Heads Up For End Of Financial Year - Part II

For those of you contemplating putting money into super, you’re now close to two weeks away from the end of financial year door closing… so read up!

Last week we highlighted the value of concessional, or “pre-tax” contributions into your super. This week we want to build on that foundation by covering off on some of the common non-concessional or “after-tax” contributions that might be beneficial to you or your partner.

In case you missed last week’s MiM, it’s a worthwhile read. In a nutshell, the more money you put into super using pre-tax contributions will likely see you paying less tax whilst building more wealth for later in life.

Non-concessional contributions are made to your super fund using after-tax income that you DON’T wish to claim a tax deduction for. This is money you have already paid tax on, such as your salary, savings, possibly an inheritance you’ve received, or even last year’s tax refund.

The non-concessional contribution cap is currently $110,000 each year and you can potentially make a larger Bring-Forward non-concessional contribution of up to three times the annual limit over a 3-year period ($330,000). This bring forward provision is for anyone under 75 years of age.

There’s one catch… in order to make non-concessional contributions into your super, your account balance needed to be less than $1.7 million as of 30 June last year (if you’re like us, you don’t have this problem!).

Let’s now look at three common examples of when you might want to consider this type of contribution (we’ll try to be brief given this is Money in Minutes): 

Get a 50% return using the Government Co-contribution:

If your yearly gross income is less than $58,445, you could be eligible for a Government co-contribution if you make after-tax contributions to your super.

The Government will match every dollar you put into your super fund by contributing up to 50 cents, towards a maximum benefit of $500 pa. This co-contribution would be paid directly into your super account after you’ve lodged your tax return.

To have the Government contribute the maximum 50 cents for each dollar you contribute after tax, you need to have earned less than $43,445 this financial year. If you earn more than $43,445 but less than the upper limit of $58,445, the Government will taper off the contribution they make. I.e., once you earn the upper limit income of $58,445, they will not contribute any funds on your behalf.

Now you may well earn too much for this strategy to be of benefit, but you may have a partner or family member who would benefit greatly from it. After all, there are no other strategies to our knowledge where you can potentially get a 50% return on your money with no risk, simply by making a contribution to super.

Please note you can still make after-tax contributions up to the cap limit of $110,000, but it will only be the first $1,000 that is eligible for any applicable Government co-contribution. 

Save tax using a Spouse Contribution:

This is a contribution you make by contributing after-tax money into your partner’s super account, and in doing so you may reduce your tax bill whilst boosting your spouse’s super!

If your spouse earns $37,000 or less in assessable income (including fringe benefits and employer super contributions), then you can make a contribution of up to $3,000 pa into their super account and potentially access the maximum tax offset of $540. The tax offset is progressively reduced until it reaches zero for spouses who earn $40,000. A tax offset is much more powerful than a tax deduction as it comes off the tax payable (rather than your income) and can equate to an 18% return on your contribution. And yes, in case you’re wondering, this contribution can be used in conjunction with the Government co-contribution.

Release home equity using a downsizer contribution:

Given we hold most of our wealth via our homes and that these homes may one day feel a little bit too big and too high maintenance, it can make sense to downsize your home, freeing up money in the process and potentially contributing this money into super, with the aim to use these funds to generate a passive income to fund lifestyle. This is the downsizer contribution!

Currently, a single person can contribute up to $300,000 as a downsizer contribution ($600,000 for couples) and you need to be 55 years of age or older.

A few points to remember with the downsizer contribution:

* Even though this strategy uses after-tax money, the contribution doesn’t actually count towards your non-concessional cap limit – therefore this strategy can be used in addition to other non-concessional contributions

* The property you sell needs to be identified as your primary residence (it cannot be an investment property) and has to have been held for at least 10 years

* The contribution/s need to be made within 90 days of receiving the property sale proceeds

* An important consideration when considering this strategy is to remember that Centrelink will assess super under their assets test rules (if you apply for the Government Age Pension), whereas your primary residence is exempt from the asset test. Having said that, if you keep your super in “accumulation” mode and are under 65 years of age it will be exempt as far as Centrelink is concerned. It’s therefore important to consider future income needs prior to making this decision

IMPORTANT: Before you make any of these contributions, particularly the downsizer contribution, please first consider whether you need to seek independent personal financial advice, carefully review the eligibility criteria for each contribution and liaise with your super provider for “how to” instructions, and ensure they have your tax file number recorded. There's a good chance your super fund has advisers who can give you once-off advice to help with decisions like these.

So, there you have it. Over the past two Money in Minutes we hope we have explained some potentially very powerful super strategies to build wealth and save tax!

As always, please shoot us an email at [email protected] if you need a helping hand.

Cheers,
Dan and Dave