After a year when the average superannuation balance fell slightly or, at best, moved sideways, the summer holidays could be a good opportunity to think about ways to boost your super while being mindful of tax.
With the Reserve Bank reducing interest rates to record lows and not anticipating a rise until 2024, it’s more important than ever to ensure your retirement savings are working as hard as possible.
One way to do that is by taking advantage of super, which offers valuable opportunities to tax-effectively rebuild your retirement savings.
Reducing your tax bill
If you make super contributions by setting up a salary sacrifice arrangement with your employer, for example, you can potentially reduce your tax bill while also boosting your super.
By diverting some of your pre-tax salary into super rather than taking it as take home pay, your money will be taxed at 15 per cent, rather than your marginal tax rate.
Investments made through super also enjoy a concessional tax rate of only 15 per cent on any investment earnings. This compares with tax at your marginal rate, which could be as high as 47 per cent (including the Medicare Levy), on investment earnings outside super.
Case study – Tax-effective salary sacrificing
Yoshi is a 45-year-old IT manager and currently earns $92,000 before tax. He decides to redirect $10,000 of his pay into salary sacrifice super contributions to boost his retirement savings.
This decision could save Yoshi $5,496 in tax and increase the contribution into his super account to $15,496 as it’s made to his super fund before income tax is applied.
| Pay ($ pa) | Without salary sacrifice contributions | With salary sacrifice contributions |
| Yoshi’s income | ||
| Gross salary | $92,000 | $92,000 |
| Less salary sacrifice | $0 | $15,496 |
| Less income tax + Medicare levy | $22,357 | $16,861 |
| Take-home pay | $69,643 | $59,643 |
| Net pay | $69,643 | $59,643 |
| Yoshi’s super | ||
| Employer super contributions | $8,740 | $8,740 |
| Plus before-tax contributions (salary sacrifice) | $0 | $15,496 |
| Less contributions tax | -$1,311 | -$3,635 |
| Net super contributions | $7,429 | $20,601 |
Assumptions: The figures used in this table are based on 2020-21 income tax rates and include the low and middle income tax offset and Medicare levy of 2%. Employer super contributions remain the same after salary sacrifice.
Figures calculated using the Moneysmart.gov.au Super Contributions Optimiser.You are also able to make personal super contributions on which you claim a tax deduction.
Previously only available to the self-employed, this strategy is now available to everyone. It allows you to claim a tax deduction in your annual tax return for eligible voluntary contributions into your super account made during the financial year from your after-tax earnings.
Providing you stay under the annual concessional contribution limit (currently $25,000 a year), this can be a useful way to cut the amount of income you pay tax on.
Play catch-up with your contributions
If you have less than $500,000 in your super account, you may consider making carry-forward concessional contributions.
If you haven’t fully used your annual concessional contributions caps since 1 July 2018, you may have some unused cap amounts that you could use to make a larger contribution this financial year.
Unused concessional cap amounts can now be carried forward for up to five years.
Consider non-concessional contributions
If you have more funds available and are closer to retirement, you might also consider making a non-concessional (after tax) contribution into your super account to boost the amount you have in the run-up to retirement.
Generally, you can contribute up to $100,000 a year in after-tax money. Not only is the tax on investment earnings on these contributions only 15 per cent, but they boost the income you can enjoy tax-free in retirement.
If you have a larger amount available, from an inheritance or selling an asset for example, you could even consider making a bring-forward contribution of up to $300,000 in a single year if you are under age 65.
Get the government to contribute
Another opportunity for eligible low to middle income earners is to make a personal after tax contribution of up to $1,000 and potentially receive a co contribution of up to $500 from the government. The co-contribution amount will vary depending on your income and the amount of contributions you make, but it can be an easy way to increase your super balance.
Another tax strategy to consider if your spouse or de facto partner earns less than $40,000 is to make an after-tax contribution into their super account. You could be eligible for the maximum tax offset of up to $540 if you make a contribution of at least $3,000 into your spouse’s super account, provided they earn $37,000 or less. The tax offset tapers off as your spouse’s income increases before cutting out at $40,000.
Strategic review of asset allocation
As super is a structure for investing – not an investment in its own right – it might also be a good time to take a closer look at the mix of assets used in the investment option you have selected for your super.
It’s also sensible to review the mix of your overall portfolio – super, property, shares and other investments – to see the percentages allocated to each asset class. After COVID-induced market volatility, your allocation may have drifted away from your strategic plan.
With interest rates and economic growth set to be lower for longer, you may now be taking more risk, or have a higher percentage of your total portfolio allocated to a particular asset class, than you intend.
In the current environment, good tax and financial advice is more important than ever. With the right advice, tax-effective super strategies offer an easy way to rebuild your retirement savings and achieve your overall wealth creation goals.
If you would like to discuss your super or investment strategy, call us today.
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