The journey towards a fulfilling retirement involves a series of financial choices, each capable of shaping your future in different ways. One strategy that deserves particular attention is carrying forward concessional contributions to superannuation. Interestingly, this strategy can also serve as a powerful tool for mitigating the tax impact of crystalised capital gains, especially when you sell a high-value asset like an investment property.
Concessional contributions and superannuation
In the realm of retirement planning, superannuation is one approach that stands out for its tax-efficiency and potential for long-term growth. Concessional contributions form an Important part of this approach. These are contributions made to your superannuation fund from your pre-tax income. As per the latest information from the ATO, there is a 15% contributions tax on concessional contributions, a significant saving compared to most individual marginal tax rates.
Unpacking the carry-forward rule
The carry-forward rule is an underutilised, but potent feature that lets you make additional concessional contributions above the annual cap. This is done by using any unused concessional contribution limits from the past five years. By strategically making these additional contributions, not only can you accelerate the growth of your superannuation fund, but also enjoy immediate tax benefits.
Offsetting your Capital Gains Tax
When you sell an investment property or any other significant asset, you are likely to attract a capital gain, which is the profit you make from the sale. This capital gain is usually subject to tax. However, your concessional contributions can offset this tax liability. In fact, certain types of assets may even be partially exempt from CGT when these strategies are employed.
To benefit from the carry-forward rule, there are certain prerequisites:
Total Super balance:
Your Super balance has to be less than $500,000 at the end of the previous financial year.
You must have unused concessional caps from the last five years.
Putting it in real-life terms
Consider this: you decide to sell an investment property that results in a substantial capital gain. By employing the carry-forward rule, you could make a large concessional contribution to your superannuation in the same financial year using the proceeds of the investment property sale. This would reduce your overall taxable income, thus reducing the tax you owe on the capital gain.
Shaping your financial future
The strategy of carrying forward concessional contributions offers a two-fold advantage. Firstly, it allows for the growth of your superannuation fund, setting the stage for a more comfortable retirement. Secondly, it provides a tax-efficient way to manage the proceeds from the sale of significant assets, such as investment properties. To fully leverage this strategy, consult with a financial advisor to tailor it to your specific financial landscape. If you would like to talk to us about how you can leverage concessional contributions to your superannuation, speak to a FuturePoint Wealth adviser today.
This information is general advice. We have not considered your objectives, personal or financial circumstances. You should consider the appropriateness of the advice for your circumstances before making any decision. You should obtain and consider the relevant Product Disclosure Statement and seek the assistance of an authorised financial adviser before making any decision regarding any products or strategies mentioned in this communication.