First published in The Australian, 5 June 2018
There is nothing quite like a deadline to turn good intentions into strategic actions.
So, it is important not to let the financial year pass without giving some thought to a number of tax effective super strategies, while, at the same time, taking the opportunity to consider how to put steps in place for the new financial year.
Choosing to maximise concessional (pre-tax) contributions to super can be a good way to boost retirement savings and also reduce the potential tax on take home income.
Generally, employees are currently entitled to receive 9.5 per cent of their salary into super as superannuation guarantee (SG) contributions which are considered concessional contributions. While this provides a source of retirement savings, it may be appropriate to consider whether relying on this alone will be enough to fully sustain an individual’s lifestyle in retirement. Furthermore, individuals who are self-employed may not be making any contributions to super unless they consciously make the decision to do so themselves. As such, it may be prudent for people to consider if and how any extra contributions to super can help to grow their retirement savings.
There are limits (known as caps) to the amount an individual can contribute each year to super on a concessionally taxed basis (15 per cent v. their marginal tax rate) and if exceeded may result in paying additional tax. With a current concessional contribution cap of $25,000 per annum, there may be scope to make additional contributions on top of the 9.5 per cent SG.
To illustrate this, take for example Mark (55) who is ten years out from retirement and is looking to boost his retirement savings and access potential tax benefits. Mark’s employer currently contributes $10,500 to super on his behalf.
Mark chooses to enter into a salary sacrifice agreement with his employer to contribute an additional $14,500 of his pre-tax salary to super which takes his concessional contributions for the year to the maximum $25,000.
This strategy would reduce the rate of tax Mark pays on the $14,500 from his effective marginal tax rate to just 15 per cent when the contribution reaches his super fund. It would also reduce the personal income tax Mark would pay as his pre- tax salary has been reduced by $14,500. Importantly, while there may be an immediate tax benefit for Mark, he generally will not be able to access them until he meets a condition of release (for example when he reaching his preservation age and stops working full time or upon turning age 65).
If Mark were self-employed or his employer didn’t offer him the ability to salary sacrifice, another way he could make the most of his concessional contributions cap could be by making a personal contribution to his super, and after following the correct process, claim a tax deduction for the contribution in his income tax return.
Are there other reasons to consider making the most of concessional contributions aside from potentially reducing an individual’s tax and boosting their retirement savings?
There are a number of potential options to consider.
Firstly, through contributions splitting, an individual may split some of their concessional contributions made during the income year to their spouse’s super to top it up.
Any extra contributions made can also help fund premiums on insurance policies that may be held within super. Plus, the eligibility criteria to make concessional contributions isn’t restricted by an individual’s total super balance, unlike non-concessional (after-tax) contributions.
It’s not only the contribution side of super where tax effective strategies can be found. When and how people choose to access super can have an impact on their individual tax position and the tax paid on the investments held within the fund.
For example, TTR strategies can be used to support the transition from full time work into retirement where an individual may look to reduce their hours of work and supplement their income with TTR pension payments. Or, when an individual is looking to maintain their hours of work and boost their super savings through a salary sacrifice arrangement as mentioned previously. However, when considering these strategies, it is important to note that since 1 July 2017, investment earnings supporting transition to retirement (TTR) pensions are no longer tax-free but taxed at 15 per cent.
While there are still benefits for those under age 60, TTR strategies may work better for individuals aged 60 and over and particularly if they are a middle to upper income earner. Personal circumstances will determine whether a TTR strategy is the right choice.
Once a person is fully retired, switching their TTR pension or accumulated super saving to a full account based pension will bring further benefits. All investment returns from assets supporting their retirement phase pension will be tax-free up to the transfer balance cap limit of $1.6 million. In addition any lump sum or pension payments taken from super after an individual turn’s 60 are also tax-free.
As people approach post-retirement, other optimisation strategies may be worth considering.
For example, if eligible to withdraw and make a contribution into super, a recontribution strategy, which involves withdrawal of some or all super benefits and then recontributing an amount back into super, may be beneficial.
While this strategy may not change the tax treatment of benefits received from a super fund, it can reduce the tax adult children may pay on super benefits they receive as a result of their parent’s death.
In certain circumstances a recontribution strategy could also be used to help equalise balances between spouses. It may be beneficial to do this so both benefit as much as possible under the transfer balance cap limit of $1.6 million.
Making the right decisions around super contributions and accessing benefits can be complex, so seeking the support of professional advisers is something to consider. Professional advice can help maximise the opportunities, but also help to avoid the potential pitfalls which come with looking to optimise super and retirement outcomes.
Tim Howard, Technical Consultant, Capability and Conduct, Advice, BT Financial Group
Information current as at May 2018. This information does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness, having regard to your personal objectives, financial situation and needs having regard to these factors before acting on it. This information provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. This information may contain material provided by third parties derived from sources believed to be accurate at its issue date. While such material is published with necessary permission, no company in the Westpac Group accepts any responsibility for the accuracy or completeness of, or endorses any such material. Except where contrary to law, we intend by this notice to exclude liability for this material. Any super law considerations or comments outlined above are general statements only, based on an interpretation of the current super laws, and do not constitute legal advice. This publication has been prepared by BT Financial Group, a division of Westpac Banking Corporation ABN 33 007 457 141 AFSL & Australian credit licence 233714.