Planning your retirement is rarely easy. Sure, you would want to save and invest as much money as you can into your super fund. But that isn’t enough. Most Aussies tend to forget about one critical part of retirement planning – how much tax you pay on your super contributions.
Nobody likes paying taxes. No, you can’t avoid paying taxes on your super contributions. But there are ways to minimise your contributions tax. The Australian Taxation Office (ATO) sets guidelines for contributions tax. Knowing their rules can help you make informed choices about your super and its tax implications.
What Is Contributions Tax?
In Australia, a superannuation fund, popularly known as super, is one of the best ways of planning your retirement. Usually, set up by employers, the super fund allows employees to ensure financial support post-retirement. Your employer will probably have one where you can make periodic contributions.
However, you will need to pay a contributions tax on a few contributions made to your supper. The standard rate for concessional contributions is 15%. Non-concessional contributions, which you can make from your after-tax income, generally don’t attract contributions tax. Understanding how contributions tax works can help you plan your finances.
8 Practical Tips for Minimising Your Contributions Tax
1. Use Salary Sacrifice
This is probably the easiest way to save your super tax. Instead of receiving a portion of your salary as cash, you can ask your employer to pay some of your salary into your super. As they are deducted from your pre-tax income, these are called concessional super contributions. These deductions are usually on top of the mandatory superannuation guarantee contributions required by law.
Your salary sacrifice goes straight into your super. Hence, it’s often taxed at 15% unless you exceed the concessional contributions cap. This comes with a dual advantage. It reduces your taxable income and results in lower contributions tax.
But there are limitations. If you make more than $250,000 a year, you may have to pay an additional 15% tax on these contributions. Also, this isn’t a mandatory contribution. So, you will need to check with your employer if it’s an option for you. You can also speak with your accountant if necessary.
2. Be Mindful of Concessional Contributions Cap
This cap might change annually. However, from 1 July 2021, the general concessional contributions cap is $27,500 for all individuals, regardless of age. Exceeding this limit may attract additional tax. Knowing these limits is necessary to lower your contributions tax.
3. Make Non-Concessional (Personal) Contributions
You can also make contributions to your supper from your after-tax income. These are called non-concessional or personal super contributions. What’s the benefit? You may not have to pay tax on these contributions. Plus, this approach can increase your super balance significantly. However, your contributions should be within the prescribed non-concessional cap.
From 1 July 2021, the ATO set the non-concessional contributions cap to $110,000. Plus, there are age-specific bring-forward rules for these contributions. You can contribute up to $330,000 over three years, depending on your age and the financial year.
4. Consider Spouse Super Contributions
Another smart way to save your contributions tax is to make spouse contributions. You can consider this option if your spouse has a low income ($40,000) or is not working. It may qualify you for the spouse contributions tax offset. Another advantage is that you can balance the super between you and your spouse.
According to the latest ATO guidelines, you can make your contributions to either your spouse’s complying super fund or their Retirement Savings Account (RSA). There are two ways to claim the tax offset:
You can claim a full tax offset of $540 if your spouse earns $37,000 or less and you contribute $3000 or more to their super or RSA.
Or, you can claim a partial tax offset if your spouse earns more than $37,000 but less than $40,000 and if you contribute less than $3000 to their super or RSA.
5. Government Co-Contributions
This scheme is for low to middle-income earners. If you belong to this group, you can use government co-contributions to boost your super balance without attracting super tax. How much you earn will determine your eligibility for this scheme.
6. Consider Downsizer Contributions
Downsizer contributions allow you to contribute up to $300,000 per person from the sale proceeds into your superannuation without attracting contributions tax. That means couples can invest up to $600,000 into their supers. However, you need to meet the eligibility criteria laid down by ATO.
To make downsizer contributions, you must be:
- from 1 January 2023, 55 years or older
- from 1 July 2022, 60 years or older
- from 1 July 2018, 65 years or older.
Plus, you or your spouse must’ve owned the house for ten years or more before the sale. It should be located in Australia and should not be a caravan, houseboat, or other mobile home. You can invest all or part of your sales proceeds into the super. But the investment amount can’t be more than your sales proceeds.
For example, if you sold your house for $400,000, you can invest this amount into your and your spouse’s super. But if the sales proceeds were $800,000, you can invest only $600,000 as a couple, with each spouse contributing up to $300,000 in their super.
7. Regularly Review Your Super Contributions
As you can see, caps apply to almost all contributions you make to your or your spouse’s super fund. It’s best to stay within these limits to avoid paying additional contributions tax or penalties. So, keep an eye on your superannuation contributions and ensure they align with the current caps as ATO keeps updating its rules and regulations.
8. Get Professional Help
Tax laws are often complex. Besides, ATO can change the regulations and contributions caps on super at any time. That makes it necessary to talk to an accountant or your bookkeeper. If you run a small business or a firm, consider hiring a bookkeeping service. These professionals can help you create a tax planning and retirement strategy that best fits your financial needs. Consult them as soon as possible to avoid paying excess contributions tax.
Let The Bookkeeping Studio Handle Your Taxes
Lowering your contributions tax in Australia is possible with careful planning and adherence to the rules. You can use different strategies to save super tax, including optimising your concessional and non-concessional contributions. You should also stay within prescribed caps and take advantage of different tax-effective schemes set up by ATO. It’s your best chance to make the most of your superannuation savings. And yes, remember to stay informed about any rule changes and consult with a financial advisor as soon as possible.
Are you looking for a reliable bookkeeping service? Whether sole traders or established businesses, our month-to-month fixed fee bookkeeping packages are designed for everyone. Want to know how we can help you save your hard-earned money? Book a call today.
