It’s that time of the year again, and I am not talking about brushing off the Uggies ready for winter, I am talking about last minute super contributions to save tax. A strategy which can potentially save you thousands of dollars in tax.
The information in this blog is relevant for the current 2022/23 financial year so if you are reading this post 1 July 2023, it may no longer be relevant.
Using super contributions to save tax
To save tax, you need to make a personal deductible contribution into your super. This is a form of voluntary member contribution where you transfer money into your super fund and claim it as a tax deduction by electing to treat it as a concessional contribution.
It is effectively the same as salary sacrificing into your super, just a different method to achieve the same net result.
Under a salary sacrifice arrangement, your employer contributes additional funds pre-tax to super on your behalf and you receive the tax benefit via a reduced PAYG instalment. Under a personal deductible contribution, you make the contribution yourself using post-tax money and claim the tax deduction when you lodge your tax return.
The benefit of a personal deductible contribution over salary sacrifice is that you don’t need to have a pre-determined arrangement established with your employer like you do with salary sacrifice. You can choose when you make the contribution which is great if you want to get a sneaky bit extra into your super right before the end of the financial year.
Also, as you are making the contribution from post-tax money, you are more likely to get a tax refund when lodging your tax return. Let me give you an example of how it works.
Example of using super contributions to save tax
Let’s say you earn $100,000 gross (before-tax) and have no other investment income and have no deductions.
Throughout the year you should have paid $24,967 in tax through PAYG. When you lodge your tax return you don’t have any additional income to declare nor deductions to claim. As a result, you will not owe anything to the tax office, nor will you receive a tax refund – the PAYG was spot on so you are all squared.
Now let’s assume you make a $10,000 tax-deductible contribution to superannuation. In this instance, you still would have paid $24,967 in PAYG tax throughout the year but now you have a $10,000 deduction to claim. As a result, the ATO will calculate that you have paid $24,967 in tax but only owe them $21,517 so you will get a tax refund of $3,450!
This can be particularly handy in offsetting a realised capital gain from selling an asset. If you know you are going to have to pay tax when you lodge your return, a personal deductible contribution to super may help soften that blow.
Now of course, everyone’s tax calculation is different, and the amount of refund will vary depending on many factors. However, as this basic illustration demonstrates, getting a tax deduction for contributing to super is a beautiful thing!
Not only will you save money in personal income tax, when the money hits your super fund, it will be invested, and the compounding can begin.
But of course, like with everything, there are some restrictions around these contributions and potential downsides that you need to consider. Let’s look at the restrictions first.
There are age restrictions to be eligible to make a personal deductible contribution. These are as follows:
|Between 67 and 75||Must meet a work test|
|Over 75||Not eligible|
Where the work test is applicable, you must have worked at least 40 hours during a consecutive 30-day period in the current financial year. This can be as an employee or a self-employed person.
A tax-deductible contribution to super will form part of your concessional contributions cap which, in the current financial year, has a $27,500 cap limit.
Employer contributions and salary sacrifice contributions will also fall under this cap limit so before you make any contribution it is best that you check your super fund to see how much space you have left in your cap limit. Remember to also account for expected contributions which are still to come in prior to 30 June.
You may have the ability to utilise any unused carry-forward unused concessional contributions. From 1 July 2018, if you haven’t utilised your full concessional contributions cap limit you can carry forward the unused amount for up to 5 years provided your total super balance is below $500,000 on 30 June in the previous financial year.
The easiest way to find out how much carry-forward concessional contributions you have available is to log into your MyGov account, click on your linked ATO services > Super > Information > Carry-forward concessional contributions.
Before making a contribution, consider this…
Assuming you are eligible to make the contribution and you have the cap limit available to do so, there are still a few considerations that you should take into account before making a contribution.
Firstly, it is important to note that concessional contributions are taxed by your super fund at a rate of 15%. Given this, it is not tax effective to make a concessional contribution if you earn less than roughly $20,000 as you basically pay no tax outside super. The net tax saving from a concessional contribution can be calculated as the difference between your marginal tax rate and your superannuation tax rate of 15%.
If you are fortunate enough to earn over $250,000, then you will get slugged with the Division 293 tax. This is an additional 15% tax on any contribution that would otherwise take your income over the $250,000 threshold. Assuming Division 293 tax did apply, this would take the tax rate on super contributions up to 30% which is still a whole lot better than the top marginal tax rate of 47% (inclusive of Medicare levy).
If you want to learn more about Division 293 tax, I wrote a detailed blog on it previously which you can read here.
Once inside superannuation you won’t be able to access funds until you meet preservation age. I won’t go into detail here about how to access your super, as that is a huge topic on its own, but if you were born after 1 July 1964 then your preservation age is 60. There are some limited circumstances in which you could potentially access your super early such as a deposit for a first home, financial hardship or compassionate grounds.
Before making a contribution, you should understand how your funds are invested inside super. I always advise people to treat your super fund with as much consideration and intent as you do with the assets in your personal name. It is YOUR money for YOUR retirement and therefore you should know the investments and the fee structure within YOUR super.
You have until 30 June to get use super contributions to save tax. The contribution is counted in the financial year in which it is processed and allocated by your super fund, not when the money was sent. Bearing this in mind, it is best to send in your final contribution prior to the 15th of June to allow for processing time.
Making the contribution is easy. All you need to do is contact your super fund and ask for banking details. Most super funds will allow you to either BPay the contribution or deposit the money via bank transfer (EFT). There will be a reference number to list in the description which will ensure the funds are allocated into your account.
Once the contribution is in, it is time to fill in a Notice of Intent to claim form which can be found on the ATO website. By completing this form, you are letting your super fund know that you intend to claim a tax deduction for the contribution and therefore your super fund will allocate it as a concessional contribution.
Upon processing of the form, your super fund will send you out an acknowledgement of the Notice of Intent. If you use an accountant to help with your tax return, they will want to see this before claiming the deduction.
And that’s it! You have successfully made a contribution, had it allocated correctly and are ready to claim a tax deduction. If you do this, you will thank yourself twice – once when your tax bill shrinks and again in retirement when your super fund is looking juicy.
Other reasons for making last minute contributions
There are other reasons why you might want to make a last-minute super contribution, other than to claim a tax deduction. Without going into too much detail, these reasons include:
- Government Co-Contribution. If you earn less than $42,016 and you make a $1,000 non-concessional contribution into your super, you may be eligible for the $500 government co-contribution. If you earn between $42,016 and $57,016 you may receive a reduced co-contribution payment. You can find out more about the government co-contribution here.
- Eligible spouse contribution. If your spouse earns less than $37,000 and you make an eligible spouse contribution of $3,000, you may be eligible for a $540 tax offset.
- Transition assets into super. As you approach retirement it may be a good idea to utilise your super to house as much of your asset base as you can. Why? Because, subject to certain eligibility requirements, you can turn your super into an account based pension which is a tax free entity – no tax on income, capital gains or pension payments.
Under the above scenarios you may look to utilise non-concessional contributions which have a whole new set of cap limits and rules which I won’t overwhelm you with now. However, if you are looking to utilise the above, I suggest you do some research on non-concessional contributions prior to making the contribution.
If you would like specific advice relating to super contributions to save tax for your particular circumstances, feel free to reach out to us for Tailored Advice.