Selling an investment property can result in a significant Capital Gains Tax (CGT) liability. However, if you’re nearing retirement or have taken career breaks, ‘catch-up’ superannuation contributions offer a powerful strategy to reduce this tax burden. By understanding and utilising these provisions, property investors can significantly improve their financial position after the sale is finalised.
What are catch-up superannuation contributions?
These contributions allow eligible individuals to make additional concessional contributions to their superannuation fund beyond the standard annual cap which is currently $30,000. This helps those who haven’t maximised contributions in previous years to boost their retirement savings. These tax-deductible contributions offset taxable income, including capital gains, reducing overall income tax and any CGT liability.
Because concessional contributions have the super contributions tax of 15% applied to them in the super fund, the tax benefit is significant for taxable income above $45,000 (where the marginal tax rate is 30% or higher). In contrast, for taxable income between $18,201 and $45,000, the marginal tax rate is only 16%, so there is very little tax advantage from making a super contribution compared to receiving the income as pay.
Eligibility for catch-up contributions
To be eligible, you must meet several criteria:
- Total Superannuation Balance (TSB): Your TSB must be less than $500,000 at the end of the previous financial year (30 June).
- Unused Concessional Contributions (CCs): You must have unused concessional cap amounts from previous financial years. These amounts accumulate over a five-year rolling period and expire after five years if not used.
- Age and work test considerations: You can’t make personal tax-deductible super contributions after 28 days past your 75th birthday. If aged 67-74, you will also need to meet the work test or an exemption.
How to use catch-up contributions to reduce CGT
Here’s a strategic short guide for property sales:
- Calculate your capital gain: Determine the gain (sale price minus cost base), applying the 50% CGT discount if held over 12 months. You might wish to consult your accountant for this first step.
- Determine unused CCs: Check your myGov account for available unused concessional contributions from the ATO. Check with your super fund (or funds) to confirm their record and if there are any recent contributions that will need to be taken into account.
- Plan your contributions: Consider consulting a financial adviser to help you determine your eligibility to contribute and the amount to contribute, which will also help you ensure you don’t exceed any relevant caps.
- Make the contribution and notify your super fund of your intent to claim a deduction: After selling your property, contribute to your super fund and inform them of your intent to claim a tax deduction using an approved form. This must be done before lodging your tax return or by the end of the following income year, and before any fund rollover or income stream begins from that contribution.
Note: You are allowed to vary the amount you notify you intend to claim within the same timeframes – which is again done in writing on the approved form.
- Claim the tax deduction: When lodging your tax return, claim the deduction to reduce your taxable income and lower your tax bill.
John’s smart super move
John recently sold an investment property, and has the net proceeds sitting in his bank account. He has worked out with his accountant that he made a $100,000 capital gain (after CGT discount), With his employment income of $70,000, his taxable income would be $170,000 before any additional super contributions.
His employer contributes $8,400 to his super account as the mandated Super Guarantee (SG) contributions (12%). This amount will be counted as a concessional contribution which is taxed at 15% in the super fund while John’s fund is in accumulation, or savings, mode. John can top this up to the current $30,000 annual concessional cap by making a personal after-tax contribution of $21,600 with the intent to claim these amounts as concessional contributions.
John checks with the ATO and his super fund and finds he has $50,000 in unused concessional contributions available from past years. He decides to make a catch-up contribution of $50,000, which will be in addition to the $21,600 he’s going to make up to the annual concessional cap.
After making his contribution totaling $71,600 ($21,600+ $50,000) to his super, he notifies his super fund of his intention to claim a tax deduction for the entire sum. The amount of $71,600 will become recorded by the super fund as concessional contributions.
When it comes to tax time, making tax deductible contributions reduces John’s taxable income from $170,000 to $98,400 – significantly lowering his overall income tax and the CGT still payable. This results in a net tax saving of $13,190 (from the difference between his personal marginal tax rates of 37% and 30%, and the super contributions tax of 15%). At the same time, John has also added to his super balance.
Important considerations
- Timing is crucial: You will need to plan contributions in the same financial year as the capital gain, and make sure to complete the approved form to notify your super fund of your intent to claim a tax deduction on the contributions.
- Contribution caps: It’s also important to be mindful of both concessional and non-concessional caps to avoid additional tax.
- Seek professional advice: And make sure to consult a financial advisor and tax professional for complex rules, eligibility, optimal amounts, and integration into your financial plan.
Utilising catch-up superannuation provisions is a valuable tool for property investors to mitigate CGT, enhance net proceeds, and bolster retirement savings.
Considering Your Retirement Strategy?
Navigating superannuation and Capital Gains Tax can be challenging. For personalised guidance on how these provisions might apply to your unique financial situation and retirement goals, why not consider a Retirement Essentials Retirement Advice Consultation with one of our fully qualified financial advisers?
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