By Colin Lewis, Head of Strategic Advice, Fitzpatricks Private Wealth
Making a deductible superannuation contribution is a great way to reduce your tax bill whilst boosting your retirement savings.
So, if you’re wanting to make a last-minute contribution to get a bigger deduction and tax saving, then you’d better snap to it as 30 June is only days away and your super fund must receive the contribution by then to have it count this tax year.
But first …
Age matters when it comes to voluntary contributions (excluding downsizer contributions) – they must be received no later than 28 days after the end of the month you turn 75.
And whilst there’s no work test for non-concessional contributions – just a total superannuation balance test – there is for personal deductible contributions.
From age 67, you must meet the work test – 40 hours of gainful employment in 30 days – or work test exemption in the financial year to claim a deduction for a personal contribution.
To meet the work test exemption in 2022-23, you must have met the work test in 2021-22, had a total superannuation balance of less than $300,000 at 30 June 2022, and not used the exemption before.
Making a deductible contribution is straightforward but be mindful the concessional contributions cap is $27,500. Generally, any excess will be included in your income and taxed accordingly less a 15 per cent tax offset.
If you are a wage earner calculating how much to contribute and claim as a deduction, remember your employer’s 10.5 per cent Superannuation Guarantee (SG) contributions (notional 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 fund with a notice of intent to claim a tax deduction for the contribution and have it acknowledged before lodging your tax return. Do not to touch the contribution – roll it over to another fund, withdraw it, or start an income stream – before first lodging this notice.
You must have sufficient income for your deduction to offset. Any amount disallowed by the Australian Taxation Office (ATO) will count towards your non-concessional contributions 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 2022-23, the effective tax-free threshold – after tax offsets – is $21,884. If you’re eligible for the seniors and pensioners tax offset, it’s $33,088 for singles and $29,783 for couples (each).
The low income super tax offset refunds this tax (up to $500) if you earn less than $37,000 a year with at least 10 per cent of your income coming from employment or business.
So, what are some ways to reduce your tax bill?
Catch-up concessional contributions
If you didn’t use your entire concessional contributions cap in previous years (starting from 2018-19) then the unused amount(s) may now be contributed – an opportunity to make a larger contribution to get a bigger deduction and tax saving.
But there’s a catch – your total superannuation balance must have been less than $500,000 at 30 June 2022.
Say from 2018-19 to 2021-22, your concessional contributions amounted to $15,000, $17,000, $19,000 and $21,000 each year. You’ve got $30,500 extra to play with this year, provided your total superannuation balance was less than $500,000 at June 30, 2022.
If you don’t utilise unused cap amounts before 30 June all is not lost as you can carry them forward on a rolling five-year basis. So, you may still have another year to use any unused amount from 2018-19.
A ‘contribution reserving strategy’ – where a contribution made to an SMSF in June is allocated in July – can be an effective way of reducing your taxable income.
A tax deduction is allowed when a contribution is received – like now in June – but as contributions must be allocated to members’ accounts within 28 days after the end of the month in which they’re received, it does not have to be allocated until 28 July – in the new financial year.
Also, the contribution does not count towards the concessional contributions cap until allocated.
So, with a second contribution now of $27,500, a deduction of up to $55,000 (plus any catch-up concessional contributions) may be available – handy if you’re trying to reduce capital gains tax arising from the sale of an investment property.
To do this correctly, 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 next year’s entire cap, so any concessional contributions in 2023-24, including employer SG contributions, may exceed the cap – which isn’t bad if you’re on the top marginal tax rate this year, say because your income’s inflated by a capital gain, but will revert to a lower rate next year.
A spouse contribution doesn’t give you a deduction, but you may 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 offset progressively reduces.
The best return you’ll get on a non-concessional contribution of $1,000 is where your income is less than $42,016 with at least 10 per cent of it coming from employment or business, as the government will make a $500 co-contribution – a 50 per cent after-tax return! But you must be under 71.
The co-contribution progressively reduces where you earn between $42,016 and $57,016.
First home super saver scheme
Under this scheme, first home buyers who make voluntary contributions of up to $15,000 per financial year can withdraw them plus associated earnings (less tax) to help with a deposit.
It takes years to get the greatest benefit from the scheme – the maximum releasable amount is $50,000. So, consider contributing before 30 June.
But first check with your super fund that monies contributed will be released.
So, if you’re wanting that last-minute deduction and tax saving, get to it as your fund must receive the contribution by Friday 30 June and you need to allow time for funds to transfer.
*The information in this document (information) has been prepared by Fitzpatricks Private Wealth Pty Ltd (ABN 33 093 667 595, AFSL 247 429) (Fitzpatricks). The information is of a general nature only and does not take into account the objectives, financial situation or needs of any person. Before acting on the information, investors should consider its appropriateness having regard to their own objectives, financial situation and needs and obtain professional advice. No liability is accepted for any loss or damage as a result of any reliance on the information.