Superannuation: Tax Planning for every working Australian
Superannuation is arguably the most tax-effective way to save for retirement, as contributions and withdrawals are taxed at a concessional rate. Given however that the Federal Government has mooted changes within Superannuation in the May Budget, particularly for wealthier Australians, we have put together a guide on the two most common types of super contributions and an overview on why Salary Sacrifice is still an attractive option for most people.
Before we can go any further, it’s important to understand that your eligibility to make contributions to your super are age based and the maximum contribution limits differ as to the source of the funds (i.e. employer, Salary Sacrifice and/or personal). For more information regarding these eligibility criteria (CLICK HERE)
Two most common types of contributions
1. Concessional contributions
Concessional contributions are contributions made into your super fund for your benefit, and which have generally been claimed as a tax deduction. Typically, these will include employer SG contributions, salary sacrifice contributions and contributions you have made for which you’re entitled to (and have claimed) a tax deduction (such as self-employed contributions).
Limits on concessional contributions
Because of the tax concessions there is a limit on the amount of concessional contributions you can make. This cap is $30,000 per annum. From 1 July 2014 the $35,000 cap will be available for people aged 50 and over. If you make a concessional contribution it will be taxed at 15 per cent, and this tax is paid from your contribution (i.e. with no out of pocket expense for you). Excess concessional contributions are effectively taxed at your marginal tax rate (plus an excess concessional contributions tax interest charge).
2. Non-concessional contributions
These are contributions you make to a super fund for which you have not claimed a personal tax deduction. Non-concessional contributions can include contributions made by:
• any eligible individual with after-tax money;
• a spouse; or
• a self-employed person who doesn’t claim a tax deduction for the contribution.
A non-concessional contribution is made with after tax money and therefore, there will be no contributions tax and the earnings on your investment will be taxed at a maximum rate of 15 per cent. Additionally, when you access your super in the future, any non-concessional contributions will be returned to you completely tax-free, either as part of a lump sum payment or over time as part of a pension. lastly, By making a non-concessional contribution you may qualify for a super co-contribution from the Government.
Limits for non-concessional contributions
There is a limit on the level of non-concessional contributions you can make to super each year. The limit for 2014/15 is $180,000. However, if you’re under 65 during the financial year, you can take advantage of the averaging rule to bring forward two additional years worth of non-concessional contributions and contribute up to $540,000 in one year.
This may come in handy for those who receive a financial windfall such as an inheritance or the sale of a large asset. But be aware that if you choose this course of action, you may not be able to contribute any more in the next two years.
Package your super and pay less tax
Salary sacrificing (a form of salary packaging) not only helps to boost your superannuation savings but reduces the amount of tax you pay as well. To encourage Australians to save more for their retirement, superannuation contributions are taxed at the concessional rate of 15 per cent, while investment earnings inside Super are generally taxed at 15% also.
For most Australians, this rate is much lower than the marginal rate of tax that applies to income derived in the 2014/15 tax year from employment and for investments held outside super as illustrated in the following table:
|Marginal Tax Rate
|Super Tax Rate
|Net Tax Savings
|Up to $18,200
|$18,201 to $37,000
|$37,001 to $80,000
|$80,001 to $180,000
Salary Sacrifice Case Study
Two employees earning $55,000 p.a. wish to make an additional after-tax Super contribution of $8,500 in the 2014/15 tax year. While employee A elects to do so from their take home pay (i.e. after tax dollars), employee B has done so through salary packaging.
(no package $)
(salary sacrifice $)
|Pre-tax Super contribution
|Tax on Super contribution
|Income tax payable
|Low income tax offset
|After-tax Super contribution
Net Tax Saving
This salary packaging comparison illustrates the overall tax saving that can be achieved via salary sacrifice. By making regular salary sacrifice contributions to super you’ll only pay the concessional rate of tax on the amount that goes into super and your taxable income will be reduced by the amount you sacrifice. So, you’ll not only increase your retirement savings, but you will pay less in tax as well.
Prior to embarking on any retirement planning or Superannuation strategy it is important to seek qualified advice that is tailored to your personal circumstances. To speak with one of the Adviser fp team about your retirement planning options, please contact our office by (CLICKING HERE).