Learn How to Save Tax Using Super
Using superannuation as a strategy for wealth creation can have great benefits for your retirement nest egg.
One significant benefit is that you will generally pay less tax both on the money that goes into your super, and on the earnings it makes within super.
In saying that, the superannuation environment does have some complexity. Rules we need to be conscious of:
Stay below contribution caps
When making contributions into super, it can be important to ensure they do not exceed contribution caps. If you have not utilized the full annual concessional contributions (CCs) cap since 1 July 2018 (AT), 2020), you may have accrued unused CCs which will allow for larger contributions in a future year. These unused CC’s can be carried forward for up to 5 years. If you exceed your CC cap, the ATO will advise you. Any contributions exceeding the cap, will be taxable at your magical tax rate and an interest charge may apply.
Following the notification from the ATO, withdrawing up to 85% of the excess CC’s will be allowed. If excess is left, it will count towards your non-concessional contribution cap.
Navigating the superannuation environment can be complex. Regardless of your income bracket, obtaining advice can help maximise your financial circumstances. Have you ever wondered if you could make more money and save tax, all at the same time? Well, it is possible. Seeking professional advice may create opportunities otherwise not considered. Because with planning… lifestyle security, is just the beginning.
5 ways that contributing super may help save tax:
Salary sacrificing may be a great strategy for those who have sufficient cash flow to divert a portion of their pre-tax salary into super. Those wishing to use this strategy must be aware that this is an out-of-pocket expense, and it may be important to check how your employer treats these contributions. As this money is taken from your gross pay (before tax), it will be taxed at 15% (ATO, 2020), unless you have exceeded the concessional contributions cap.
Note: If you earn more than $250,000 a year, you may be subject to an additional 15% tax.
Have you earned less than $53,564 pa? If so, if you have made personal (after-tax) super contributions up to $1,000 pa, the Government will contribute $500 into your super (ATO, 2020). Paying tax on the Government co-contribution is not required. What a bonus!
Personal super contributions
Personal contributions are non-concessional (after-tax) contributions. They count towards your non-concessional contributions cap unless you have claimed a tax deduction for them. You can add to your super fund or into your spouse’s super fund. These contributions are non-concessional contributions and will count towards this cap unless you claim a tax deduction for them. If a tax deduction is claimed, they will form part of your concessional contributions.
Note: If you are aged between 65 and 75, a work test must be met to be eligible to contribute and claim the deduction.
You can check if you are eligible to claim a deduction for personal super contributions on the ATO website here.
Superannuation legislation and tax deduction claims on contributions can be complex. We recommend speaking with a superannuation expert before taking action.
What if you’re not working?
You may still make personal after-tax contributions even if you are not working, providing you are under the age of 65.
If you claim personal super contributions as a tax deduction or make a downsizer contribution it may reduce your taxable income. This can reduce the amount of tax you pay.
If you are 65 or older, you may make personal after-tax super contributions if you aren’t yet 75 or older and; you have been employed for a minimum of 40 hours over 30 consecutive days during the financial year.
A spouse is someone who you are in a relationship with, registered under a state or territory law or if not legally married, living with you on a genuine domestic basis as a couple. If you have made contributions under the threshold to your spouse’s super fund or retirement savings account, you may be entitled to a spouse contribution tax offset if your spouse was under the age of 70 when the contribution was made. The maximum tax offset is $540 (ATO, 2020).
Super contribution splitting
Depending on your super fund, you may be able to transfer some of your before-tax contributions from the previous year to your partner’s super account. Before-tax contributions that have been claimed as a tax deduction are known as concessional contributions. Concessional contributions made in the previous financial year (which counted towards the contributions cap) can be transferred to your spouse’s superannuation account. The maximum amount that may be transferred is:
- 85% of concessional contributions for the financial year or
- The concessional contributions cap for that financial year (ATO, 2020) Splitting super contributions may provide benefits for you and your spouse such as providing superannuation and paying for insurance premiums for non-working or low-income spouses.
Is super the right investment vehicle for you? Don’t lose sleep over it. Let a Modoras Financial Planner guide you to a strategy that will create a retirement lifestyle beyond expectation. Call us on 1300 888 803 for a complimentary consultation.
Below are some articles that may interest you:
- Accessed Super Early: How to Rebuild
- Are You Investing for Income or Capital Growth?
- You Can Be Young Without Money, But You Can’t Be Old Without It
IMPORTANT INFORMATION: This blog has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (Number 233209). The information and opinions contained in this presentation is general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals’ personal circumstances have been taken into consideration for the preparation of this material. Any individual making any investment or borrowing decisions should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to borrow funds or purchase, sell or hold any particular investment. Modoras Pty Ltd recommends that no financial product or financial service be acquired or disposed of, credit contract entered into or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this blog may change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.