Coronavirus: $5000 income tax loophole created by the pandemic

The deadly coronavirus pandemic is devastating the Australian economy – but it could end up saving you thousands in income tax.

A new government incentive could help you save more than $5000 in income tax – but it’s only on the table for the next six months.

As the coronavirus pandemic wreaks havoc on the Australian economy, the Government has scrambled to introduce measures to keep Australian households and businesses afloat.

One of those initiatives was to temporarily allow people to access $10,000 of their superannuation this financial year if needed, and another $10,000 in the next financial year.

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In a piece published in The Conversation, Australian National University tax experts Robert Breunig and Tristram Sainsbury explained the new policy – covered by the Coronavirus Economic Response Package Omnibus Bill 2020 – did not include restrictions regarding how people could contribute to their super.

As a result, a “loophole” has emerged – because it is now totally legal to put money into your super, withdraw it soon after and save on tax in the process.

While the exact amount of savings will depend on your individual income tax bracket, it could represent a total saving of more than $5000 for higher income earners.

“This means that it’s possible to voluntarily contribute $10,000 of your pre-tax income into super over the next three months, and also apply to withdraw a $10,000 lump sum from super tax-free at some point before June 30,” they wrote.

“You still end up with $10,000 in your pocket. But if you contribute through a salary sacrifice arrangement with your employer and stay within the concessional contributions limits, your voluntary contributions will be taxed at 15 per cent rather than your marginal personal tax rate.

“When you pull out the funds from super, the withdrawal is tax-free. And, you will be able to do the same thing again between July 1 and late September.”

However, this super loophole isn’t available to every Australian.

Firstly, you can only withdraw your super early if you meet the criteria for having been impacted by the COVID-19 crisis – for example, if your working hours have been slashed, or if your business turnover has dropped.

You will also have to still be in a job paying you a taxable income of up to $10,000 during this salary-sacrificing period, to be able to have enough money to get by without that cash in your take-home pay, and to have enough money in your super account to make the withdrawals.

But H&R Block director of tax communications Mark Chapman said there were important things to consider.

“Essentially … you can make a contribution of $10,000 to your super, and you then withdraw that using this new early release scheme – so you start with $10,000 and you end up with $10,000, but the tax benefit is, if you salary sacrifice or put it in your tax return as a deduction, you can get tax relief on that,” he said.

For example, a top-rate taxpayer in the 45 per cent tax bracket would save 30 per cent out of that $10,000 – or $3000 – as super is taxed at a flat rate of 15 per cent.

“Saving 30 per cent is nothing to be sneezed at and you can do it without incurring any overall financial loss – you’re just putting it in and taking it out in a nutshell, so it’s quite simple and straightforward.”

But Mr Chapman said the loophole raised several “red flags” for him.

“I hate to be the bearer of bad news, but firstly you’ve got to meet the super early release rules and in practical terms, if you’ve suffered economic loss I’m not sure how many people will be in a place where they have a spare $10,000 lying around to do this,” he said.

“And the other issue is, to the best of my knowledge the ATO has not commented on this … but it seems to be blatantly against the spirit of what it is intended to do, so I wonder if the ATO will put its hand up over the course of the next few weeks and say, ‘You can’t do this.’”

Mr Chapman said individuals could also only contribute a maximum of $25,000 to their super fund, and warned this method could get you close to that threshold once other voluntary contributions and employer contributions were factored in.

He warned Australians to speak with their accountant and financial adviser before committing to the loophole to ensure it was a “wise” choice.