I tried to understand the rules for putting a lump sum from the sale of an investment property into a superannuation and claiming a tax deduction, thereby reducing or eliminating capital gains tax (CGT). It’s incredibly complex. I’m retired. No suggestions?
Let’s go step by step.
When you realize a taxable capital gain, the amount of this capital gain, minus a 50% discount if you have owned the property for more than a year, is added to your taxable income for the year of the signing of the sales agreement.
It will then be taxed at your marginal tax rate, which may be higher than if all or part of that gain moved you into a higher tax bracket.
Suppose a person earns $35,000 per year and realizes a taxable capital gain of $30,000 after the reduction. $10,000 of that amount would again be taxed at 19%, bringing them to the next tax threshold of $45,000. In this case, the remaining $20,000 would be taxed at 32.5%. The tax treatment would be the same if you received a salary bonus of $30,000.
However, you can reduce the CGT if you can reduce the amount of your taxable income in the year you realized the gain.
In this case, if you made a super tax-deductible concessional contribution of $27,500, the entire capital gain on the property would be kept below $37,500, which would significantly reduce the additional tax that would normally be paid.
Remember that super deductible contributions lose a 15% contribution tax. Also, if you’re retired and between the ages of 67 and 75, you’ll need to pass the work test – worked at least 40 hours in a maximum of 30 days – before making the super contribution this exercise.
After a lifetime of self-employment, I plan to retire at the end of the fiscal year, just before I turn 70. I have $1.1 million in my super account and want to start a pension fund. In 2017, when I had a self-directed super fund, I adopted a withdrawal and re-contribution strategy to dilute the taxable component of my super, for the long-term benefit of my children, who will inherit any super balance – my only asset – when I die. Would you recommend that I withdraw $330,000 now, then return it as an after-tax contribution before converting my super into pension mode?