), as you will be closely involved in any asset sales.

Regardless of the type of fund, the amount of CGT payable could be significantly less when compared to completing the asset transaction outside the super environment.

The key difference to the tax treatment depends on whether your super account is in accumulation phase or pension phase.

If you are in the accumulation phase… when you are still working and growing your super, the maximum tax rate is 15%.

However, this can be reduced to 10% if the asset has been owned by the super fund for more than 12 months, before it was sold. For most people, this percentage is far below their regular income tax rate and highlights the benefit of asset ownership within superannuation.

If you are retired and already drawing your pension income from your super accounts, CGT is not applicable. All investment earnings in pension phase are tax exempt to a limit of $1.6million.

Another strategy you could consider is to sell a non-super related investment, pay the associated CGT and then utilise some of the remaining funds from the sale as a tax deductible concessional super contribution.

Depending on your annual income, the tax deduction could offset some of the capital gain and therefore potentially reduce your CGT liability. In addition, there is another layer of opportunity within this strategy for people with a super balance of less than $500,000.

From 1 July 2018, unused concessional contributions up to the $25,000 cap can be rolled over and accrued for up to five years.

If you are not working, or your annual employer super guarantee is less than $25,000, you could group five years’ worth of contributions… potentially reaching the maximum of $125,000. Therefore, by 2023, if you sold an asset such as an investment property and made a capital gain, you could contribute your rolled over amount directly into your superannuation and qualify for a tax deduction – offsetting the CGT on your asset sale.

This has the potential to make a significant difference to your super balance by the time you choose to retire.

We understand that navigating the complexities of tax effective strategies can seem daunting.

This is where the team at First Financial can help.

Our experienced financial advisers have the knowledge to provide you with tailored advice to suit your unique circumstances.

We are here to help you maximise your financial success and prepare for a comfortable retirement.

If you have any questions, please contact us today. Read more Superannuation articles.