25 May 2020
With 30 June 2020 fast approaching, now is a good time to ensure your year-end financial strategies are in place. To help, we’ve prepared this list of superannuation strategies all individuals should consider.
1. Superannuation contributions
While you might not have the ability to put large amounts into superannuation at the moment, it’s important to be aware of how to maximise your super balance and possibly reduce your tax at the same time.
The tax-deductible super contribution limit (or “cap”) is $25,000 for all individuals up to age 75. Individuals need to pass a work test if over age 65.
To potentially save tax, consider making the maximum tax-deductible super contribution this year before 30 June 2020. The advantage of this strategy is superannuation contributions are taxed at between 15 percent to 30 percent compared to typical personal income tax rates of between 34.5 percent and 47 percent.
2. Carry forward contributions
Carry-forward contributions are not a new type of contribution. They are simply new rules that allow eligible super fund members to use any of their unused concessional contributions limit (or cap) on a rolling basis for five years.
Eligibility is subject to your total superannuation balance (TSB) being less than $500,000 at the end of the financial year immediately before the year in which any unused cap amounts are utilised.
This means if you don’t use the full amount of your concessional contribution cap ($25,000 in both 2019 and 2020), you can carry-forward the unused amount and take advantage of it up to five years later.
Carry-forward contributions are calculated on a rolling basis over five years, but any amount not used after five years expires. These carry-forward rules only relate to concessional contributions into super, not non-concessional contributions, as they have different caps.
3. Spouse super contributions
You can make super contributions on behalf of your spouse (married or de facto), provided you meet eligibility criteria and your super fund allows it. This is known as contribution splitting.
Doing this not only helps to boost your spouse’s retirement savings, it can also help you save tax if your spouse has limited income.
You may be eligible for a tax offset of up to $540 on super contributions of up to $3,000 that you make on behalf of your spouse if your spouse’s income is $37,000 p.a. or less.
The offset gradually reduces for income above $37,000 p.a. and completely phases out at $40,000 p.a. and above.
4. Additional tax on super contributions by high income earners (Division 293 Tax)
An additional 15 percent tax is payable on super contributions when you reach the income threshold of $250,000 p.a. If you are required to pay this additional tax, making super contributions within the cap can still be a tax effective strategy.
Super contributions are taxed at a maximum of 30 percent and investment earnings in super are taxed at a maximum of 15 percent. Both these tax points are more favourable when compared to the highest marginal tax rate of 47 percent (including the Medicare levy).
5. Government co-contribution to your super
You may be eligible for a Government co-contribution of up to $500 if you are:
- On a lower income.
- Earn at least 10 percent of your income from employment or carrying on a business.
- Make a non-concessional contribution to super.
- Aged less than 71 years old at the end of the financial year.
- Have lodged your tax return for the relevant financial year.
- Have a TSB of less than $1.6million at the end of the most recent financial year.
In 2020, you can receive the maximum co-contribution if you contribute $1,000 and earn $38,564 or less. A lower amount may be received if you contribute less than $1,000 and/or earn between $38,564 and $53,564.
6. Non Concessional Contributions
You can make super contributions using your after-tax pay.
Given that you have already paid tax on this income, the payments are referred to as ‘non-concessional’ contributions and can be up to $100,000 each financial year, unless you are under 65 in which case you may be eligible to make non-concessional contributions of up to three times this amount in a single year.
If you meet the eligibility critera and choose to make non-concessional contributions to your super greater than the annual cap, this automatically grants you access to future year caps, known as the ‘bring forward arrangement’ outlined above.
7. Making super contributions using sale money from your home
You may also be able to contribute up to $300,000 to your super from the sale of your home.
In order to do this, you must have owned your home for more than 10 years, be aged 65 years or older, and meet the eligibility requirements outlined here.
As changes to superannuation and taxation have shifted the tax planning goal posts, last year’s tax tips may not be appropriate for this year. Start afresh this financial year and work from the information available to you for 2019/20.
If you require more information on these tax planning and superannuation opportunities for the year ahead, please contact the Wealth Management team or speak to your Findex adviser.