CGT Offset – extraordinary results with ordinary money

A popular strategy you may be able to use before you purchase an income stream is to sell an ordinary investment and contribute the proceeds to super as an undeducted contribution. Not only does this allow you to purchase a larger retirement income stream, it also increases the tax free 'Deductible Amount' of the income stream.

The down-side to this strategy is that when you sell an ordinary investment, such as units in a unit trust or shares in a portfolio, there are usually capital gains tax implications. This can considerably reduce the after-tax amount available for you to invest.

However, if you're eligible to make a tax-deductible contribution to super, there is a way you can reduce or even eliminate capital gains tax.

How does the strategy work?

To use this strategy, you must be able to contribute to super (eg: you must be under age 65 having worked at least 10 hours a week in the last two years, or between age 65 and 70 and working at least 10 hours a week). In addition, you can't receive any employer superannuation support in the year you make the contribution (unless you meet the criteria for being 'substantially self-employed').

The strategy is therefore generally limited to self- employed investors and recently retired investors under 65.

The strategy is built around the fact that you can claim a deduction on the first $5,000 of any sale proceeds contributed to super, plus 75% of the balance up to your age-based Maximum Deductible Contributions limit. Any contributions that you don't claim as a tax deduction are classified as undeducted contributions.

By contributing the proceeds of a sale to super and claiming a tax deduction for an amount that 'offsets' the assessable capital gain, it is possible to eliminate a capital gains tax liability. Although the deductible super contribution will attract contributions tax of 15% (and in some cases, the super surcharge), the after-tax proceeds should be considerably greater than if CGT was paid and the balance used to commence the income stream.

The Benefits

• You can 'offset' or even eliminate CGT on the sale of ordinary investments by making tax-deductible contributions to superannuation.

• If you use the sale proceeds to purchase a retirement income stream, this can significantly increase the after-tax purchase price.