From 1 July 2027, Australia's CGT reforms will fundamentally change the way deductible super contributions interact with capital gains. While contribution deductions have traditionally been used to reduce tax on capital gains, the new 30% minimum tax rule means this strategy may deliver little benefit and, in some cases, leave clients worse off.
Let’s look at the example of Renee. She’s 50 and recently sold a parcel of shares she’d owned for a few years, making a capital gain of $50,000 after the 50% CGT discount. She has other income of $40,000.
Renee’s tax for the year on her $90,000 taxable income will be $19,320, including Medicare levy. The sale of the shares gave her surplus cash so she wants to take the opportunity to add to her super balance and reduce her tax. If she was to make a $25,000 contribution to super (she has at least that amount available in her concessional cap) and claim a tax deduction for it, the $25,000 deduction would reduce Renee’s taxable income to $65,000 and her personal tax bill to $11,320. Her super fund will pay $3,750 tax on the contributions but she’s still ahead by $4,250. This is because she’s moved $25,000 of income from being taxed in her own name at her marginal rate of 32% (including Medicare levy) to being taxed in her super fund at 15%.
On 1 July 2027, the current 50% CGT discount for individuals and trusts will be replaced with cost base indexation. In addition, most individuals will be subject to a 30% minimum tax on their capital gains (an exemption will be available for individuals receiving an eligible income support payment, such as the age pension, in the year their gain is realised).
Importantly, the 30% minimum tax won’t be able to be reduced by deductions other than deductible gifts and donations. This means the minimum tax can’t be reduced with a deductible super contribution.
These new rules have already been legislated and will apply prospectively to all capital gains accruing on or after 1 July 2027, including post 30 June 2027 gains accruing on pre-CGT assets.
As explained above, prior to 1 July 2027, it is common to use deductible super contributions to reduce the tax payable on a capital gain. In many cases, the larger the contribution, the greater the tax saving.
From 1 July 2027, the outcome will be very different.
While a deductible super contribution will still reduce an individual’s taxable income, it does not reduce the 30% minimum tax that applies to most post 2027 capital gains. If the contribution reduces the individual's average tax rate on the gain below 30%, a "top up" tax applies to bring the tax back to the required 30% minimum tax.
Let’s look at Renee’s friend, Neil, who’s is in a very similar financial situation. He’s 50, made a capital gain of $50,000 and has other income of $40,000. However, unlike Renee, his $50,000 capital gain is a post 2027 gain (he bought and sold the asset post 1 July 2027).
Under today's rules, a deductible contribution would reduce the tax payable on his capital gain.
But under the new rules, Neil must still pay at least 30% tax on his post 2027 gain. The contribution reduces his taxable income, but it also increases the amount of top up tax payable. Once contributions tax in the super fund is taken into account, Neil will end up paying more tax overall as shown in the table below.
|
|
No super contrib
|
Super contrib
|
|
Other income
|
40,000
|
40,000
|
|
Capital gain
|
50,000
|
50,000
|
|
Super contribution
|
nil
|
(25,000)
|
|
Taxable income
|
$90,000
|
$65,000
|
|
|
|
|
|
Minimum tax capital gain
|
50,000
|
50,000
|
|
30% minimum tax
|
15,000
|
15,000
|
|
Basic tax with gain
|
17,252
|
9,752
|
|
Basic tax without gain
|
3,052
|
nil
|
|
Tax on gain without “top up” tax
|
14,200
|
9,752
|
|
Top up tax
|
$800
|
$5,248
|
|
|
|
|
|
Basic tax
|
17,252
|
9,752
|
|
Top up tax
|
800
|
5,248
|
|
Medicare levy
|
1,800
|
1,300
|
|
Individual tax
|
19,852
|
16,300
|
|
Fund tax
|
nil
|
3,750
|
|
Total tax
|
$19,852
|
$20,050
|
From 1 July 2027, deductible super contributions can only reduce tax on post 2027 capital gains until the gain is effectively taxed at 30%. Any further deduction is largely offset by "top up tax", meaning the strategy may deliver little benefit or even leave the client worse off.
The new rules don't mean deductible super contributions will never be effective.
For example, where a client already has substantial salary, business, rental or dividend income, their marginal tax rate may already exceed the 30% minimum rate applying to the capital gain.
In those situations, a deductible super contribution may still reduce a person’s overall tax payable. This occurs when they have enough “other” taxable income (not including the capital gains) so that even after allowing for a deductible super contribution, their overall taxable income remains above $45,000 ie their marginal rate of tax is at least 30%.
From 1 July 2027, advisers will need to rethink the long-standing practice of using deductible super contributions to offset capital gains.
For post 2027 gains:
Deductible super contributions may however continue to be valuable for reducing tax on other income like salary, business income, rental income and dividends. They will also continue to reduce the tax on the pre 1 July 2027 component of capital gains that fall under the transitional rules.
The challenge will no longer be identifying whether a contribution deduction is available. Instead, it will be determining whether the contribution is generating a genuine tax saving once the 30% minimum tax on capital gains is taken into account.
Join us at our upcoming Super Intensive Day where we’ll be exploring these changes in more detail.
Lyn will be presenting her session "Contributions - now & next" at our upcoming virtual Super Intensive Day. Shifting tax settings are reshaping the way contribution strategies work. This session explores how changes to the taxation of capital gains and discretionary trusts could disrupt common approaches, and what that means for planning in 2026/27 and beyond. Register now.