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Tips and Traps for Maximising Your Tax Effective Super Contributions by 30 June 2017
18 February 2017

Take Home Points 

  • Last chance to maximise your tax deductions for Concessional super Contributions before they DROP next financial year. 
  • This strategy is most suited to individuals with Taxable income of $65,000 or higher, especially individuals considering retirement within 10 years and most definitely within 5 years.
  • It’s important to refer to both your employer (HR/payroll) and your Super Fund to understand the timing differences and get the calculations right.
  • Understand the difference between the strategy for a wage earner versus  a self employed/retired person to achieve the same objective.

It has been much publicised now that the maximums (CAPS) for tax effective (CONCESSIONAL) super contributions will REDUCE for everyone next financial year. 

The 2 Age categories are summarised in the following table:

Age Group2016/172017/18Change Next Year
Aged under 50$30,000$25,000$5,000 less
#^ Aged 50-74$35,000$25,000$10,000 less

Over Age 65 at time of contribution requires satisfaction of the Work Test (40 hours n 30 day period) before a contribution can be made.

 If you are aged 49 as at 30/6/16 – you fall into the 50+ age group with $35,000 CAP. More simply put if you turn 50 before this 30 June 2017, then you fall into the higher CAP category. 

WHO DOES STRATEGY SUIT?

  • Taxable Income of $65,000 or more.Whilst this opportunity for Maximising Concessional contributions is applicable to all income earners it is most suited to individuals with Taxable income of $65,000 or higher well into the 34.5% tax bracket (including Medicare). 
  • Approaching Retirement. It is especially appropriate for individuals considering retirement within 10 years and most definitely within 5 years.
  • Additional Taxable Income. It is also particularly relevant to anyone with abnormal additional taxable income this year (for example if you have or are expecting to crystalise a large Capital Gain this year or a particularly high Bonus).

You still have time to considerably reduce your taxable income and either salary sacrifice from your last pay or if self-employed make a larger contribution to lower your taxable income for the year. 


THE SCENARIO FOR WAGE EARNERS

It’s not too late to ramp up contributions in the last 4 months of the year.

You can for example still sacrifice large amounts of your last 3-4 month’s wages if you communicate with your payroll department now.

Make sure you account for your employers ‘Super Guarantee’ (SG) contributions in your CAP calculations as well as timing differences between payroll and Super contributions to your Super fund.

Example

Clark Kent (age 48) wants to make the maximum contributions to help offset some Capital Gains he has this year.  He earns $120,000 with his employer (Daily Planet) and has been sacrificing $1,000 per month all year.  He has a healthy cash buffer and wants to aim for his maximum (in his case $30,000) and wants to know how he can get to the $30,000 CAP. 

Calculations

  1. Employer SG payments (9.5% of wage) for full 12 months will be $11,400
  2. Salary sacrifice for 8 months to date (8 x $1000)   is $8,000
  3. The shortfall from the Maximum amount is $30,000 less $19,400 = $10,600
  4. Dividing by remaining 4 months = $2,650


In Summary, if Clark can increase his salary sacrifice to $2,650 per month for March to June he can make the $30,000 CAP.  Super Job Clark.

Trap 1 – Your pay slip does not necessarily match the timing of when the super fund receives employer or sacrificed contributions, so if you are running up to your CONCESSIONAL CAP, be sure to check in with your payroll and your super fund on the timing of your employer contributions and in particular the Total contributions received so far by your super fund.  It can be quite normal for an employer to pay the contributions from your June payroll in the month of July (in which case your contribution will fall into the reduced CAP of the next financial year). 

Trap 2 – Given contribution CAPS drop next year, it will be imperative you adjust your sacrifice down accordingly at the start of the next financial year.

THE SCENARIO FOR – SELF EMPLOYED

This covers Sole Traders, Partnerships or Pty Ltd and even retirees (if under age 65).

You have a little more flexibility to make late contributions. 

  • Review your projected taxable income for this year and if you (and or spouse) are likely to be approaching $65,000 or more in taxable income, you can benefit from making lump sum contributions to super to lower your income tax. 
  • Make sure you account for any life insurance premiums that may be structured under a Super Ownership as these contributions may count towards your Contribution CAP.
  • For the genuinely self-employed (i.e. unincorporated) – Before making contributions – check with your accountant that you qualify as being substantially self-employed (often referred to as the 10% rule).

Trap 3 – Confirm with your accountant exactly how your “Self Employment” is represented and how your contribution should be made/funded. You can rule yourself ineligible for the tax deduction if you do not get this right.

Running your own business can be represented in many structural forms.

Example (Company Structure)

If you pay yourself a wage through your own company structure you effectively are a wage earner and your contributions would have to come from your ‘company account’.

Example (Sole Trader / Partnership / Retiree: under age 65)

Confirm with your accountant if you pass the 10% substantial self-employed rule. If ‘Yes’ you will need to make the contributions personally from your own bank account and then secondly lodge a form with your super fund acknowledging your “intention to claim a tax deduction’. 

WHAT HAPPENS IF YOU BREACH THE CAP

The ATO removed the penalty for accidental breaches, however it is recommended you do not Breach for the following reasons:

  1.  The ATO will send you a notice of the breach requesting you pay the regular income tax that was due to apply based on your Marginal tax Rate (less the 15% Contributions tax you have already paid). You may be given alternatives to pay the outstanding tax by:

a) withdrawing part of the excess contributions (up to 85%) to help pay the higher amount of income tax – OR Alternatively;

b) you can choose to retain the excess concessional contributions in your super account, and pay the extra income tax from your personal savings.

For those clients who have encountered this before, it simply becomes a hassle one could do without. 

2. Whilst there is no penalty for the breach the ATO will charge you relatively high interest (around 9-10%) on your now overdue tax amount, so there is a real cost.

3. If you do choose to retain the excess contributions within your super account, the excess will be counted towards non-concessional Contribution Limits. If you happened to have already maximised this too, then this will now also be in breach and you could be up for a maximum tax of 49% on the surplus.





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