It's that time of year again when we start thinking about tax time and what we can do to legally reduce the amount of tax we are paying. Part of this analysis should inevitably turn our attention to our superannuation accounts. So now is a good time for a brief summary of some of the factors to consider when looking at superannuation.
The following provides a brief summary of the superannuation environment. If you would like more details please do not hesitate to get in contact.
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The benefits of making extra contributions into super above your employer's contributions are outlined below:
1) Tax effectiveness
The greatest benefit of contributing more into superannuation is for those earning more than $30,000 of assessable income. Salary sacrifice superannuation contributions into super are taxed at 15% rather than this income being taxed at marginal tax rates of 31.5%, 41.5% or 46.5%. On top of this, investment income earned within superannuation is taxed at a maximum rate of 15% another significant improvement compared to marginal tax rates.
2) Investing for the long term
By investing through superannuation you effectively ensure that these savings are left untouched until retirement (or the lead up to retirement). The benefit of locking savings away is that they are exposes to the compounding effect of investments. Not only do your investments earn income, you earn income on your income.
Another benefit if you choose to make extra regular contributions over time is that you are using a dollar cost averaging method to buy into investments. What we see as a very prudent way of increasing exposures to volatile assets such as Australian share, international shares and listed property.
3) Government Co-contribution
If you earn less than $58,980 of assessable income you are eligible to receive at least some government co-contribution into your superannuation account. To receive this co-contribution you need to make a personal contribution into superannuation (i.e. after tax contribution). The government will contribute $1.50 for every $1 personal contribution up to a maximum limit depending on your assessable income. If you earn less than $28,980 you can contribute up to $1,000 to receive a co-contribution of $1,500. For every dollar of income greater than $28,980 the maximum government co-contributed reduces by 5 cents. As an example, if you earned $38,980 you would be eligible to receive a maximum $1,000 government co-contribution.
4) Self employed tax concessions
If you make personal contributions and are self-employed, or earn most of your income from non-employment sources, you may be eligible for a tax deduction for your contributions.
5) Spouse contribution rebate for spouses of low income earners
If you are a low income earner, earning less than $13,800, your spouse may be entitled to a tax rebate, up to a maximum of $540, for contributions they make on your behalf. If you earn less than $10,800 your spouse may claim a rebate of 18% on the first $3,000 they contribute on your behalf, i.e. $540. If your income exceeds $10,800 the maximum contribution that attracts a rebate is reduced below $3,000 by $1 for every $1 by which your annual income exceeds $10,800. i.e. no rebate once your annual income exceeds $13,800.
There are some conditions to watch out for before jumping into making extra contributions:
1) Beware of the contribution caps
Concessional contributions, those that are taxed in the fund when they are made (e.g. employer contributions) are limited to $50,000 per financial year. If you are aged 50 or more at any time in the current financial year, your concessional contributions cap is $100,000. This exception will be valid until the financial year ending 30 June 2012.
If you go over these limits, every extra dollar will be taxed an extra 31.5% (effectively the highest marginal tax rate of 46.5%)
Non-concessional contributions, those from after-tax money including contributions made on your behalf by your spouse, are limited to $150,000 per financial year. If you are 64 for or under at any time during the financial year you are able to bring forward up to 2 future year's contribution and thereby contribute a maximum of $450,000. For instance you made a $450,000 contribution in June this year. You would not be able to make another personal contribution until July 2010.
2) Beware of the age based limits
If you are under 65 there are no restrictions on making contributions aside from the contribution caps.
Once you turn 65, your super fund can continue to accept mandated employer contributions, but to accept non-mandated contributions (such as salary sacrifice contributions), personal contributions and spouse contributions you must meet the work test - worked at least 40 hours in 30 consecutive days.
If you are 70 and over but under 75, the same conditions apply except that your fund cannot accept spouse contributions.
For those 75 and over, the only contributions your fund can accept are mandated employer contributions. (Your fund can accept personal and non-mandated employer contributions after you turn 75 if they are made before the end of 28 days following the month in which you turn 75 and provided you have met the work test.)
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The decision to contribute extra into superannuation has to be weighed up against the inability to access that money until you reach your preservation age. As an example, for those with mortgages it would need to be weighed up against the alternative of reducing the mortgage and thus reducing the non-deductible debt that you have in your situation. This will be a delicate balancing act dependant on your ability to continue to service your mortgage into the future and your own tolerance to debt levels.
How do we apply this?
It is our job as financial advisors to assist our clients thinking through the ramifications of making extra contributions into superannuation. If a decision is made to make extra contributions we assist with determining how best to invest those contributions.
