Each financial year presents an opportunity to action tax effective strategies… and there is nothing quite like a deadline to turn good intentions into strategic actions.
With just over a month left until the 30 June deadline for the 2018/19 financial year, we have some beneficial superannuation taxation strategies for you to consider.
You could make a significant difference to your wealth later in life by utilising your annual superannuation contribution caps.
Concessional contributions
Each financial year the government permits personal concessional contributions into super of up to $25,000. These contributions can have a dramatic impact and can maximise your superannuation balance during your wealth building years.
The super guarantee of 9.5% that your employer pays into your super counts towards this cap, but you can make additional contributions up to the limit in two different ways:
- Salary sacrifice – your employer deducts the contribution from your pre-tax income and pays it directly into your super fund.
- Lump sum payment – you pay a lump sum of money to your fund and claim a tax deduction.
Salary sacrifice is a process whereby your employer automatically deducts an agreed amount from your gross income and pays it to your super fund.
Your taxable income is then determined by the remaining amount after the sacrifice. This can provide a significant tax saving as the contribution is taxed at 15%, rather than at your marginal tax rate. Financial Adviser, Adam Ezerins explains,
“Most people working full time will be in a tax bracket of 32.5% or above. So, the tax savings they can make through salary sacrifice are significant.
It’s important to assess all your day to day expenses and if you can afford it, it can be a beneficial strategy to help maximise your superannuation. The money will be locked away until you can access your super, but the powerful compounding effect over time means the strategy can make a substantial impact on your super balance at retirement.”
Lump sum payments can also be concessional, as long as the total amount contributed is no more than $25,000. You can pay an amount directly into your super account and claim a tax deduction for the contribution which will be accounted for when you submit your personal tax return. Adam continues,
“The contribution cap resets every year on the 1st of July. So, if you want to utilise your concessional contribution cap in this financial year you would need to act soon.”
Recontribution strategy
Another beneficial taxation strategy you could consider right now is a ‘withdrawal and recontribution’ strategy. This strategy involves withdrawing some of your super, and depositing it back in, to change its tax components.
The deposit is made as a non-concessional contribution, which means a tax deduction is not claimed on the amount and no tax is paid when it goes back into super.
Within your superannuation there are two distinct components:
- Taxable funds
- Non-taxable funds
While you are alive, the difference between these components does not directly impact you. But if you were to pass away and your superannuation was distributed to some beneficiaries, for example adult children, the amount held within each of these components will determine how the funds are taxed once they are forwarded to the beneficiary.
Any non-taxable funds will be passed to the beneficiaries tax free, but the taxable amount will be subject to a 15% tax rate. The recontribution strategy focuses on reducing the amount of the taxable component in your super. Adam provides an explanation of how this works:
“Generally, you become eligible to take a pension from your superannuation when you have stopped working or you’ve turned 65. Once you start a pension, you can withdraw funds without paying any tax and then deposit them straight back into your super as a non-concessional contribution.
This process increases the tax-free component within your super total because when you deposit money as a non-concessional contribution it becomes classified as non-taxable. The non-concessional contribution limit is $100,000 per year. This means that each year you implement this strategy you can potentially increase the tax-free component of your super by $100,000, reducing the tax that might be payable one day by your beneficiaries.”
Utilise the government co-contribution
The government wants to encourage you to put as much into super as possible so that you don’t need to rely on government benefits in retirement. They encourage this by offering a government co-contribution to those who are eligible.
If you will earn less than $37,697 in 2018/19 and you make a $1,000 non-concessional contribution to super before 30 June 2019, you will be eligible for the maximum co-contribution of $500. The government will deposit this into your super fund on your behalf. If you earn more than $37,697 but less than $52,697 your entitlement will reduce progressively as your income rises.
There are many factors to consider in relation to these strategies and it can be difficult to navigate the eligibility rules that must be satisfied. If you’re considering making additional contributions into super before the end of the financial year, it’s important to speak to an adviser.
Contact us for more information or to speak with a team member.
Please note this is general information only and does not take into account your personal objectives, financial situation or needs. It is for information purposes only and a professional should be consulted before acting upon any such information.
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