Managing capital gains

About the author:

Terri Bradford
Author name:
By Terri Bradford
Job title:
Head of Wealth Management
Date posted:
16 May 2022, 3:15 PM

How to use your super to manage capital gains

Capital gains tax (CGT) applies if a capital gain (or profit) is made as a result of selling (or otherwise disposing of) certain assets. This is known as a CGT event.

A capital gain arises if the amount of money and value of any property the taxpayer receives, or is entitled to receive, as a result of the disposal is more than what it cost to purchase the asset originally (referred to as the "cost base" of the asset).

As a result, the taxpayer will be required to pay tax on the gain at marginal tax rates.

Using superannuation to manage capital gains tax

Individuals up to the age of 75 who make contributions into their own personal superannuation accounts may be entitled to a tax deduction for the contributions if they are eligible to do so. By claiming a deduction on the personal contribution into superannuation the individual can reduce their overall taxable income which in turn results in a lower tax liability.

The ability to claim a tax deduction on super contributions is available to all individuals regardless of whether they are self-employed or an employee. This change is part of the superannuation reforms which took effect from 1 July 2017. The "substantially self-employed" test has been removed.

If the person is over age 67 and under age 75, the 40hr over 30 consecutive day work test must be met in the year the contribution is to be made. The individual must of course have sufficient assessable income to offset the deduction.

Contributions for which a tax deduction is to be claimed must be in accordance with the current concessional contributions cap.

Concessional Contribution Cap for the 2021/22 FY

  • $27,500 pa per person

If the eligible individual has also realised a capital gain from the sale of assets during the financial year, or from the transfer of their listed shares or business real property into their self managed super fund (SMSF), the tax deduction available from personal super contributions can indirectly offset the assessable gain.

Important note: The limit is per person not per employment arrangement so other concessional contributions, e.g. employer SG contributions and salary sacrifice contributions (if any) must also be included when calculating the available deduction.

Example: Transferring a share portfolio into a SMSF

A transfer of shares "in-specie" from an individual into his or her self managed superannuation fund (SMSF) is recognised as a sale from one entity to another. Therefore, the transfer will trigger a capital gains tax liability (for the individual) if the market value on transfer of the shares is greater than the original cost base.

By claiming a portion of the "in-specie" transfer as a concessional contribution, the eligible individual can offset the available deduction against the amount of capital gains tax incurred.

Case study: Self-employed person

John, age 48, is a self-employed carpenter who has his own SMSF. John has an Australian share portfolio currently valued at $150,000. He purchased the shares approximately six years ago for a total cost of $100,000.

The transfer of the share portfolio to the SMSF will realise a capital gain of $50,000 but because John has owned the shares for more than 12 months he will be entitled to a 50% discount on this gain. An amount of $25,000 must therefore be included in John's tax return as assessable capital gains.

John already declares $85,000 income from his carpentry business, so with the inclusion of the $25,000 assessable capital gains this year his total assessable income will be $110,000. However, by claiming part of the transfer as a personal deductible contribution up to the concessional contribution cap John can reduce his taxable income from $110,000 back to $85,000.

For the purposes of this strategy, we have ignored any catch-up concessional contributions that may be available for John.

How does he do this?

John will nominate $25,000 of the shares transfer as a Concessional (deductible) Contribution and the balance of $125,000 as a non-concessional (non-deductible) contribution - a total of $150,000 can be contributed within his concessional and non-concessional contribution limits.

The deduction available will effectively offset John's capital gains liability, resulting in a personal tax saving of $9.225 for that income year. Overall, taking into account the additional contributions tax applied to the concessional contributions, John will still save approximately $7,050.

Case study: Employee

Jane, age 48, works full-time as a personnel manager, earning $85,000 per annum. Her employer pays the standard 10% super guarantee contributions (SGC) which are paid into Jane's SMSF.

Jane also has an Australian share portfolio currently valued at $100,000. She purchased the shares approximately ten years ago for a total cost of $65,000. Jane would like to transfer the shares into her SMSF so, as with John, the transfer of her share portfolio will realise a capital gain, this time in the amount of $35,000.

Jane will also be entitled to the 50% discount on this gain as she has owned the shares for more than 12 months. The amount of $17,500 must therefore be included in Jane's tax return as assessable capital gains.

This brings Jane's total assessable income for the year to $102,500.

Jane would like to claim a part of the transfer as a deductible contribution up to her available concessional contribution cap. As Jane also receives SGC from her employer in the amount of $8,500 she needs to take this into account when determining how much she can claim.

Her cap is $27,500 less the $8,500 already utilised, so the maximum Jane can claim as a tax deductible contribution is $19,000 (ignoring catch up contributions).

Jane would normally pay around $18,700 on her $85,000 salary so she has been able to transfer the shares into her SMSF without too much impact on her personal tax position. The available tax deduction for her super contributions has been very handy for Jane. She has been able to manage her capital gains as well as build her super account for retirement.

Find out more

For more information on this strategy, or if you would like a review of your investment portfolio, speak to your Morgans adviser.

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Disclaimer: This is not tax-related advice and therefore individuals should speak to a Registered Tax Agent before acting. The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so. 

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