Trick to save $2658 tax a month via superannuation

There are some little known tax rules that you can use to your advantage – saving tens of thousands in the process.

I get it – superannuation is boring and something you shouldn’t really need to think much about until you’re pretty old, so what’s the point?

Many younger Aussies fall into this thinking trap, and cost themselves a bunch of money as a result. 

But now, more than ever, is the time to get a grip on your finances as the cost of living is rising and we come to the end of the financial year. Superannuation is a great place to start if you want to make savings on your tax.

You should know that the government wants you to be financially successful. They know that if you’re wealthy you’ll rely less on government payments, and contribute more to future tax revenues.

If you’re young and have a long time until retirement, super is unlikely to be the core of your investment and wealth building strategy. But, because of some of the tax benefits available through super strategies, it’s possible to accelerate your wealth building without slowing down much of your progress today.

Here I unpack some of the key super strategies that can help you get ahead faster and save tax dollars in the process.

Tax on super earnings

The tax rate on investment income in your super fund is capped at a maximum rate of 15 per cent, as opposed to marginal tax rates of up to 47 per cent that apply on income earned outside super.

This lower tax rate allows your investments (and investment income) to grow faster than it would if you were investing outside superannuation.

And it gets even better. Once you hit age 60 and start a super pension, there is no tax payable on the earnings of the first $1.6m in investments you have in super. And, when you take an income from this super pension the income isn’t taxed at all. Your super, in effect, becomes like a tax free investment account.

Consider this example:

You grow your investments to the point where they generate income of $10,000 per month. If these investments were owned in your personal name, you’d be subject to marginal tax rates on this income and pay tax of $31,897 each year.

In super, this income would be entirely tax free, saving you tax of over $2658 every single month. Savings worth taking advantage of, but how do you make it happen?

Tax savings on super contributions

Contributing money to your super can also create some serious tax savings. Under the current rules, you can contribute up to $27,500 each year to your super as a ‘concessional contribution’ and claim a tax deduction.

Important to note, this amount also includes any amounts contributed by your employer under the compulsory 10 per cent ‘superannuation guarantee’ rules.

If you increase your super contributions then you can have some serious tax savings. Picture: iStock.

Also worth noting is that concessional super contributions are taxed on the way into super at a rate of 15 per cent. Annoying but unfortunately unavoidable, and this rate is well below most people’s marginal tax rates.

An Aussie earning the average income of $90,329 receives $9033 each year in employer superannuation guarantee contributions. This leaves a further $18,467 you can contribute/invest into your super fund.

Contributing this amount each year would reduce your taxable income in the ATO’s eyes, giving you a tax deduction for this amount. For someone earning this level of income your marginal tax rate + Medicare levy is 34.5 per cent, meaning you’d receive a reduction in your tax bill of $3601 each and every year.

Your super would also be growing at a serious clip, benefiting from the lower tax rate on investment earnings as outlined above.

After tax contributions

What most people don’t know is that on top of the ‘concessional’ super contributions discussed above, you can put even more money into your super fund. This is called a ‘non concessional’ contribution, which is one made with after tax income or savings.

While these contributions don’t give you a tax deduction, they do get money into superannuation where the future earnings are taxed at the reduced rates outlined above.

Because you can’t access your super money until age 60, I’m not suggesting you rush out and start saving all your money under super. But if you have some spare money that’s earmarked for your future wealth that you don’t need access to, investing inside of your superannuation will help these investments grow faster.

First homebuyer super hacks

For first home buyers, there are even more benefits to contributing to super on top of the super tax strategies outlined above. The First Home Super Saver Scheme allows you to save for the deposit on your first property through super, and because you can contribute to super with pre-tax money, it means you can accelerate how quickly you build your deposit.

First home buyers can save their deposit through their super fund. Picture: NCA NewsWire / David Swift

The rules with this strategy can get a little complex and confusing, and saving a property deposit through super does come with some risks, but given the potential tax savings it’s worth looking at closely.

Streamline your super growth for the future

If you’ve already put in the work around your super fund growth strategy, you should make sure you have the right fund to support you moving forward.

You’ll want to confirm you’re paying the right amount in fees, that your investments are right for you. If you have multiple super funds, you should also look at consolidating super so you’re not doubling up on fees and charges.

Some small changes will have a big impact, and if you’re going to focus on growing your investments and wealth through super, take the time to ensure it’s set up for success.

The wrap

If you have a while until retirement age, building your super is unlikely to replace your other investing strategies in the short term. But given the tax perks outlined here, it’s worth thinking about how you can use the rules to your advantage.

The power of time and money is a beautiful thing, and some seemingly small changes now will have a big impact on your wealth into the future. Super also gives you the opportunity to cut your tax bill today, and use more of your hard earned income to actually get ahead.

Take the time to understand the rules and what makes sense for you, and you’ll accelerate your path to money success.

Ben Nash is a finance expert commentator, podcaster, financial advisor 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 is putting on a series of free money education events in 2022 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.