Superannuation Contributions - a tax strategy?
Did you know it is possible to maximize your super balance and possibly reduce your tax at the same time?
Deductible Super Cap of $25,000 for everyone
The tax deductible super contribution limit (or "cap") is $25,000 for all individuals under age 75. Individuals need to pass a work test if over age 67.
To save tax, consider making the maximum tax deductible super contribution this year before 30 June 2021. The advantage of this strategy is that superannuation contributions are taxed between 15% and 30% compared to typical personal income tax rates of between 34.5% and 47%.
Carry forward contributions
Carry-forward contributions are not a new type of contribution, they are simply new rules that allow super fund members to use any of their unused concessional contributions cap on a rolling basis for five years.
This means if you don’t use the full amount of your concessional contribution cap ($25,000 in 2019, 2020 and 2021), you can carry-forward the unused amount and take advantage of it up to five years later.
Carry-forward contributions are calculated on a rolling basis over five years, but any amount not used after five years expires. These carry-forward rules only relate to concessional contributions into super, not non-concessional contributions, as they have different caps.
Spouse super contributions
You can make super contributions on behalf of your spouse (married or de facto), provided you meet eligibility criteria and your super fund allows it. This is known as contribution splitting.
Doing this not only helps to boost your spouse’s retirement savings, it can also help you save tax if your spouse has limited income.
You may be eligible for a tax offset of up to $540 on super contributions of up to $3,000 that you make on behalf of your spouse if your spouse’s income is $37,000 p.a. or less.
The offset gradually reduces for income above $37,000 p.a. and completely phases out at $40,000 p.a. and above.
Additional tax on super contributions by High Income Earners
The income threshold at which the additional 15% (‘Division 293’) tax is payable on super $250,000 p.a. Where you are required to pay this additional tax, making super contributions within the cap is still a tax effective strategy.
With super contributions taxed at a maximum of 30% and investment earnings in super taxed at a maximum of 15%, both these tax points are more favourable when compared to the highest marginal tax rate of 47% (including the Medicare levy).
No advice disclaimer:
Taxpayers should not act solely on the basis of the material contained in this post and any of our website/social media pages. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly. We therefore recommend that our formal advice be sought before acting in any of the areas. Posts are published as a helpful guide to taxpayers and for their private information.