Ask Noel: Using super to reduce capital gains

I read your article on using super contribution to reduce capital gains and I’m not sure I know what to do in my situation. My husband and I bought a property two years ago and intend to sell it soon. The profit should be $100,000 after all deductions – $100,000 in the bank after settlement.

We have a self-managed super fund. Would it be better to transfer the funds into the SMSF prior to 1 July 2019 and would the contribution be classed as concessional or a non-concessional contribution?

Would we still pay capital gains on the amounts that were put into super or only pay CGT on the amounts that are not put into super, or do we pay CGT on the whole $100,000 and 15 per cent tax on amounts we put into super?

Be aware that net proceeds need not be the same as the taxable profit. There could have been capital expenditure and purchase costs, which would increase the base cost and, accordingly, reduce the taxable profit.

The most that can be contributed by each of you as a concessional contribution is $25,000, and this includes any contributions that may have been made for you by an employer. The balance would be non-concessional contributions.

Capital gains tax is calculated by adding the taxable profit to your taxable income in the year the sales contract was signed – so simply contributing money to superannuation would not, of itself, affect the amount of capital gains tax you would pay. Capital gains tax may be reduced because deductible concessional contributions reduce overall taxable income and possibly keep you in a lower tax bracket.

We are looking to sell an investment property by this time next year. We stand to make about $150,000 profit. I want to know if this capital gain could be rolled over into our super thus avoiding capital gains tax? Or would it be wiser to sell our family home and go live in the rental property and avoid CGT altogether?

See the answer to the previous question – you cannot avoid capital gains tax by rolling a profit into superannuation. What you can do, in some circumstances, is minimise the effect of capital gains tax by reducing your taxable income through deductible superannuation contributions. It may be possible to minimise capital gains tax on the investment property if you move into it, but you would need to be there for a long period because the capital gain would be apportioned on a pro rata basis according to the time it was occupied.

If a person has more than $1.6m in superannuation will they be allowed to contribute say $300,000 under the downsizing provisions?

As long as they comply with all the downsizing regulations, a person with more than $1.6 million in superannuation would be allowed to contribute up to $300,000.

Anybody considering doing this should note the downsizing contributions will still count towards their $1.6m transfer balance, so if their fund is in pension mode now the additional contribution will have to remain in accumulation mode.

This means funds in super in accumulation mode will be paying tax on their income at a flat 15 per cent from the first dollar earned. In view of the fact the first $18,200 a year income per person is tax-free, you may decide the money is better invested in your own name. It’s a matter of doing the sums with your accountant.

  • Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance.