For many salary and wage earners, the super guarantee that is deducted from each pay is something most of us don’t notice. Some people choose to contribute extra funds to super to further build retirement savings. Concessional super contributions are taxed at 15%* as opposed to marginal tax rates of up to 49% providing significant tax savings.
With the recent superannuation reforms, one simple change has provided an excellent tax planning opportunity.
Prior to 1 July 2017, you were only eligible to make a deductible personal super contribution if less than 10% of your total income came from salary & wages. This was commonly known as the 10% or 90/10 rule. For those who passed this test, it provided the opportunity for a tax deductible super contribution of up to $35,000.00 for those over the age of 49 at the start of the 2016 Financial Year.
The good news is that the 90/10 rule has now been abolished. There is no longer a restriction on salary and wage earners wishing to make deductible personal super contributions to reduce their taxable income provided you are under the age of 75. With the concessional contribution cap now set to $25,000.00 for everyone regardless of age, there will potentially be room to top up your super and claim valuable deduction in your tax return.
Keep in mind that employers currently pay 9.5% of your salary into super each year. This should be taken into account before making any deductible contributions. Exceeding the contribution cap in any given year may lead to extra tax.
Let’s see how this will work:
Corey works at a retail store on a salary of $40,000.00 per year (before tax). He also owns a positively geared rental property which earns net rental income of $20,000.00 per year. His employer has paid him the minimum super guarantee of 9.5% totaling to $9,500.00.
With the current concessional contribution cap being $25,000.00, Corey has an opportunity to make a deductible personal super contribution of up to $15,500.00. He has decided to make a $10,000.00 deductible personal super contribution. Below is a table showing the difference this deduction has on reducing taxable income.
Over many years these additional contributions will have a compounding effect on your super balance as earnings in super are only taxed at 15%. This will help you reach your retirement goals which for many of us (including myself) are quite a few years away!The added incentive here is not just the tax deduction.
One thing to remember is that most of us will not be able to access our super until age 60, with that age having the potential to be pushed back by future governments. It’s important to speak with your financial adviser about any strategies should be considered as part as your overall financial plan.
*People with adjusted taxable income of $250k or higher have a 30% tax rate on concessional contributions.