Can I do that?

It depends on whether you're eligible to claim a tax deduction on your personal super contributions. If you're an employee, this strategy isn't open to you. But if you earn less than 10 per cent of your income from employment and are eligible to contribute to super, Andrew Lawless, MLC technical services manager, says it could save on your tax bill.

How does it work?

When we talk about capital gains tax, it sounds like a specific stand-alone tax. But in practice, taxable capital gains are simply added to your taxable income to determine how much tax is payable. This means any deductions that could reduce your income tax can also be applied to reducing the tax on your capital gains.

Lawless uses the example of Lisa, a self-employed 38-year-old with a taxable income of $80,000. Lisa recently sold some shares and realised a $25,000 capital gain. As she had owned the shares for five years and was eligible for the CGT discount on assets held for 12 months or more, she has a $12,500 taxable capital gain to be added to her income at the end of the year. On her marginal tax rate, Lawless says, she can expect to pay $5187 tax on the gain, including the Medicare levy. But if Lisa contributes $12,500 of her sale proceeds to super, she will be able to use the tax deduction to offset her $12,500 taxable gain and wipe out any extra tax liability. Lawless says she'll have to pay the 15 per cent contributions tax on the super ($1875) but she will still have reduced her tax liability by $3312.

Lawless says this tax strategy has been around for a while, but it was given a boost by the introduction of the new super system as the self-employed and other "unsupported persons" can now claim a full tax deduction on their super contributions. Formerly they were able only to claim a full deduction on the first $5000; now they may have to contribute less to offset the capital gain.

However, he says investors should be careful not to exceed the new caps on tax deductible contributions of $50,000 for those under 50 and $100,000 for those aged 50 or more. This cap also includes any compulsory super you may receive from an employer.

If you exceed this cap, Lawless says excess contributions will be hit with a 31.5 per cent penalty tax on top of the 15 per cent contributions tax.

Is there any benefit in contributing more than I need to offset my capital gain? Lawless says any deduction left over can be used to reduce tax on income from other sources - such as self-employment. So if Lisa had contributed $20,000 to super, she would have a further $7500 tax deduction to reduce the tax on her other income. If you don't have other income to use the deduction against, Lawless says it may be better to put in the extra as an after tax or non-concessional contribution to avoid the 15 per cent contributions tax.

If you're self-employed and eligible for the super co-contribution, Lawless says it is worth contributing $1000 after tax to claim this benefit, even if you could use the deduction against other income. With the Government kicking in $1.50 for every eligible $1 you contribute, the co-contribution easily delivers the greater benefit.

For investors with a self-managed super fund or a master trust that allows in-specie contributions, Lawless says it is possible to transfer investments to your super fund and claim a tax deduction to reduce any CGT liability.

This is a tax-effective way for older investors, in particular, to shift assets into super, though there are strict rules on what assets can be shifted across and transfers must be made on an arms' length basis. Stamp duty may also be payable on the transfer.