Tax Advantages of Superannuation Constributions
Your superannuation will probably play a significant role in your retirement income. For this reason, topping it off while you work is a smart idea.
But did you know that by making your own voluntary superannuation payments, you can also enjoy some significant tax benefits right now?
There are various methods to gain tax benefits from your super contributions.
How “Concessional” Super Contributions are Taxed
Employer super payments paid on your behalf, salary sacrifice contributions you make, and personal contributions you claim as a tax deduction on your tax return are all examples of concessional (before tax) super contributions. If your yearly earnings plus superannuation contributions total less than $250,000 per year, these contributions are taxed at 15% when they are received by your super fund (up to a cap of $27,500 annually).
If your company won’t set up a salary sacrifice agreement or you have a higher marginal tax rate, personal super contributions can be extremely helpful.
The income bracket above $45,000 would provide the most benefits, as the marginal tax rate plus the Medicare Levy increases to 34.5% at this level. When you claim a tax deduction for super contribution, your effective tax rate is only 15%. What a significant tax savings!
Catch Up Super Contributions
If your total superannuation balance is less than $500,000 and you haven’t paid the maximum annual super contribution in any year starting in 2019, you can “carry-forward” concessional super contributions. For five years, you get rolling access to their unused concessional contribution caps. Unused amounts that were carried forwards will expire after five years.
Taxation of Low-Income Earners
Low-income superannuation tax offset makes ensuring that you don’t pay a higher rate of tax on your super contributions than your income tax rate if you make less than $37,000 annually. The offset will be paid to your super account directly, with a maximum payment of $500 and an amount equivalent to 15% of your concessional payments for the year.
For the 2023 fiscal year, people who earn between $42,016 and $57,016 may also be eligible for government super co-contributions of 50 cents for every dollar, up to a maximum of $1,000 in non-concessional (after tax) contributions.
Taxation of High-Income Earners
Concessional contributions are subject to an extra 15% tax if your annual income (including super contributions) exceeds $250,000, for a total tax on these contributions of 30%. Even so, this is still a lower tax rate than your marginal rate of 47%. Division 293 tax is the name for this additional 15%. The only concessional contributions that subject you to the additional tax are those that raise your total income above $250,000.
If you make more than the annual ceiling of $27,500 in concessional contributions, the excess is reported on your tax return and subject to tax at your marginal rate (minus a deduction for the 15% your super fund has already deducted). You may decide to use some of the extra contributions to pay for expenses.
WHAT TO DO NEXT?
Please contact Success Accounting Group if you would like to discuss saving tax with super contributions.
To make sure you don’t go over your super caps, there are a lot of things we need to check for you. If you want to be eligible for a tax deduction for your contributions in the year 2023, you may need to see a licenced financial counsellor, complete the proper documentation, and time your contributions properly.
Call us right away! We can save you money on taxes faster if we get started as soon as possible, ideally before 30 June 2023 to give ourselves ample time to put tax-saving measures in place.
Consider the possibilities for your tax savings! You might:
- Lower your credit card and mortgage debt.
- Increase your Super.
- Save for a vacation (when we can all take vacations again!
- Down payment on a rental property
- Spend money on your kids’ education
About Lan Nguyen
Lan is the Founder and Chief Strategist at Success Accounting Group, Melbourne based CA firm. In a matter of short 8 years she has built up a reputable Chartered accounting firm with 3 offices and a team of 6 professional accountants and support team members. Her mission is to provide Innovative and Strategic Financial advice to help her customers make smarter financial decisions today for a brighter future.
Success Accounting Group is for established business owners who would like help to grow a sustained business. As a business owner you understand what drives your business success with our accounting team taking care of the rest.