Super remains one of the most tax-effective ways to save for your retirement, so it's important to understand how you can best benefit from it, writes Gayle Bryant.
Superannuation provides an environment for you to accumulate your retirement savings and from a tax perspective it has few rivals.
It can help you tax-effectively save for your retirement in a number of ways, such as:
- the money you contribute before tax (employer payments and salary sacrifice) is generally taxed at 15 per cent, which is lower than most people's marginal tax rates (additional 15% tax applies for high income earners)
- investment earnings inside super are taxed up to 15 per cent.
The trade-off for these benefits is that your money is preserved until retirement, so you can't generally access it until you have reached your preservation age (55 to 60 years, depending on when you were born) and have retired or you reach age 65.
How much can you save?
The difference in tax outcomes you can get from contributing extra to super depends on the marginal tax rate that applies to your taxable income. The table below shows you the difference between marginal tax rates (as an individual taxpayer) and the tax rate for a superannuation fund taxpayer.
Marginal tax rates v super tax rates (current at July 2022)
* The above rates assume Medicare Levy of 2 per cent.
** This is for illustration purposes only and does not take into account any tax offsets or credits you may be entitled to.
*** Up to an additional 15 per cent may apply to concessional contributions that exceed the $250,000 income threshold for higher income earners.
Tax effective strategies that make the most of your super
Here are some tax-effective strategies that can give your super a boost.
Salary sacrifice or personal tax-deductible contributions
Making concessional contributions into super can be one of the most tax-effective strategies around. If you ask your employer to put some of your salary into super before it goes into your pay packet, this amount is generally taxed at 15 per cent instead of your marginal tax rate.
Be aware you can only contribute $27,500 per year to your superannuation at this concessional rate, including any employer contributions (for example, 11 per cent superannuation guarantee). (Refer to the need-to-know section below for details of the 'carry-forward' arrangement that began on 1 July, 2018).
There are some exceptions to the amount of tax on contributions you pay. For example, since 1 July 2017, if your income plus concessional contributions exceed $250,000, you pay up to an extra 15 per cent tax (up to a total of 30 per cent) on all or part of the concessional super contributions within your concessional cap.
Move savings into super for a tax-effective earnings boost
If you have a large amount of cash or other investments outside super that you don't need to access till retirement, you could consider moving them into super so that any investment earnings (including interest and capital gains) may be taxed at up to 15%. Just be aware of the personal tax implications if you're selling any investments to do this and remember that there are limits on the amount you can contribute to super.
Tax effectiveness of having life insurance through super
Life insurance that's available through your super fund may be more affordable than if you pay for it outside of super, which means you can potentially save money on the premiums and/or pay for a higher level of life insurance cover.
This is because when you take out insurance within super, your insurance premium may be paid from your pre-tax income (for example, pre-tax salary sacrifice to super or personal deductible contributions), which leaves you with a lower gross income amount on which to pay tax. Your super fund may also claim a tax deduction for the premium and may pass on this benefit to you. Generally you cannot claim a tax deduction for life insurance premiums paid for life insurance held personally.
Make the most of the spouse contribution rules
You may receive a tax offset of up to $540 by making a contribution to your spouse's super account. To receive the maximum tax offset requires a spouse contribution of at least $3,000 into your spouse's super account and your spouse's income must be $37,000 or less. To be eligible for a part spouse contribution tax offset your spouse's income must be less than $40,000. Additional criteria applies for a spouse to be eligible and it is important to note that contributions made to your own super fund then split to your spouse do not qualify for the spouse contribution tax offset.
Tax offset for low income earners
If you earn $37,000 or less, you may also qualify for the low-income superannuation tax offset. This amount, up to $500 each year, is 15 per cent of the concessional contributions you or your employer makes to your super throughout the financial year.
Need to know
Super remains one of the most tax-effective vehicles in which to save for your retirement. Below is a summary of some of the key legislated changes to super.
- Generally you can only move up to $1.7 million of super savings into a retirement income stream if you have never commenced a retirement phase pension before 1 July 2021. For those who have commenced a pension before that date, you may have a lower limit.
- Transition-to-retirement pensions are no longer considered a retirement-phase income stream and investment earnings are taxed at up to 15 per cent (in most cases pension payments from these super pensions continue to be tax-free if you are at least age 60).
- Concessional contributions are capped at $27,500 in the 2023/24 financial year.
- If you haven’t contributed up to the maximum concessional contribution cap in any one year since 1 July 2018 and your total superannuation balance last 30 June was less than $500,000, you can make more concessional contributions this financial year using any unused concessional caps since 1 July 2018. Any unused concessional caps in a financial year can be carried forward for 5 years.
- Personal (non-concessional) super contributions are limited to $110,000 from after-tax savings in the 2023/24 financial year.
- The downsizer contributions into superannuation measure allows eligible persons who are 55 years and over to make a contribution into their super of up to $300,000 using the sale proceeds of their home, without affecting their non-concessional cap.
- From July 1 2022, the requirement to pass a work test was repealed for super contributors aged between 67 and 74 who wanted to make non-concessional or salary-sacrifice contributions into their super account. The work test, however, still applies for those ages 67 to 74 making personal contributions for which you intend to claim a tax deduction. To pass the work test, you must prove that you are gainfully employed, which requires you to be working and receiving an income for at least 40 hours in a period of 30 consecutive days during the financial year in which you wish to make super contributions. The 40 hours can be in any arrangement over the 30 consecutive days, and the 30 consecutive days can be at any time during the financial year.
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