The superannuation trick with a whopping $3518 tax benefit

There’s an easy way to beat the share market downturn and pay less tax – you just need to do this one thing.

Aussie super funds are down over $45 billion through the first three months of 2022, and with rising inflation and interest rates, it seems like more pain is on the cards.

Many investors are panicked, but the smart investors are seeing this decline as an opportunity – one that can help them come out of this period of disruption in a stronger position than they went in.

So is now the right time to contribute to your super fund?

The current state of superannuation

In Australia, our super funds are heavily exposed to the Australian and international share markets, with the majority of default super investment options holding over 75 per cent of their total assets in shares.

Through 2022, the global share market has been declining off the back of sky-high inflation and rising interest rates, with the US sharemarket alone shedding over $US3 trillion ($A4.3 trillion) and officially entering a ‘bear market’.

The Australian share market has fared better, but is still down over 13 per cent for the calendar year to date.

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The global share market has been in decline throughout 2022.

Because super funds hold so much of their investments in shares, Australian super funds have seen the value of their investments go backward. As a result, super fund members are seeing negative returns for the first time since the Covid market meltdown in 2020 – something that’s never comfortable.

What you need to know

The share market goes through cycles, which has been happening since markets began in the 1500s. Markets have periods of time where they go up, and periods where they go down. But over the long term we’ve seen the share market continue to rise following every downturn in history.

Share market cycles line up with how the economy is performing and investor sentiment at any given point in time. Unfortunately, indefinite growth is impossible to achieve, meaning periods of market decline like we’re seeing today are completely normal and should be expected by investors.

The share market has operated in cycles since markets first began in the 1500s.

While it’s always concerning to see your investments going backwards, there is a silver lining.

If you thought a company was a good investment six months ago at a certain share price, and that share price has now gone down, you can view lower share prices as an opportunity to invest at a discount.

If you invest while markets are down, when the recovery eventually comes your investments will benefit from the additional growth seen in the down market.

Superannuation benefits

In addition to just investing while markets are down, contributing to your super has some additional benefits.

Under the current rules, you can make tax deductible contributions of up to $27,500 to your super fund each year. This amount includes any funds your employer contributes on your behalf.

For someone earning the Australian average income of $90,916, your marginal tax rate plus Medicare levy is 34.5 per cent. The tax on any deductible contributions to super is 15 per cent. So working backwards, the tax benefit of contributing to super equates to 19.5 per cent.

For someone earning the average income in Australia of $90,916, your employer would make compulsory super guarantee contributions of $9456 in the current year, meaning you have room to make another $18,044 in tax deductible contributions.

Based on a contribution of $18,044 and a tax benefit of 19.5 per cent, the tax benefit available to you this year is $3518.

And this is all on top of any investment gains you receive.

By contributing extra super you can save thousands as a tax benefit.

And further, once your money is invested inside superannuation, the maximum rate of tax you pay on your super investment earnings is 15 per cent. This is much lower than marginal tax rates, meaning your investments inside super are able to grow at a faster rate than money invested in your personal name.

What are the risks

Before contributing to super, you should know that your money is going to be ‘locked up’ until you can access your super, which is age 60 under the current rules.

For anyone younger, that is a long time until you can access your super so you need to find balance between the benefits you can get from super and the want or need to access your money.

If you’re earlier on in your wealth building journey, super might not be the first strategy you look to go all-in on. But given the benefits outlined above, it’s something worth thinking about.

You should also be aware that there is always the potential for the markets to continue going down in the shorter term, particularly if the global economy slows further as a result of the current environment of increasing interest rates.

To get comfortable with both these risks, before jumping into any super strategy there’s a couple of things you should look to do.

First, you should be crystal clear on your overall money plan and how super fits in. This will help you make sure any money that you put into super won’t be needed for any of your other money goals.

The next thing you should do is take the time to understand your super fund investments. This will give you the confidence to stick to your strategy if and when market conditions change, and particularly if they get worse.

You only ever really lose on an investment if you sell, so making sure you have investments you can hold until you see good performance is key here.

The wrap

It never feels good to see your investments go backwards. But if you let panic and fear set in, you could be missing out on a serious opportunity.

Markets will turn around, it’s just a matter of when. The question to ask yourself is what position you want to be in when that happens.

Ben Nash is a finance expert commentator, podcaster, financial adviser and founder of Pivot Wealth, and Author of the Amazon Best Selling Book ‘Get Unstuck: Your guide to creating a life not limited by money’.

Ben has just launched a series of free online money education events to help you get on the front financial foot. You can check out all the details and book your place here.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstances before acting on it, and where appropriate, seek professional advice from a finance professional.

Originally published as The superannuation trick with a whopping $3518 tax benefit