Capital gains tax and superannuation: How does it work?

You may be familiar with the concept of capital gains tax (CGT) when it comes to buying and selling property or shares, but do you know how it applies to the money or other assets in your superannuation account? Here’s an overview.

Capital gains tax refers to the money Australian taxpayers have to pay to the Australian Taxation Office (ATO) when they sell certain types of investment assets for a profit. Superannuation funds regularly buy and sell investments to make a profit for their members, and these profits may also be subject to CGT, but as the ATO points out there are a couple of differences in how it works for a super fund compared to an individual.

What is capital gains tax?

When you sell certain types of investment assets – including real estate, shares or other investments like cryptocurrency – for a profit, the difference between what you paid for the asset originally and what you’re selling it for is known as a capital gain, and you may have to pay tax on it, according to the ATO.

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For example, if you bought a bundle of shares for $1,000 and sold it for $1,500, the capital gain you made on it would be around $500 (although you’d need to take any buying and selling costs into account to work out an exact figure based on the ATO’s guidelines). The capital gains tax on the sale would be the tax you need to pay on that $500 gain.

It’s important to note that CGT is not a separate kind of tax, but part of your income tax.

The ATO explains that as a general rule, you have to report any capital gains and losses as part of your income tax return each financial year. If you make a net capital gain for the year, this will be added onto your overall taxable income, potentially resulting in a higher marginal tax rate and a bigger income tax bill overall.

→ Find out more: What is capital gains tax?

How does CGT apply to super contributions?

The way CGT applies to your super contributions can depend on a range of factors, including the type of contributions you make and your personal circumstances.

To begin with, there are two main types of contributions you can make into your super account – concessional (pre-tax) contributions and non-concessional (after-tax) contributions.

CGT and concessional contributions

As the ATO advises, concessional contributions are generally taxed within your super fund at a discounted or ‘concessional’ rate of 15%, which is lower than most people’s top income tax bracket.

Concessional contributions include things like compulsory Super Guarantee payments and salary-sacrificed contributions, but the ATO says they can also include any personal contributions you make that you’re eligible to claim a tax deduction for.

This means that if your marginal tax rate is higher than 15% and you meet the ATO’s eligibility criteria, converting some or all of your capital gains into concessional contributions to your super could potentially mean you pay less CGT on these gains – 15% rather than your higher marginal tax rate that would otherwise apply.

More specifically, government regulator ASIC says on its Moneysmart website that making concessional contributions is generally tax-effective if you earn more than $37,000 per year.

There are some exceptions to this, however. For instance, you may have to pay more than 15% tax on your concessional contributions if you are a high income earner, or if you exceed the concessional contributions cap for a particular financial year.

It’s important to be aware, too, that the ATO’s eligibility criteria for making a tax-deductible concessional contributions from your investment income are quite strict, so it’s important to think carefully about how they may apply to you.

This is a complex area of Australia’s super and tax systems, so it may be wise to seek professional advice from a suitably qualified tax agent before proceeding.

CGT and non-concessional contributions

After-tax or non-concessional contributions are those that have already been taxed before going into your super fund. This means you will normally have already paid CGT as part of your income tax on any capital gains that you contribute to your super from your after-tax income, meaning they won’t be taxed again within your super, according to the ATO.

An exception to this is if you exceed your non-concessional contributions cap, in which case you may have to pay extra tax.

How does CGT apply to investment gains within super?

Moneysmart explains that generally speaking, your super fund will pay 15% tax on its investment earnings (including capital gains) during your working life.

If you have a super fund, you may not see CGT as a separate transaction, because investment returns are usually added to your account once the fund has finished paying any tax it owes to the ATO.

You’re more likely to see the effects of capital gains tax if you’re part of a self-managed super fund (SMSF) that buys and sells assets like property or shares.

Additional CGT rules and concessions may apply for SMSFs, according to the ATO, such as a one-third CGT discount (down to a typical tax rate of 10%) that may be available if the fund had owned the asset it made a capital gain on for at least 12 months.

While the ATO points out that an individual in this same situation can potentially obtain a 50% CGT discount, most people have a higher marginal tax rate than the 15% super fund rate to begin with so you could still end up paying more CGT if you owned the asset yourself, compared to within a super fund.

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