We all want to reduce our tax bill and build wealth and extra superannuation contributions are a great way to do this, but the rules are complex and time can get away from our best-laid plans, especially in times like these. We only have a few weeks until the end of the financial year, so now is the time to consider your options for this financial year.
The reason superannuation contributions are so tax-effective are three-fold, with the second reason often underestimated but being very significant.
Reason 1 – Lower Tax Rate
Superannuation contributions that we choose to claim as personal or business tax deductions are taxed at 15% by the super fund, compared with personal marginal tax rates that are typically higher than 15% or the company tax rate of 27.5%.
Our tax saving is the difference between either our personal or company tax rate and the 15% super fund tax rate, multiplied by the contribution amount.
The table below shows a comparison for a $10,000 super contribution.
| Super Fund | Individual earning between $37,000 and $90,000 | Individual earning between $90,001 and $180,000 | Company | |
| Tax rate | 15% | 34.5% | 39% | 27.5% |
| Tax payable | $1,500 | $3,450 | $3,900 | $2,750 |
| Extra tax | $1,950 | $2,400 | $1,250 |
Reason 2 – Earnings in Super are Taxed at Low Rates
Earnings in the super fund are taxed at 15% (when the fund’s members are still working) whereas if we retained the funds in our own name or company and reinvested them, the earnings would be taxed at our personal or the company tax rate.
The table below compares the investment balances on a $10,000 contribution and investment earnings of 10% for a super fund, an individual with a marginal tax rate of 39% and a company.
| Super fund | Individual taxed at 39% | company taxed at 27.5% | |
| Contribution $ | 10,000 | 10,000 | 10,000 |
| Tax $ | 15% | 39% | 28% |
| Amount to invest after tax paid $ | 8,500 | 6,100 | 7,250 |
| Investment earnings % | 10% | 10% | 10% |
| Investment earnings before tax $ | 850 | 610 | 725 |
| Tax on investment earnings $ | 128 | 238 | 199 |
| Investment earnings after tax $ | 723 | 372 | 526 |
| Investment balance $ | 9,223 | 6,472 | 7,776 |
| Variance % | -2,750 | -1,447 | |
| Investment balance as % super fund’s balance | 70% | 84% |
The reduction in tax that the super fund pays on both contributions and earnings has a huge impact on the investment balance. Over time and with large total balances and with the impact of compounding, the difference will be enormous.
Reason 3 – Forced Savings You Can’t Access
Third, superannuation contributions are like a form of forced savings that you can’t access until you meet age requirements, whereas investing in your name or in a company may result in funds being pulled out and spent and the benefits of compounding contributions and earnings being lost.
Want to Contribute More?
If this makes you want to contribute more to your super, the next step is to understand some key rules about how much you can contribute and when. Some of these key rules are;
Rule 1 – Limits to contributions
There is a limit to how much you can contribute each year and claim as a tax deduction and reduce your tax as discussed above. This amount is $25,000, though as you will see in item 2 below, this is complicated by rules that allow you to contribute more based on how much you have previously contributed, as long as your total super is under a certain amount.
Rule 2 – Possible extra contributions
If you have a total superannuation balance of less than $500,000 on 30 June of the previous financial year, you may be able to contribute more than $25,000 up to the balance of prior year ‘unused amounts’. The unused amounts are the difference between the maximum $25,000 contribution and what you contributed. These extra contributions are known as ‘carry-forward contributions’.
The first year you will be entitled to carry forward unused amounts is the 2019–20 financial year. Unused amounts are available for a maximum of five years, and after this period will expire.
These carry-forward rules only relate to deductible (‘concessional’) contributions into super.
Example
In the 2019 financial year, your super contributions were $10,000. In the current financial year, you can contribute an extra $15,000, bringing the total contribution limit to $40,000. The extra $15,000 is the difference between the maximum $25,000 and the actual $10,000 contribution in 2019.
If you are considering this, make sure you check the amount in your super account at 30 June 2019 and ensure it’s under $500,000.
Rule 3 – Contributions must be cleared in your fund by 30 June
Contributions must be received and cleared by your super fund by 30 June. It is no use transferring the funds via EFT on 30 June as they won’t clear in your super fund by 30 June. If you are using a clearing house for employee payments, you need to allow time for the funds to reach the clearing house and then be transferred to each employee’s fund. This may take over a week.
Rule 4 – Notify your fund you will claim a deduction
You must notify your super fund that you intend to claim the super contribution as a tax deduction and this notification must be made either (and whichever is earliest) prior to lodgement of your tax return or the last day of the income year after the income year in which you made the contributions.
Rule 5 – Ensure you work within the aged-based contribution limit rules
There are aged based limits to deductible super contributions.
If you are over 65 years old but not 75 years old, if you want to contribute to super over and above any employer-mandated contributions (standard 9.5% of salary), you must have worked at least 40 hours within 30 consecutive days in that financial year. This is known as the work test.
Once you reach age 75, you’re generally ineligible to make voluntary contributions into your super (except for downsizer contributions), however you can still receive employer-mandated contributions.
These age-based limits can be complex around exact timings of contributions that are allowed so please contact me if you have a query.
Summary
Contributing to super can save significant tax and lead to significantly more funds than if you invest in your own name or in a company. Make sure you know the rules and if making extra contributions, ensure any extra contributions are received by the fund by 30 June and you lodge a notice of intent to claim a tax deduction on time. If you have any queries, please contact me.
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