Ways to reduce your tax bill with super
By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
With only a month to 30 June, it’s time to consider a contribution to super to reduce your tax bill whilst boosting your retirement savings.
If you have unusually high income this year – say because you’ve made a capital gain from selling an investment property – there are ways you may be able to get more into super to get an even bigger tax saving.
But first …
Your eligibility to contribute depends on your age.
Anyone under 67 may contribute, but if you’re 67 to 74, you must meet the work test – 40 hours of gainful employment in 30 days. If you haven’t, you may still contribute – under the work test exemption (WTE) – provided you met the work test in 2020-21 and had a total superannuation balance (TSB) of less than $300,000 at 30 June 2021.
Whilst the work test has been abolished for people in this age group wishing to make non-concessional contributions (NCCs) and salary sacrifice contributions, this doesn’t apply until 1 July. And you’ll still need to meet the work test if you make personal deductible contributions from then.
Making a deductible contribution is straightforward but be mindful that the concessional contributions (CCs) cap is $27,500 – exceed this and the excess will be included in your income and taxed at your marginal rate.
If you are a wage earner calculating how much to contribute and claim as a deduction, remember your employer’s 10 per cent Superannuation Guarantee (SG) contributions (notional taxed contributions if you’re in a defined benefit fund), salary sacrifice contributions and fund administration and insurance expenses paid by your employer all count towards this cap.
You must provide your super fund with a notice of intent (NOI) to claim a tax deduction for the contribution and have it acknowledged before lodging your tax return for 2021-22. Do not to touch the contribution – roll it over to another fund, withdraw it, or start an income stream – before first lodging your NOI.
You must have sufficient assessable income for your deduction to offset. Any amount disallowed by the Australian Taxation Office (ATO) will count towards your NCCs cap.
It’s not worth making a deductible contribution which reduces your taxable income below the effective tax-free threshold as it’ll be taxed at 15 per cent, whereas no tax is payable on income below this threshold. For 2021-22, the effective tax-free threshold – after tax offsets – is $25,437. If you’re eligible for the seniors and pensioners tax offset, it’s $35,231 for singles and $31,926 for couples (each).
So, what are some ways to increase your tax deduction?
Catch-up concessional contributions
If you didn’t use your entire $25,000 CCs cap previously (starting from 2018-19) then the unused amount(s) may now be contributed – allowing you to make a larger one-off contribution to get a bigger deduction and tax saving – but the catch is, you must have had a TSB of less than $500,000 at 30 June 2021.
Say in 2018-19, 2019-20 and 2020-21, your CCs amounted to $15,000, $17,000 and $19,000, respectively. You’ve got $24,000 extra to play with this year provided your TSB was less than $500,000 at 30 June 2021.
If you don’t utilise unused cap amounts before June 30, 2021, all is not lost as you can carry them forward on a rolling five-year basis.
Implementing a ‘contribution reserving strategy’ – an arrangement whereby a contribution made to an SMSF in June is allocated in July – can be an effective way of reducing your taxable income.
Contributions must be allocated to members’ accounts within 28 days following the end of the month in which they’re received, but they do not count towards a member’s CCs cap until allocated.
Importantly, a tax deduction is permitted when the contribution is made, despite it not being allocated until the following financial year.
With a second contribution of $27,500, a deduction of up to $55,000 – plus any catch-up CCs – may be available. Remember to allocate this contribution by 28 July.
So, this strategy may allow you to claim a larger deduction this year – handy if you’re trying to reduce capital gain tax arising from the sale of an investment property.
To do this right, the SMSF trustee must resolve to defer the allocation of the contribution until the new year and lodge a Request to Adjust Concessional Contributions form with the ATO by the time the fund’s annual return and your tax return are lodged – otherwise it could be treated as an excess contribution.
This strategy can utilise the entire CCs cap for 2022-23. So, any CCs next year, including employer SG contributions, may exceed the cap, which isn’t that bad if you’re on the top marginal tax rate this year – because your income includes a capital gain – but will revert to a lower rate next year.
A spouse contribution does not give you a tax deduction, but you could get a tax offset.
If your spouse earns less than $37,000 and you contribute up to $3,000 to their super fund, you can claim an 18 per cent tax offset – a benefit of up to $540.
You still benefit if your spouse earns between $37,000 and $40,000 but the tax offset is progressively reduced.
Your spouse must meet the work test (or WTE) if 67 to 74.
The best return you’ll get from a personal contribution of $1,000 is where you’re under 71 and your income is less than $41,112 with at least 10 per cent of it coming from employment or business, as the government will make a co-contribution of $500 – a 50 per cent after-tax return!
You still benefit if you earn between $41,112 and $56,112 but the co-contribution is progressively reduced.
Don’t leave it to the last minute as a contribution is made when the fund receives it – so you need to allow time for the transfer of funds.
*This information is prepared by Fitzpatricks Private Wealth Pty Ltd (Fitzpatricks) ABN 33 093 667 595 AFSL No. 247 429 and, where relevant, its related bodies corporate. The information in this publication is of a general nature only. All information has been prepared without taking into account your objectives, financial situation or needs. Because of this, we recommend you consider, with or without the assistance of a financial adviser, whether the information is appropriate for you.