THERE are several ways in which superannuation contributions can reduce a person's income tax.
The most common is to sacrifice salary as a superannuation contribution. In this case, rather than paying tax on income to be used for investment purposes at their marginal rate of tax, which could range from 30 per cent up to 45 per cent, the amount sacrificed is taxed at 15 per cent.
In addition to salary sacrificing producing more superannuation at retirement due to the increased amount being invested which on every $1000 at the low tax rate of 30 per cent results in an extra $150 invested other tax benefits can be achieved.
When a person knows they will be making a large capital gain, salary sacrificing can reduce the tax payable on the gain. By sacrificing up to the maximum contribution limits, a person's employment income is reduced so that the capital gain is taxed at a lower marginal rate.
For someone who meets the self-employed test, tax on the capital gain can be reduced by making a deductible contribution to a super fund up to the relevant contribution limit.
Q I am 60 years old and still working. I'm selling an investment property for $300,000, on which I'll make a $200,000 capital gain. If I transfer the amount into my superannuation, as a
non-concessional contribution, will I be subject to capital gains tax? If I also sell shares worth $150,000, by transferring the proceeds into my super, will I still need to pay capital gains tax? I already contribute up to the $50,000 concessional-contribution limit through salary sacrifice.
A Non-concessional contributions cannot decrease income tax or capital gains tax. The only time a capital gain can be decreased, when it is contributed to a super fund, is when a person qualifies for the small-business capital gains retirement exemption. As this applies only to a capital gain made on the sale of active assets, such as goodwill on the sale of a business, it cannot be used to reduce tax payable on the sale of your investments.
Q I am 68 years old and have rental income from one property. I will be selling some share options, making a large capital gain in 2012 which means that I will have a large tax liability. I understand that one way to reduce this tax liability is to make a deductible concessional contribution to super up to the $50,000 cap.
This would enable me to reduce my taxable income below $80,000 into a lower tax category of 30 per cent for each dollar over $37,000. However, being over 65, I must satisfy a work test of working at least 40 hours in a period of not more than
30 consecutive days in that financial year. Does assessable income such as the sale of shares or rental income satisfy a work test for concessional contributions to super, or does one need to have specific employment income for at least 40 hours to satisfy the work test?
A Share and rental income is passive investment income and therefore work done in earning this will not qualify you for the 40-hours work test. It must be either paid employment income or you being paid for work done as a contractor. Working as a volunteer does not qualify for the work test, it must be 40 hours of paid employment.
To qualify for the self-employed super contribution tax deduction your employment income must be less than 10 per cent of your total taxable income.
Questions can be emailed to super@taxbiz.com.au
Max Newnham's book, Funding your Retirement: A Survival Guide, is available in bookstores and as an e-book.
Frequently Asked Questions about this Article…
What is salary sacrificing into superannuation and how does it reduce my income tax?
Salary sacrificing means directing part of your pre-tax salary into superannuation. Instead of that income being taxed at your marginal rate (which the article notes could be 30–45%), the sacrificed amount is taxed in the fund at 15%. That lower tax rate both cuts your immediate income tax and leaves more money invested for retirement.
How do concessional (deductible) super contributions help reduce capital gains tax?
Making concessional (tax-deductible) contributions can lower your taxable employment income, which in turn can reduce the marginal rate applied to a capital gain in the same year. The article explains you can use deductible contributions up to the contribution cap to reduce your employment income so a large capital gain is taxed at a lower marginal rate.
Can I avoid capital gains tax by putting sale proceeds into super as a non‑concessional contribution?
No. Non‑concessional (after‑tax) contributions do not reduce income tax or capital gains tax. The only exception noted is the small‑business capital gains retirement exemption, which applies only to active business assets (for example, goodwill on sale of a business) and cannot be used to shelter ordinary investment sales.
What is the $50,000 concessional contribution cap mentioned in the article?
The article refers to a $50,000 concessional contribution cap — that is the maximum amount in concessional (tax‑deductible) super contributions discussed. Making deductible contributions up to that cap can materially reduce your taxable income and therefore your tax liability in the year you make them.
If I'm over 65 and still working, does rental or share sale income count toward the 40‑hour work test for making concessional contributions?
No. Passive income such as rental income or profits from selling shares does not meet the 40‑hour work test. To satisfy the work test you must have paid employment (or be paid as a contractor) for at least 40 hours within a consecutive 30‑day period in the financial year; volunteering does not qualify.
How does the self‑employed test affect my ability to claim a deductible super contribution?
To claim a deductible super contribution as a self‑employed person, your employment income must be less than 10% of your total taxable income. If you meet that test you may be able to make a deductible contribution to reduce your tax payable, as described in the article.
Will salary sacrificing into super actually increase the amount I have at retirement, or is it just a tax trick?
Salary sacrificing increases the amount invested in super as well as providing tax benefits. Because the sacrificed amount is taxed at 15% in the fund rather than your higher marginal rate outside super, more of each dollar ends up invested. The article illustrates this effect with an example where $1,000 that would have been taxed at 30% results in an extra $150 being invested when salary sacrificed.
Are there circumstances where contributing to super won’t help lower my tax bill?
Yes. After‑tax (non‑concessional) contributions do not reduce your income tax or capital gains tax. Also, if you’re over 65 you must meet the paid work (40‑hour) test to make some types of concessional contributions, and the small‑business capital gains retirement exemption only applies to active business assets—not ordinary investment sales.
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