There is nothing quite like a deadline to turn good intentions into strategic actions.
So, it is important not to let the financial year pass without giving some thought to a number of tax effective super strategies, while, at the same time, taking the opportunity to consider how to put steps in place for the new financial year.
Choosing to maximise concessional (pre-tax) contributions to super can be a good way to boost retirement savings and also reduce the potential tax on take home income.
Generally, employees are currently entitled to receive 9.5 per cent of their salary into super as superannuation guarantee (SG) contributions which are considered concessional contributions. While this provides a source of retirement savings, it may be appropriate to consider whether relying on this alone will be enough to fully sustain an individual’s lifestyle in retirement. Furthermore, individuals who are self-employed may not be making any contributions to super unless they consciously make the decision to do so themselves. As such, it may be prudent for people to consider if and how any extra contributions to super can help to grow their retirement savings.
There are limits (known as caps) to the amount an individual can contribute each year to super on a concessionally taxed basis (15 per cent v. their marginal tax rate) and if exceeded may result in paying additional tax. With a current concessional contribution cap of $25,000 per annum, there may be scope to make additional contributions on top of the 9.5 per cent SG.
To illustrate this, take for example Mark (55) who is ten years out from retirement and is looking to boost his retirement savings and access potential tax benefits. Mark’s employer currently contributes $10,500 to super on his behalf.
Mark chooses to enter into a salary sacrifice agreement with his employer to contribute an additional $14,500 of his pre-tax salary to super which takes his concessional contributions for the year to the maximum $25,000.
This strategy would reduce the rate of tax Mark pays on the $14,500 from his effective marginal tax rate to just 15 per cent when the contribution reaches his super fund. It would also reduce the personal income tax Mark would pay as his pre- tax salary has been reduced by $14,500. Importantly, while there may be an immediate tax benefit for Mark, he generally will not be able to access them until he meets a condition of release (for example when he reaching his preservation age and stops working full time or upon turning age 65).
If Mark were self-employed or his employer didn’t offer him the ability to salary sacrifice, another way he could make the most of his concessional contributions cap could be by making a personal contribution to his super, and after following the correct process, claim a tax deduction for the contribution in his income tax return.
Are there other reasons to consider making the most of concessional contributions aside from potentially reducing an individual’s tax and boosting their retirement savings?
There are a number of potential options to consider.
Firstly, through contributions splitting, an individual may split some of their concessional contributions made during the income year to their spouse’s super to top it up.
Any extra contributions made can also help fund premiums on insurance policies that may be held within super. Plus, the eligibility criteria to make concessional contributions isn’t restricted by an individual’s total super balance, unlike non-concessional (after-tax) contributions.
It’s not only the contribution side of super where tax effective strategies can be found. When and how people choose to access super can have an impact on their individual tax position and the tax paid on the investments held within the fund.
For example, TTR strategies can be used to support the transition from full time work into retirement where an individual may look to reduce their hours of work and supplement their income with TTR pension payments. Or, when an individual is looking to maintain their hours of work and boost their super savings through a salary sacrifice arrangement as mentioned previously. However, when considering these strategies, it is important to note that since 1 July 2017, investment earnings supporting transition to retirement (TTR) pensions are no longer tax-free but taxed at 15 per cent.
While there are still benefits for those under age 60, TTR strategies may work better for individuals aged 60 and over and particularly if they are a middle to upper income earner. Personal circumstances will determine whether a TTR strategy is the right choice.
Once a person is fully retired, switching their TTR pension or accumulated super saving to a full account based pension will bring further benefits. All investment returns from assets supporting their retirement phase pension will be tax-free up to the transfer balance cap limit of $1.6 million. In addition any lump sum or pension payments taken from super after an individual turn’s 60 are also tax-free.
As people approach post-retirement, other optimisation strategies may be worth considering.
For example, if eligible to withdraw and make a contribution into super, a recontribution strategy, which involves withdrawal of some or all super benefits and then recontributing an amount back into super, may be beneficial.
While this strategy may not change the tax treatment of benefits received from a super fund, it can reduce the tax adult children may pay on super benefits they receive as a result of their parent’s death.
In certain circumstances a recontribution strategy could also be used to help equalise balances between spouses. It may be beneficial to do this so both benefit as much as possible under the transfer balance cap limit of $1.6 million.
Making the right decisions around super contributions and accessing benefits can be complex, so seeking the support of professional advisers is something to consider. Professional advice can help maximise the opportunities, but also help to avoid the potential pitfalls which come with looking to optimise super and retirement outcomes.
Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.