Are you making any personal Super contributions into your Super fund? If not, you need to seriously consider it.
I never wanted to make any personal Super contributions until later in life after becoming a tax consultant. It’s never late than ever. I finally learned how important it is to have Superannuation strategies to save tax and build wealth.
In case you don’t know, I’m naturally not good with handling my own money.
I always thought personal super contributions were not necessary until now
Along time ago, more than 10 years from now, I quit my corporate job and stopped contributing to my Superannuation altogether. Up until then, all my Superannuation balance was made up of compulsory employer contribution and earnings from that. Salary sacrifice to Super has been a thing for a long time but I was remarkably (also stupidly) confident on my own ability to invest and build wealth. During the 10 years being self employed, I never made any personal super contributions. It turns out, my Super performed much, much better than my personal investments outside Super. A decade is long enough to teach a money fool like me to finally learn to stop wasting my hard earned cash and my precious time. I’ll just concentrate on the most simple and effective way to build a next egg – through personal super contributions.
Understand the Tax advantage of Superannuation
First of all, tax on your Super investment income earning is 15 per cent. There’s no tax on investment income on the first $1.6 million of Super funds for people over age of 60.
We could save a lot of tax by using Superannuation to our advantage, considering most people’s average tax rate is higher than 15%.
Fair enough, you can’t access your super money until later in life. But paying less tax on your super investments means you’ll be able to keep more in your Super fund and grow personal wealth faster.
There are a few ways to to save tax and build your wealth at the same time. The Australian government allows Australians to contribute up to $25,000 from your after tax money now ( $27,500 from Financial Year 2022). This is your concessional Super contribution cap.
Concessional Contributions Cap
You can claim a deduction providing you don’t go over your concessional contributions cap. This concessional cap includes super guarantee payments made by your employer, as well as any salary sacrificed contributions. The difference between those other contributions and you concessional cap is the max amount you could contribute personally and claim a tax deduction. The concessional cap for the 2020 and the 2021 years is $25,000. However this may be increased by unused concessional contributions brought forward from previous years (from 1 July 2019.)
You can claim a tax deduction on personal super contributions, which can save you a lot of tax dollars every year.
Most likely, you’ll be able to claim a tax deduction for personal superannuation contributions. Prior to 01 July 2017, only those who earned less than 10% of total income as an employee could claim this deduction. This 10% rule doesn’t exit any more. As a result, many Australians under 75 years of age can claim an income tax deduction for personal superannuation contributions made into an eligible superannuation fund. There are certain eligibility requirements.
Personal super contributions are amounts that you’ve paid from after-tax income to an eligible superannuation fund or retirement savings account (RSA). You can’t claim Salary-sacrificed contributions as tax deductions.
Most superannuation funds are eligible complying superannuation funds but this should be checked if a deduction is to be claimed.
Any deduction claimed can only reduce your taxable income to nil. It cannot add to or create a loss.
You must have done the following before claiming a personal super contributions as a tax deduction:
- provided the superannuation fund or RSA provider with a Notice of intent to claim or vary a deduction for superannuation contributions;
- received acknowledgement from the superannuation fund.
The following additional conditions must be satisfied:
- the age-related conditions
- the fund must not be a
- commonwealth public sector superannuation scheme with a defined benefit interest
- constitutionally protected fund or other untaxed fund that would not include the contributions in their assessable income, or
- super fund that notified the Commissioner before the start of the income year that they elected to treat all member contributions to the
- super fund as non-deductible, or
- defined benefit interest within the fund as non-deductible.
Age Related Conditions
- Aged 75 years old or older. You can only claim contributions made before the 28th day of the month following the month in which you turned 75 as a deduction. You must satisfy the work test.
- 18 years old at the end of the year. You can only claim a deduction if you earned income as an employee or a business operator during the year.
- Aged 67 – 74 years of age. You must satisfy the work test or meet the work test exemption criteria for the fund to accept your contribution.
From 1 July 2020, there’s some change for a fund to accept personal superannuation contributions if you are over 67. You must satisfy the work test or meet the work test exemption. To satisfy the work test, you must have worked at least 40 hours during a consecutive 30-day period in the financial year. Otherwise, the superannuation fund won’t accept the contributions. Prior to 1 July 2020, you needed to satisfy the work test. Or meet the work test exemption if you were over 65 years of age when the contribution was made.
The work test exemption applies from 1 July 2019. To meet the work test exemption criteria, the taxpayer must have:
- Satisfied the work test in the financial year preceding the year in which the contributions were made
- Have a total superannuation balance of less than $300,000 at the end of the previous financial year, and
- Not previously used the work test exemption.
Australian 2021 federal budge has some update on the work test, as mentioned in this post.
Note: You Super will deduct a 15% contributions tax from any superannuation contribution that you intend to claim as a tax deduction.
If your average tax rate is below 15%, it won’t be a tax effective strategy. Low income earners could benefit from government super co contribution, which I’ll cover in another blog post.
From 1 July 2018, a tax payer like me with a total superannuation balance (TSB) of less than $500,000 on 30 June the previous financial year may be entitled to contribute more than the concessional contributions cap. We can make additional concessional contributions for any unused concessional cap amounts from previous years. The first year of entitlement to carry forward unused amounts is the 2019/20 year. Unused amounts are available for a maximum of 5 years.
So in 2019/2020 tax year, I made larger than ever personal super contributions based on unused concessional cap amounts from 2 years, to my Super fund. And claimed the whole amount as a tax deduction.
Take advantage of carry-forward unused Superannuation concessional contributions
From 2019–20, carry-forward rules allow you to make extra concessional contributions. You can contribute above the general concessional contributions cap, without having to pay extra tax.
The carry-forward arrangements involve accessing unused concessional cap amounts from previous years. An unused cap amount occurs when the concessional contributions you made in a financial year were less than your general concessional contributions cap.
To use your unused cap amounts you need to meet two conditions:
- Your total super balance at the end of 30 June of the previous financial year is less than $500,000.
- You made concessional contributions in the financial year that exceeded your general concessional contributions cap.
The amount of unused cap amounts you will be able to carry-forward will depend on the amount you have contributed in previous years, starting from 2018–19. You can use caps from up to five previous financial years.
ATO will apply the oldest available unused cap amounts first. For example, unused cap amounts from 2018–19 would be applied to increase your cap first before unused cap amounts from 2019–20.
Unused cap amounts are available for a maximum of five years and will expire after this. For example, a 2018–19 unused cap amount which is not used by the end of 2023–24 will expire.
If, after applying all your available unused cap amounts, you still have excess concessional contributions, you may need to pay extra tax – divisional 293 tax. So be very mindful not to exceed your accumulated cap amount.
How to view your carry-forward concessional contributions
You can view and manage your concessional contributions and carry-forward concessional contributions using ATO online services through myGov.
Log in to ATO online services, select Super, then navigate to Carry-forward concessional contributions.
Be aware that due to the reporting timeframes of funds, the latest information may not be available in ATO online services. I would say the best way is to contact your super fund for the most up to date information. Your online super account should have all the information about your contribution history so you can easily keep track yourself too.
Dis I say It’s better late than ever? My super balance is still embarrassingly low compared to what it should have been now. But I’m finally playing catch-up and learning to use Superannuation as a financial vehicle to save tax and save for retirement.