CGT contribution strategy marginalised

A superannuation specialist has warned the strategy where an individual makes a personal deductible contribution in order to reduce the amount of capital gain to be included on their tax return will no longer be effective in certain circumstances.

The Colonial First State (CFS) technical team indicated this approach has now been compromised due to the minimum 30 per cent tax that will be charged on any net capital gains calculated under the indexed cost-base method accruing from 1 July 2027 as announced in this year’s federal budget.

“Under the proposed rule, the taxpayer is going to need to compare the additional tax payable due to the inclusion of the net capital gain after the tax deduction is applied in their taxable income,” CFS senior technical manager Tim Sanderson told listeners of the latest FirstTech podcast.

“[It has to be compared to the] amount that would be payable if the gains were instead subject to a flat 30 per cent tax rate.

“Where the tax payable, under the first [approach], is less than the 30 per cent calculation, a top-up tax will be payable to increase that tax rate back up to the minimum 30 per cent rate.

“As a result, the strategy of making personal deductible contributions to offset the tax on realised capital gains that are being subject to the minimum 30 per cent tax rate is going to have to be carefully considered under the proposed rules.

“So while making personal deductible contributions may still make sense in some situations, once the deduction starts to reduce the capital gains [tax] to less than the 30 per cent minimum tax rate, so you get a top-up happening, the benefit of the strategy will start to reduce and may eventually result in the client being worse off overall.”

To illustrate how the efficacy of the aforementioned strategy has been reduced, Sanderson provided the following example.

“If a taxpayer with a net indexed capital gain of $250,000 and no other income made a $32,500 personal deductible contribution to reduce the amount of the gain included in their taxable income, the tax payable under the normal taxable income approach would be $11,523 less than the proposed 30 per cent minimum tax,” he said.

“As a result, the taxpayer would need to pay top-up tax of $11,523. Once the 15 per cent contributions tax and Medicare levy are also taken into account, the taxpayer would be $1123 worse off overall than if no deduction had been claimed.”

Given the change in the taxation rules brought about by the budget, he emphasised advisers now need to carefully assess a client’s individual circumstances before recommending making a personal deductible contribution to reduce any capital gains tax liabilities.