As you approach retirement, your superannuation is likely to become a significant source of income. To ensure that you are financially secure during your retirement, it is essential to top up your super while you are still working with voluntary super contributions.
But did you know that making these super voluntary contributions can also provide you with excellent tax deductions and benefits?
In general, investing money in your super fund is taxed at a lower rate than your personal income tax rate. This means that by making voluntary contributions, you can take advantage of significant tax benefits, especially in the lead-up to the financial year.
Please note that the information provided here is personal tax planning advice and not financial advice.
Voluntary super contributions & tax deductions
There are several ways to get tax benefits from making super contributions.
Tax on concessional super contributions
Concessional super contributions, for instance, are before-tax contributions, including employer contributions, salary sacrifice contributions, and personal contributions that you claim as a tax deduction in your tax return.
These contributions are taxed at a rate of 15% when your super fund receives them, up to a limit of $27,500 per year, provided your annual earnings combined with superannuation contributions are less than $250,000 annually.
Voluntary super contributions are particularly useful for people who are on higher marginal tax rates or whose employer refuses to set up a salary sacrifice arrangement. If you earn above $45,000 per year, claiming a tax deduction on super contributions can effectively reduce your tax rate to only 15%, resulting in significant tax savings.
Tax on catch-up super contributions
Suppose you have not made the maximum annual super contributions in any year from 2019 onward. In that case, you can make “carry-forward” concessional super contributions if you have a total superannuation balance of less than $500,000. You can access your unused concessional contributions cap on a rolling basis for five years, after which any amounts carried forward will expire.
How low-income earners are taxed
If you are a low-income earner, earning up to $37,000 per year, the low-income superannuation tax offset ensures that you do not pay a higher tax rate on your super contributions than your income tax rate. The offset will be paid directly to your super account and will equal 15% of your concessional contributions for the year, capped at a maximum of $500.
Individuals who earn less than $43,445 during the 2023-2024 financial year may also be eligible for super co-contributions from the government of 50 cents for each dollar, up to a maximum of $500 in non-concessional (after-tax) contributions.
How high-income earners are taxed
If you earn more than $250,000 a year, including super contributions, your concessional contributions are taxed at an additional 15%, bringing the total tax on these contributions to 30%. However, this is still less than your marginal income tax rate of 47%. This additional tax is known as Division 293 tax, and only concessional contributions that make your total income exceed $250,000 are subject to it.
If your concessional contributions exceed the concessional contributions cap of $27,500 per year, the excess is included in your tax return and taxed at your marginal tax rate (less an allowance for the 15% already withheld by your super fund). You can choose to withdraw some of the excess contributions to pay the additional tax.
If you would like to discuss saving tax with voluntary super contributions and find our how we can help, please contact us as soon as possible. There are several things we need to check to ensure that you do not exceed your super caps.
You need to get your paperwork in order and time your voluntary contributions right in order to be able to claim a tax deduction before end of the financial year. Contact us now before it’s too late.