Heads Up For The End Of Financial Year
We are 25 days and counting until the end of financial year (how exciting right?!)
Okay, so perhaps not that exciting but possibly important. For some of you, it’s time to consider making a contribution to your super fund.
Here’s the deal… hopefully you’re already well aware that super is simply a tax-effective way to invest money. It comes with one drawback, and that is you can’t touch it until you retire (and turn 60). But, if you’ve been following Wages to Wealth, you’ll also recognise that this rule is also super’s biggest advantage.
Now, when it comes to the tax advantages, if you’re earning more than $45,000 per annum, then every dollar over this amount up to $120,000 is getting taxed at 34.5% (i.e. 32.5% + the 2% Medicare Levy).
Concessional contributions paid to super only get taxed at 15%. So, if you have some savings looking for a long-term home, you can make a contribution to your super and claim a tax deduction. The money gets taxed at 15% and the tax deduction is worth 34.5% (for those earning $45,000 to $120,000), the net result is a benefit to you of 19.5%!
If you earn over $120,000, the tax saving benefit grows to 24%, and if you earn over $180,000 it is equal to 32%!
Is this the easiest tax deduction Australians can get? The fact it provides significantly more benefit to higher income earners is perhaps debatable, but we can’t change the rules. Whichever way you dice it, if you earn more than $45,000 per annum, super provides a ‘super’ way to reduce your tax and keep more of your money for your long-term future.
There’s a catch! Because the benefits are so tax-effective, the government puts a cap on how much you can contribute. That cap is $27,500 for the financial year. Importantly, the cap also includes your employer contributions of 11%, so this has to be factored in.
Here’s an example…
You are on a salary of $85,000 per annum, that means work puts $9,350 per year into your super. Take that away from $27,500 and that leaves $18,150 available to you. Now, many of us won’t have a spare $18,150 to simply add to our super, but anything you can contribute will be more tax-effective than keeping it outside super.
The other thing to make a point of, is that the tax savings are equivalent to an immediate, guaranteed return on that money of the difference in tax payable. It’s easy money!
So, if you have some savings that can be identified as long-term money that you are willing to put away, then the next couple of weeks is when it’s time to take action.
Get in touch with your super fund to get the details of how to make the contribution and get them to send you a Notice of Intent to Claim form. Make the contributions, send the form to your super fund, enjoy the tax benefits. It’s a great system just waiting for you to take full advantage.
NOTE: DO NOT LODGE YOUR TAX RETURN UNTIL YOU CONFIRM YOUR NOTICE OF INTENT TO CLAIM HAS BEEN PROCESSED BY YOUR SUPER FUND.
It’s important to point out that you need to make sure whatever you do is right for you. For example, if you are very young, even though the tax benefits are enticing, perhaps you don’t want to tie up your savings in a tax vehicle where you won’t be able to access the money until you are at least 60.
So, if this year isn’t the year, just always keep this in the back of your mind, because at some point super is very likely going to the best way for your future self to get ahead!
But if you’re a little more advanced in age and the benefits really make sense for you, then one thing to bear in mind is that you can make a lump sum contribution between now and the end of June, but then consider setting up a salary sacrifice arrangement with your employer from July onwards. That way you can drip feed money into super throughout the year and put things on auto-pilot.
If you circle back to the $85,000 example above, it’s simply a case of dividing your available concessional contribution cap, minus employer contributions, by 26 (if you get paid fortnightly). Probably worth leaving a little bit of wiggle room so you don’t find yourself going over the cap.
There’s one last little trick that’s available… it is now possible to access previous years’ unused concessional super caps stretching back to the 2018-19 financial year. To find out if you have any available room under these rules, just log in to your MyGov account, then go to the ATO portal and find the Superannuation section. In there, you’ll be able to see if you have any “carry forward concessional contributions” available. If so, that gives you some additional room to contribute above the $27,500 cap for the financial year. This can be particularly handy if you have perhaps sold a property or some shares and are expecting a capital gains tax bill… it’s best to first have a chat to your accountant in before taking action here. In order to use this strategy your super balance needed to be less than $500,000 on 1st July 2023.
It constantly amazes us how many people want to talk about investment properties as a way of saving tax, without realising there is far simpler and effective way… the HUGE tax concessions available on money contributed to super – particularly for higher-income earners.
And before we go, for those of you with your hand up wanting to know about after-tax contributions to super… we’ll cover this next week! These types of contributions will be of particular interest to those on lower incomes.
As always, please shoot us an email if you need a hand of have questions.
Cheers,
Dan and Dave
