Pre-retirement, pre-tax super breaks still shine

Workers nearing retirement can effectively maximise their superannuation contributions. Picture: iStock.

Not everyone wants to withdraw super early, for many — especially those approaching retirement — these are the last years you can make important contributions.

As redundancies and reduced work hours become a feature of our shell shocked economy, there is a significant cohort of people that are in a position to make a contribution to super and do not know it.

Older Australians approaching retirement tend to try and max out the $25,000 pre-tax super cap each financial year to build their retirement nest egg in a tax effective way. However,

the pre-tax superannuation cap is $25,000 per year and from 1 July 2018, if your super balance is less than $500,000, you can carry forward up to 5 years of unused cap amounts to make more than $25,000 contributions in a future financial year.

Technically known as a concessional contribution, it is taxed at 15 per cent and has the big upside of reducing personal income tax, which at its maximum is 47 per cent.

It is always important to remember that both the 9.5 per cent employer superannuation guarantee and voluntary salary sacrifice amounts count towards the $25,000 cap.

Many do not know but from 2017, the government scrapped the 10 per cent self-employed eligibility rules for making personal super contributions. In effect, it opened up the door for employees to make pre-tax super contributions from their personal bank account and bypass the employer, as long as they complete a “notice of intent to claim or vary a deduction for personal super contributions” form.

For those who have several years left before retirement, it does not present such a large problem as they can roll forward the unused amount under the $25,000 cap and use next financial year. But for those who plan to retire over the next 12 months, using this financial year’s super cap may be the last chance to tax effectively add to super which can be done via the personal super contribution method.

So if you find yourself redundant or you do not wish to engage with your employer right now, you can still put money into super and use the $25,000 pre-tax super cap this financial year. This is also particularly useful for people who have a spike in taxable income this financial year due capital gain events such as the sale of an investment property or vesting of company shares.

Lastly, there is also a loophole in the rules that some are exploiting. For those in the higher tax brackets and eligible to withdraw from super under COVID-19 provisions, they can withdraw $10,000 this financial year tax free, then contribute it back to super and claim a tax deduction on the $10,000. In effect, reducing their taxable income by $10,000 and paying $1,500 super tax instead of up to $4,700 personal income tax resulting in a maximum potential tax arbitrage of $3,200.

James Gerrard is the principal and director of Sydney financial planning firm FinancialAdvisor.com.au