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Superannuation Strategies

Eight ways to accelerate your superannuation and pay less tax

Whether you have your superannuation invested in an industry, retail or self-managed super fund (SMSF), there are a number of strategies you can consider to boost your account balance and reduce tax.

It’s important that you optimise your superannuation arrangements because for most people, superannuation will become a key asset in planning for retirement and achieving financial security. The reason for this is twofold:

1) Employer contributions into super are usually compulsory and as such, the power of compounding returns over your working life results in a significant pool of funds upon retirement, and

2) Superannuation provides strategic planning opportunities and tax benefits not available with other investment structures.

If you need help reviewing your super arrangements and would like to find out what strategies are right for you contact Financial Planning Expert or phone (03) 5974 4350 today for an obligation free discussion.

Discussed below are eight strategies to consider for accelerating your account balance and reducing the amount of tax you pay.

1) Salary sacrifice to reduce tax

This is a logical place to start because it enables you to increase super contributions and reduce income tax. Salary sacrificing is relatively simple in principle, you forgo a portion of your wage before income tax has been applied and the amount is contributed to your super fund. However there are a few things to be mindful of. For instance, contributions tax of 15% applies to all salary sacrifice contributions (as it does for employer contributions).

If your marginal rate of tax is 31.5-46.5% pa, this is not an issue as you’ll still be saving tax by sacrificing income to super. But if your marginal rate of tax is 15% or less, it generally won’t be worthwhile sacrificing income superannuation because you’ll be no better off from a tax perspective. Additionally, salary sacrifice (concessional) contributions can result in less favourable tax outcomes for beneficiaries later on compared to after-tax (non-concessional contributions), so it may be a better strategy to contribute funds to superannuation from after-tax income if your marginal tax rate is 15% or less.

Another trap to be aware of when salary sacrificing is adherence to the super contribution caps. Basically, these are annual limits stipulating how much you may contribute to super on a pre and post-tax basis for a financial year. If you exceed the caps, you may have to pay penalty tax of up to 93% on the excess!

The table below illustrates the superannuation contribution caps for 2011/12 and 2012/13:

Concessional cap P/A Non-concessional cap P/A
2011/12 financial year $25,000 if aged under 50$50,000 if aged 50 or over $150,000 (or can use two year bring-forward rules to contribute $450,000)
2012/13 financial year $25,000 (unless strict criteria is met) $150,000 (or can use two year bring-forward rules to contribute $450,000)

2) Use a Transition to Retirement (TTR) strategy to boost super savings

A TTR strategy can be considered if you are aged 55 or more and working, full or part-time. Generally, a TTR strategy involves salary sacrificing to super and simultaneously drawing a pension from super. This strategy is purely tax-driven. A TTR strategy produces further tax savings over salary sacrificing alone because the pension payments attract little or no tax and once you start to draw a pension from your super fund, fund earnings will become tax free (fund earnings are taxed at 15% if not drawing a pension).

In terms of cashflow, the idea is to balance your salary sacrifice and pension payments to ensure your net cash position doesn’t change (i.e. the combined salary and pension amounts you receive equal your usual take-home salary).

By doing this, you can maintain your lifestyle and reduce tax at the same time. Essentially, the tax saved using a TTR strategy results in more money staying in your super fund and less going to the tax office.

3) Earn a 100% return on investment using the Government co-contribution scheme until June 30 2012

The co-contribution scheme has been around for a number of years now and whilst not as generous as it once was, it still remains an attractive incentive. From 1 July 2012, you could receive a co-contribution of $500 if you make a $1,000 non-concessional (after-tax) contribution to superannuation. This equates to a 50% return on investment. In earlier years you could have received a co-contribution for as much as $1,500, but the government have progressively reduced the matching rate from 150% to 50%. It’s worth noting that this has largely occurred due to the Low Income Superannuation Contribution (LISC) scheme due to be introduced on 1 July 2012.

This scheme, according to the government, will benefit more low-income earners than the co-contribution scheme and means individuals earning $37,000 pa or less will have the 15% contributions refunded back to their super accounts resulting in a $500 saving per year.

