I have never come across a client that has told me that they like paying tax. This article will outline the many ways to take advantage of the tax savings on offer by contributing to superannuation before the end of the financial year.
Pre-tax or Concessional Contributions
The best way to save on tax is to utilise any unused available concessional contributions. This is after your employer super guarantee (SG) contributions, with up to $27,500 available to you annually, this is called the concessional contribution cap. You can do this through salary sacrifice or personal deductible contributions.
How it works:
Instead of paying tax at your marginal tax rate (plus the Medicare Levy of 2% or 2c in the dollar), which can be up to 47c in the dollar, you pay tax at the super contributions tax rate which is 15% or 15c in the dollar, and you benefit from the tax-saving difference. You could be up to 32c better off for each dollar you put into super if you are on the highest marginal tax rate.
Example 1 – Maximising Concessional Contribution limit for 2022/23
Salary sacrifice and personal deductible contributions work differently in practice but have the same net effect. Below is an example showing the benefits.
Let us assume you earn $100,000 p.a. with your employer contributing $10,500 p.a. (10.5%) into your super through the mandatory SG contributions. You want to maximise your concessional contributions for the year and contribute up to your annual cap of $27,500. You can salary sacrifice $17,000 split over your pay periods for the year, or you make a one-off lump sum personal deductible contribution of $17,000 before the end of the financial year.
The income tax payable on your taxable income of $100,000 is $24,967 (including the 2% Medicare Levy).
If you contribute $17,000 as a concessional contribution, this reduces your taxable income to $83,000 and the income tax payable to $19,102. An income tax saving of $5,865.
With the $17,000 contribution, you have to pay the super contributions tax of 15% which is $2,550.
Therefore, the net amount you have contributed into super after the 15% contributions tax is $14,450 ($17,000 – $2,550), and you have also paid $3,315 less tax overall ($5,865 – $2,550).
There is an excellent calculator here to calculate your tax payable and you can run different scenarios of super contributions.
If your total super balance is less than $500,000 you may have catchup concessional contributions available, and you will be able to contribute more than the yearly limit of $27,500. Any unused yearly concessional contributions accrue on a rolling 5-year basis. These can be used and contributed as a lump sum. This can significantly reduce the amount of tax paid and get more money into the low-tax environment of super.
You can check your available unused concessional contributions and catch-up contributions via the ATO through MyGov.
Example 2 – Maxamising Catchup Contributions in 2022/23
Let’s say you earn $100,000 p.a and your income has been the same since 2018/19, and your super balance is $200,000. You have not made any extra contributions, and only your employer SG contributions have counted towards your yearly concessional contributions caps. You receive an inheritance/windfall or have some cash in the bank and want to put it into super as a personal deductible contribution. The below table shows your accrued unused concessional contributions for the last 5 years.
In the 2022/23 tax year, you could make a personal deductible contribution of $81,050 using up all your unused catchup contributions since 2018/19. For this example, we assume you have fulfilled the other eligibility requirements like lodging the ‘Notice of Intent to Claim a Tax Deduction’ form, the contribution being received in the 2022/23 tax year and receiving the acknowledgement from your superannuation fund.
This would reduce your taxable income from $100,000 to $18,950. This would reduce the amount of income tax you pay (including the 2% Medicare Levy) from $24,967 (tax payable on $100,000) to $0 (tax payable on $18,950). You would actually get a tax refund of $48 when you take into account the Low Income Tax Offset. An income tax saving of $25,015 (including the 2% Medicare Levy).
However, this is not the full story, as there is the super contributions tax. On the $81,050 contribution, you have to pay super contributions tax of 15% which is $12,157.50.
Therefore the net amount you have contributed into super after the 15% contributions tax is $68,892.50 ($81,050 – $12,157.50), and you have also paid $12,875.50 less tax overall ($25,015 – $12,157.50).
The higher your income or, the higher your marginal tax rate is, the greater the tax savings are. Therefore this benefits higher-income earners more than individuals on lower marginal tax rates.
Government Super Co-contribution
The government co-contributions scheme is designed to help low and middle-income earners save for their retirement.
If your income is below $43,445 and you make an after-tax personal contribution (Non-concessional contribution) of $1,000, you will receive the maximum $500 government co-contribution into your super. This is a 50% instant return on investment and essentially free money from the government. If you earn more than this and your spouse only works part-time and earns less than $43,445, it could be a good opportunity to give your Spouse $1000 and boost up their super on an annual basis also.
There is a sliding scale of contributions made by the government. If you earn between $43,445 and $58,445, you will receive part of the government co-contribution. Above $58,445, you will not be entitled to any.
However, there are other eligibility requirements to be able to receive the government super co-contribution. You must have made one or more personal super contributions during the financial year and be under the age of 71 at the end of the financial year. There are other minor requirements, and you can find out more on the ATO website here.
Spouse contributions are a way for couples (married or de facto) to boost their partner’s retirement savings and claim a tax offset. If your spouse’s annual income is $37,000 or less, you can make an after-tax non-concessional contribution of $3,000 to their super and receive the maximum tax offset of $540. If your spouse’s income is greater than $37,000, you can still make the spouse contribution, but the offset scales down and reduces to zero when your spouse’s income reaches $40,000.
Side note: a tax offset is different and often more beneficial than a tax deduction. A tax offset directly reduces the amount of tax you need to pay. Whereas a tax deduction reduces your assessable income, and the amount of tax you save depends on your marginal tax rate and how many cents in the dollar you are paying in tax.
Let’s assume you earn $100,000 and are paying tax at 32.5c in the dollar. A tax offset reduces the tax you pay by $540. In contrast, you would need a tax deduction (money you would need to spend on an allowable expense to earn assessable income) of $1,661.50 to get the same tax benefit.
Getting more money into super is great for compounding returns as it is a low-tax environment. The super tax environment is usually lower than your marginal tax rate. Then, when you retire and move to pension phase, it is a completely tax-free environment which makes a huge difference when you are selling down assets and receiving franking credits and income.
The downside of putting extra money into super is that you cannot touch it until you reach your preservation age or retire.
You must get these contributions lodged during this tax year for them to count. A trap for inexperienced players is the misconception that the cut-off for these contributions to be received is the 30th of June. This is not the case. The cut-off for payment this year for Praemium is the 26th of June at 5pm AEST. Super funds get very busy at this time of the year, so be sure to make your payments before this time.