Superannuation

Reader’s question: I am 61 and work full time. I’m considering making extra tax deductible contributions to my superannuation fund up to the amount allowed, which I believe is $50,000 subtracted by the amount my employer contributes.

I’m contributing about 5 per cent extra because I own three investment properties that are negatively geared. My super balance is about $400,000, while my wife’s super has about $60,000. As well as making extra contributions, I’d like to reduce capital gains tax after selling my investment properties during the next three years.

Can I contribute a lump sum equivalent to the deductible contributions just before the end of each financial year, using the sale proceeds of each investment property, or can the contribution only be made through salary sacrificing and on a monthly basis? My income is about $105,000.

For your proposed strategy of offsetting gains from property sales with super, says Deborah Wixted of Colonial First State, you must be eligible to claim a tax deduction for personal super contributions.

Employment income the key

To qualify, less than 10 per cent of your income must come from employment. Employment income in this instance is potentially more than your $105,000 salary – it’s also the extra 5 per cent contributed to super (assuming this is being salary sacrificed). You haven’t mentioned any fringe benefits but, if you receive any that are reportable, their value must also be added. This income from employment must represent less than 10 per cent of your total income – calculated by adding your investment income including the capital gain from any property sale.

When you work through these numbers, it suggests that to be eligible for a personal deduction you need an assessable capital gain of more than $940,000 if you ignore the extra super contributions or $990,000 if you include them. At this point, the capital gain is so great the amount of super contributions needed to offset it would be well in excess of the $50,000 concessional cap you are allowed.

On the other hand ...

An alternative approach is to increase salary sacrifice contributions during the year capital gains are made so total concessional contributions become $50,000. That way, taxable income from salary can be reduced, which may partly compensate for the tax on additional income from the assessable capital gain on any property sale.

Unfortunately, as the salary sacrifice super contributions are counted as income in determining eligibility for a personal tax deduction, there is no real benefit in this strategy when it comes to attempting to improve your personal contribution deduction eligibility.

As for the timing of salary sacrifice contributions, it is normal for this to be in line with an employer’s pay cycle. But if your remuneration involves the payment of a bonus that is salary sacrificed, it would generally be done as a lump sum.

Given your circumstances, it would seem your chance of qualifying under the 10 per cent test is highly unlikely. But you are able to use the after-tax proceeds from the sale of the properties to make non-concessional contributions for yourself and your wife, which may assist with retirement planning but not, it seems, your taxation position. Until you reach 65, you can use the “bring forward” rule to each contribute $450,000 into super over the next three years, assuming no other non-concessional contributions are made.