Back to the co-contribution. To be eligible for a co-contribution, you need to make sure you meet the co-contribution work test (at least 10% of your income must be from eligible employment), income test (earn less than $46,920 pa from 1 July 2012) and age test (must be under age 71 at the end of the financial year in which you made the contribution). If you meet these criteria but are 65 or older, you also need to meet a 2nd work test to qualify for a co-contribution. The test requires that you work at least 40 hours over any 30 consecutive day period during the year in which you made the contribution to super.

4) Split contributions with your spouse and get access to super sooner

Contribution splitting is often overlooked but the potential benefits can be significant. For contribution splitting to be effective, usually there needs to be a significant age difference between you and your spouse. Contribution splitting only applies to concessional (pre-tax) contributions, such as employer and salary sacrifice contributions and only 85% of contributions can be split (as 15% contributions tax needs to be deducted). Because superannuation is not accessible until you reach preservation age (55-59), the older spouse will be able to access their super (and take advantage of the tax benefits of doing so) earlier than the younger spouse. For this reason, you could consider splitting the younger spouse’s contributions to the older spouse. This might be a particularly attractive option if the younger spouse is the higher income earner and has a higher account balance than the older spouse.

5) Sell your business tax-free and make a CGT cap contribution to super

A number of capital gains tax (CGT) concessions may apply to small business owners when they sell their business. Eligibility for these concessions may also mean you are eligible to make CGT cap contributions to your super fund after the sale of your business. CGT cap contributions do not affect your other contribution caps (i.e. concessional and non-concessional) and a lifetime limit of $1.205m (indexed) applies. This means the cap doesn’t restart each year like your other caps, it’s a once-off lifetime cap but can be used progressively.

CGT cap contributions come about as a result of applying the capital gains tax small business concessions upon the sale of your business, specifically the small business 15-year exemption and the small business retirement exemption. If you are eligible to apply these concessions when you sell your business, it is possible that the entire capital gain will be disregarded and up to $1.205m is contributed to your super fund as a CGT cap contribution.

This contribution is not subject to contributions tax of 15%. By employing this strategy, you have effectively sold your business without paying any capital gains tax on the profit and converted the funds to a tax-free income stream.

6) Pay less for Life & TPD insurance

If you have a need for Life and Total and Permanent Disability (TPD) insurances, you could consider holding these policies within your super fund instead of outside super in your own name. Premium payments then become payable from your super fund account balance, meaning you could salary sacrifice the premium amount (making sure you account for the 15% contributions tax that will apply) to your super fund to fund the payment. By doing this, you are effectively funding your insurance premiums in pre-tax dollars whereas if the policies were held outside superannuation, you would be funding the premiums in post-tax dollars (i.e. up to 46.5% tax may have been paid on your income).

7) Reduce your income tax bill by making a deductible contribution

You may be eligible to make tax-deductible contributions to your super fund if you are self-employed. By doing this, you could reduce your taxable income by the amount of the super contribution and reduce your income tax bill. However, you need to ensure you meet the criteria to make a deductible contribution and don’t exceed your annual concessional contribution cap. Generally speaking, you may be eligible to make a deductible contribution if at least 90% of your income is earned from self-employed activities.

8) Reduce your income tax bill by making a spouse contribution

This strategy is applicable if you have a spouse and they aren’t working or are working part-time. Under these circumstances, you could consider taking advantage of the spouse tax offset. If your spouse earns less than $13,800 pa, you may be eligible for a tax rebate of up to $540 where you make a non-concessional (after-tax) contribution of $3,000 to their super fund. Additionally, you could consider making non-concessional contributions to your spouse’s super fund over and above $3,000 pa and indeed up to your spouse’s annual non-concessional contribution cap of $150,000. The reasons for considering this are the same as those for contribution splitting above. To be eligible to receive a spouse contribution, your spouse must be under age 65 or if 65-69, must satisfy the same work test outlined for government co-contribution eligibility above (i.e. the 2nd work test). The age of the contributing spouse is irrelevant.

These are some of the strategies you could consider to boost your superannuation savings and reduce your tax bill. Whether these strategies are appropriate for you will depend on your individual circumstances. Contact Financial Planning Expert or phone (03) 5974 4350 to review your super arrangements and find out what strategies are right for you

This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.