Superannuation trick to save $23,000 in tax

Superannuation might not be the most exciting topic but Aussies are missing out on $23,000 a year with this mistake.

Before we get into this one, I want to call out that I get that superannuation isn’t a very exciting place to invest, particularly if you’re young and there are a lot of years or decades until you can access the money.

But the reality is that under the current tax rules, superannuation is the best place you could possibly invest when it comes to tax, because the tax rates in super are much lower than they are in any other investment account.

For example, if you build enough investments to give you a yearly income of $95,000, earning this income in your personal name you’d pay a total of $23,272 in tax every year. However, earning this same income in your super fund you’d pay no tax at all.

That means your super fund is able to deliver you tax savings of $23,272 every single year. The tax benefits of super are compelling.

The government wants you to save lots of money through your super fund. This isn’t because they really like you, but instead it’s because the government knows that the wealthier you are at retirement, the less you’ll rely on government benefits and the more money you’ll spend – therefore the more tax revenue you’ll generate.

A yearly income of $95,000 from super is tax free, whereas earning this income through investments in your personal name you’d pay a total of $23,272 in tax every year.

To incentivise you to save money through your superannuation fund, the government offers reduced rates of tax. The tax benefits of super come from two main areas, firstly you can get tax deductions for putting money into your super. Secondly, money invested in your super fund is taxed at a lower rate.

Tax deductions on the way into superannuation

Firstly, you can contribute money to your super fund every single year and get some significant tax deductions. Under the current rules, you can make tax deductible contributions to your super fund of up to $27,500 each year and claim a deduction, including any money contributed by your employer.

These deductions mean that it doesn’t cost you $10,000 to get $10,000 into your super fund, which essentially gives you more investments than you’d have investing money outside your super fund.

Lower tax rates inside your super fund

But it gets better – the reality is that the lower tax rates inside your super fund will most likely make you even more money over time.

You can see from this that the maximum rate of tax that applies to money invested in your super fund will be 15 per cent, and the rate is even lower on gains made on your longer term investments. This 15 per cent tax rate is lower than personal marginal tax rates for anyone earning more than $18,200, and if you’re a higher income earner in the top marginal tax rate, the tax saving is up to a massive 32 per cent.

Further, once you get to retirement age (currently 60) and start a ‘pension’ account with your super money, the tax rate within your super fund goes down to zero on the first $1.9 million you have invested.

Based on $1.9m in an investment account, you’d expect to be able to generate an income around $95,000 p.a. (based on the 5 per cent rule). This means that under superannuation you’ll have a fully tax free income stream of $95,000 every single year.

If instead you were to earn an income of $95,000 in your personal name, under the current tax rates you’d pay income tax of $23,272 on this money.

That means that by having the money in your super fund instead of your personal name, with the exact same investments and income, you’d be better off by over $23,000 every single year.

That’s an extra $23k you can reinvest to build your investments faster or spend today.

And calling out here that this example assumes that this investment income of $95k is the only income you receive, meaning you’re accessing the full tax free threshold and lower tax rates.

If instead you have other income of $95,000 annually, the tax that would apply on that same $95k of investment income would be $36,275 p.a. (total tax $59,997), meaning the tax savings are likely even higher.

The wrap

I get that super can seem a little bit boring, and something you think you probably don’t need to worry too much about until you’re old – and that’s partly true. But the tax benefits are compelling, and while super probably shouldn’t be the first place you focus on building up your investments, it also shouldn’t be the last.

Ben Nash is a finance expert commentator, financial adviser and founder of Pivot Wealth. Ben is the creator of the Smart Money Accelerator program that helps people build a second income investing faster.

Ben is also the Author of the brand new book, ‘Replace your salary by Investing’ and the host of the Mo Money podcast, and runs regular free online money education events, 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.