How to grab bigger tax deductions from superannuation strategies

Australians building their superannuation nest eggs will soon be able to increase their tax deductions. This is how it will affect you.

Australians building their superannuation nest eggs will soon be able to increase their tax deductions.

The annual cap on tax-deductible super contributions – known as concessional contributions – rises from $25,000 to $27,500 on July 1 because it’s indexed to wages growth.

This, coupled with other recent changes, delivers savers extra flexibility that super specialists say can help people rapidly grow their retirement savings.

For many years salary sacrifice was the top strategy for workers to get tax benefits from super contributions, before rule changes in 2017 enabled almost anyone to make concessional contributions at any time during a financial year.

KNOW YOUR LIMITS

And since 2019 the Federal Government has allowed most super savers to make catch-up contributions for unused portions of their contribution cap.

This means people can potentially inject up to $75,000 into super before June 30 this year and claim tax deductions for the whole lot, says Wealth for Life Financial Planning principal Rex Whitford.

That’s as long as they haven’t made any other concessional contributions, which include compulsory employer contributions, since July 2018.

Pride Advice CEO Brett Schatto

Wealth for Life Financial Planning principal Rex Whitford

Whitford says many people don’t focus on super until too late in life, so they miss out on the massive benefits of compounding returns over several decades.

“More money in sooner is worth 10 times more than putting it in five minutes before you retire,” Whitford says.

“But you don’t get that unless you are prepared to make the sacrifice early on.

“Choice is always good, and it’s a good thing that these opportunities are available.”

SIMPLE PROCESS

Pride Advice CEO Brett Schatto says making extra payments is simple, and people can contact their employer to organise salary sacrifice or speak with their fund about making other voluntary contributions.

“Flexibility is always good, but once it’s in super it’s quite inflexible,” he says, with your money generally locked away until retirement.

Schatto says “superannuation is about long-term saving and retirement planning”, not tax deductions.

He says a full age pension provides just over half of what is considered to be a comfortable retirement income.

Financial planner Patricia Howard, author of The No-Regrets Guide to Retirement, says it’s never too late to quickly grow the size of your retirement nest egg.

“Just 12 months of concerted savings can make a big difference,” she says.

Author of The No-Regrets Guide to Retirement, financial planner Patricia Howard

A TAX-FREE RETIREMENT

“Superannuation should be the cornerstone of your retirement plans. This is because once you do retire and start an account-based income stream, or your own private pension, everything within super becomes tax free, including any capital gains and any income.”

Howard says people earning less than $50,000 should take advantage of the Federal Government’s co-contribution scheme.

“Under this scheme, you can contribute up to $1000 in after-tax dollars and the Federal Government will match this by adding up to $500 to your super account – that’s a return of 50 per cent,” she says.

Howard says chatting with an accountant or tax agent well before the end of the financial year is a good idea to determine if you can cut your tax bill through extra contributions for yourself or your partner.

STRATEGIES FOR SUPER TAX BENEFITS

• Salary sacrifice arranged through an employer cuts your tax bill during the year.

• Voluntary concessional contributions of up to $25,000 annually ($27,500 from July 1) can deliver one-off deductions, but remember this cap also includes employers’ compulsory contributions.

• Pay $3000 into a low-income spouse’s super fund and get a tax offset of $540.

• Non-concessional contributions of $100,000 a year and downsizer contributions of up to $300,000 when seniors sell a family home don’t deliver direct tax deductions, but can inject big money into super’s low-tax structure.

@keanemoney

Originally published as How to grab bigger tax deductions from superannuation strategies