Are you looking for ways to increase your retirement savings and reduce your tax? If so then, you are in luck. There are several ways you can contribute to your super, depending on your personal circumstances.

Here is one way you can grow your super and access tax benefits at the same time.

Claim a tax deduction on your personal contributions to super.

When you contribute to your super using after-tax income (that is, from your take-home pay or personal savings), these are called non-concessional contributions that count towards your annual non-concessional cap.

Depending on your circumstances, you may be eligible to claim these contributions as a personal tax deduction. Known as ‘personal deductible’ contributions, they become concessional contributions and then will count towards your annual concessional cap.

You may be able to claim a tax deduction on any personal super contributions you make until you turn 75.

You can check if you’re eligible to claim a deduction for personal super contributions with a financial adviser, an accountant or by visiting the ATO at www.ato.gov.au.

Speak to us at Financially Sorted if you need help.

Each year, you can contribute up to $27,500 in concessional contributions. If you didn’t use the full amount of your cap in the earlier years, these unused amounts automatically carry forward and remain available for use for up to five financial years. This is called the carry forward of unused concessional contributions.

You’re eligible to access unused concessional contributions in the current financial year if your total super balance on 30 June was less than $500,000. 

What’s the tax concession?

Claiming your personal super contributions as a tax deduction may reduce your taxable income, thereby reducing the total amount of tax you pay. The amount will vary based on your own personal circumstances.

Also, future earnings inside super are taxed at only at 15%. If your marginal tax rate is 39% (including Medicare Levy), this means investing in super leaves you 24% better off and you can take advantage of compounding returns also.

Meet Susan

Let’s look at an example. Susan earns an annual salary of $80,000. Her employer is making 11.0% super guarantee contributions, and she has received $100,000 net capital gains from selling an investment property.

To reduce her taxable income, she makes a $50,000 personal deductible contribution to super.

Her available concessional cap this financial year is $80,000 (this years $27,500 concessional cap increased by $52,500 of unused concessional contributions as her total super balance is $350,000 on 30 June 2022).

Comparing tax with and without personal deductible contributions 

The table below shows the tax difference if Susan makes a personal deductible contribution.

 

No personal deductible contributions

With personal deductible contribution

Salary

$80,000

$80,000

Net capital gains

$100,000

$100,000

Personal deductible contribution

$0

$50,000

Taxable income

$180,000

$130,000

Less income tax incl. Medicare Levy

$55,267

$35,797

Total take-home pay

$124,733

$94,203

 After making a $50,000 personal deductible contribution:

Susan has contributed $42,500 to her super net of 15% contributions tax ($50,000 – $7,500).

Susan’s tax payable has reduced by $19,470 ($55,267 minus $35,797). 

Extra Benefit – She could split her concessional contributions to a spouse.

If Susan’s spouse was eligible, she could also choose to split a portion of her concessional contributions directly into her spouse’s super account. While the amount she chooses to split continues to count towards her concessional cap, it can help boost the retirement savings of a spouse who currently has a lower super balance.

Splitting concessional contributions to a spouse can be useful in keeping Susan’s total super balance below $500,000 so she can take advantage of unused concessional contributions sometime down the track.

In conclusion, contributing to super can get you more money back at tax time, however your super cannot be accessed until you satisfy a condition of release.

To discuss whether you’re eligible to make a personal deductible contribution and whether this strategy is appropriate for your circumstances, speak with our team of experienced accountants and financial advisers.

Please note – the above should not be acted upon. It’s general information only. Our team of experts are always here to assist.

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