When you retire, your superannuation is likely to become an important source of your income. That’s why it’s a good idea to top it up while you are working.
But did you know, there are also some excellent tax benefits you can take advantage of right now just by making your own voluntary superannuation contributions?
Generally, money invested in super is taxed at a lower rate than your personal income tax rate.
In the lead-up to 30 June 2021, we want you to be aware of opportunities to save tax with super contributions.
How “Concessional” Super Contributions are Taxed
Concessional (before tax) super contributions include employer super contributions made on your behalf, any salary sacrifice contributions you make, or any personal contributions that you claim a tax deduction on in your tax return. These contributions are taxed at 15% when they are received by your super fund (up to a limit of $25,000 per year), provided you earn less than $250,000 annually.
Personal super contributions are especially useful for people who are on higher marginal tax rates or if their employer won’t set up a salary sacrifice arrangement.
The people who would benefit the most are those who earn above $45,000 per year, as this is where the marginal tax rate plus Medicare Levy rises to 34.5%. Claiming a tax deduction on super contributions effectively makes your tax rate only 15%. That’s a big tax saving!
There are several ways you can get tax benefits from super contributions:
1. Catch up super contributions
From 1 July 2018, individuals can make “carry-forward” concessional super contributions if they have a total superannuation balance of less than $500,000. You are also able to access your unused concessional contributions caps on a rolling basis for five years. Amounts carried forward that have not been used after five years will expire.
2. Low income earners
If you’re a low-income earner (earning up to $37,000 per year), the low-income superannuation tax offset ensures that you don’t pay a higher rate of tax on your super contributions than your income tax rate. The offset will be paid directly to your super account and the payment will be equal to 15% of your concessional contributions for the year, capped at a maximum of $500.
Individuals who earn between $39,837 and $54,837 during the 2021 financial year may also be eligible for super co-contributions from the government of 50 cents for each dollar, up to a maximum of $1,000 in non-concessional (after tax) contributions.
3. High income earners
If you earn more than $250,000 a year (including super), your concessional contributions are taxed at an additional 15%, bringing the total tax on these contributions to 30%. However, this is still less than your marginal income tax rate of 47%. This extra 15% is known as Division 293 tax. Only the concessional contributions which make your total income exceed $250,000 are subject to the additional tax.
If your concessional contributions exceed the concessional contributions cap of $25,000 per year, the excess is included in your tax return and taxed at your marginal tax rate (less an allowance for the 15% already withheld by your super fund). You can choose to withdraw some of the excess contributions to pay the additional tax.
Please contact us ASAP if you would like to book a 2021 tax planning meeting to discuss saving tax with super contributions. There are many things we need to check for you to ensure you don’t exceed your super caps and you may need to seek the advice of a licensed financial advisor. The timing of your contributions is also crucial to get right so you can claim the tax deduction in the 2021 year.
Our specialist Superannuation accountants have extensive experience in the tax and compliance issues specific to super and self-managed super funds. With our expert guidance, you’ll have peace of mind that you are ticking all the right boxes and avoiding any risk of non-compliance.
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GENERAL ADVICE WARNING: This information has been prepared without taking into account your objectives, financial situation or needs. Because of this, you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs. We suggest you obtain specific financial advice from a licensed financial advisor.