Super Contribution Strategy to Reduce Australian Capital Gains Tax – With Australian house prices accelerating in recent years, the sale of an Australian property by an Australian expat in the current market could result in a significant capital gains tax (CGT) liability with the Australian Tax Office.
There are however methods to deploy to to reduce the capital gain and improve the CGT outcome.
The carry-forward superannuation provisions (also referred to as the “catch-up” contribution rules) are one method and have only recently become available to use to their full effect this financial year commencing 1 July 2023.
The rules can act as an effective way to offset (reduce) the capital gain from the sale of a property (after working through all the cost-base elements) by making a tax-deductible superannuation contribution.
What are the Carry-forward provisions?
The carry-forward provisions allow individuals to “carry forward” unused concessional contribution cap space from up to 5 previous financial years into the current financial year.
Currently, the maximum amount that can be contributed to superannuation as a concessional (tax-deductible) contribution in a given financial year is $27,500. This maximum cap (limit) also includes any super guarantee (SG) contributions paid by an employer.
This would allow an individual who hadn’t received any concessional contributions in the last 5 (five) financial years to contribute up to $130,000 this current financial year, plus $27,500 in the current financial year to claim a total tax deduction of $157,500:
| Financial Year | Contribution Cap | Cap space (Carried fwd’) |
Years |
| 2018-19 | $25,000 | $25,000 |
1 |
| 2019-20 | $25,000 | $50,000 |
2 |
| 2020-21 | $25,000 | $75,000 |
3 |
| 2021-22 | $27,500* | $102,500 |
4 |
| 2022-23 | $27,500 | $130,000 |
5 |
*the concessional cap changed from $25,000 per financial year to $27,500 from 1 July 2021.
Who is eligible to use the carry-forward provisions?
To be eligible for the carry-forward provisions, your Total Super Balance (TSB) must be less than $500,000 on 30 June in the prior financial year. This means if your super balance is approaching $500,000, there may be limited time to make use of the rules.
Example
Alfred is an Australian Expat who has been living in Singapore for the last 10 years. He has recently entered into a contract to sell one of his investment properties in Sydney on the 1st of August 2023.
The property has increased in value significantly since it was purchased and as a result, Alfred realizes a capital gain of $180,000.
Alfred had a total super balance (TSB) of $350,000 on 30 June 2023 and has not contributed to superannuation in the last 5 financial years, nor has he received any contributions from his employer.
Alfred can contribute up to $130,000 in unused concessional contributions from previous financial years using the bring forward provisions, plus an additional $27,500 in concessional contributions for the current financial year to reduce the capital gain from $180,000 to $22,500.
Outcome: The amount contributed to super is taxed at the concessional tax rate of 15% compared to Foreign Resident tax rates starting at 32.5%.
| Scenario 1 – Using the Carry forward Super provisions. | Scenario 2 – Do nothing | |
| Capital Gain from sale: | $180,000 | $180,000 |
| Less Super Contribution: | $157,500 | $0 |
| Net Capital Gain: | $22,500 | $180,000 |
| Tax rate (%) on Contribution | 15% | N/A |
| Tax ($) on Contribution | $23,625 | N/A |
| Tax rate (%) on the Net Capital Gain | 32.5% | X < $120,000 = 32.5%
X > $120,000 to 180,000 = 37% |
| Tax ($) on the Net Capital Gain | $3,375 | $39,000 + $22,200 |
| Total Tax paid | $27,000 | $61,200 |
In the above scenario, the total tax saving would be $34,200 ($61,200 less $27,000).
Considerations to note
Need to be careful of Division 293 tax where Australian sourced income exceeds $250,000. An additional tax of 15% applies to your contributions to the extent your Australia-sourced income exceeds $250,000. It’s important to also note that superannuation is subject to preservations rules and cannot be accessed until meeting a condition of release.
Conclusion
The above discussion aims to bring attention to the effectiveness of the carry-forward provisions when disposing of a property where a capital gain has been realised. It’s important that you seek professional tax advice before taking action as the the consequences for misinterpreting the legislation could be highly punitive to your tax outcome. You should speak to your Tax Accountant or Financial Adviser to understand how the rules may apply in your individual situation.