If you boil it right down, the benefit of super is the superannuation tax concessions. I mean, yes, it’s a home for compulsory employer super contributions, too; but the whole system wouldn’t be nearly as effective without us all making voluntary contributions, which is incentivised by tax concessions.
This article explores superannuation tax concessions in more detail.
Superannuation Tax Concessions
Superannuation tax concessions are the basis for the existence of superannuation itself. Without tax concessions, superannuation would not exist.
Many people wrongly assume superannuation is an investment. It’s not. Superannuation is a tax structure that we invest inside of. You are responsible for how your super is invested by choosing your preferred investment option from your super fund’s investment menu.
The tax concessions associated with super are an incentive for you to contribute more to super, with the expectation being that you will be able to fund more of your retirement and rely less on social security, such as the Age Pension.
Specifically, the Government is saying, “We will give you immediate and ongoing tax concessions if you invest within super, provided you understand you can’t access these funds until a certain age” – known as your superannuation preservation age.
How Much Super Can I Claim as a Tax Deduction?
The amount of super that you can claim as a tax deduction is based on the general concessional contribution cap, plus any unused carry-forward cap amounts available to you.
The general concessional contribution cap is $27,500 per person, per financial year. However, if your super balance was below $500,000 on 30 June of the most recent financial year, you are also able to utilise any unused portion of the cap that you have not utilised from the previous five financial years.
Importantly, there are a number of types of contributions that count towards the same concessional contribution cap. These include:
- Employer superannuation guarantee (SG) contributions
- Salary sacrifice contributions
- Personal concessional contributions
So, in order to determine how much you can contribute to super and claim as a personal tax deduction, you first need to:
- Calculate your total cap amount (general cap + unused cap); then
- Deduct from your total cap any employer contributions (if relevant) expected to be received throughout the year; then
- Deduct from your remaining total cap any salary sacrifice contributions that will be made to super throughout the year.
The remaining amount after completing the three steps above will be the amount that you can contribute to super as a personal super contribution and claim a personal tax deduction for.
How Do I Claim a Deduction for Personal Concessional Contributions?
If you make a personal contribution to super that you intend on claiming a tax deduction for, you need to make the contribution/s and then notify your super fund of your intention to claim a tax deduction for those contributions.
You then need to wait for confirmation from your super fund that they acknowledge receipt of your intention to claim a tax deduction prior to claiming the deduction. You should also not make any super withdrawals or super rollovers prior to receiving acknowledgement from the super fund, otherwise this is likely to result in you being unable to claim a personal super contribution tax deduction for the amount contributed.
How Does Concessional Super Reduce Tax?
The concessional superannuation environment reduces tax in a number of ways, including providing tax deductions for certain contributions, reducing or eliminating personal CGT, as well as concessional tax treatment of investment earnings within super.
Tax Deductions for Certain Super Contributions
There are two types of super contributions that will reduce your personal income tax: salary sacrifice contributions and personal concessional contribution.
Salary sacrifice contributions is an arrangement where you sacrifice part of your salary in exchange for equivalent increased super contributions. The benefit of this is that less of your salary is taxed at your individual tax rate. However, such contributions will incur contributions tax.
Personal concessional contributions work similarly to salary sacrifice contributions, but instead of sacrificing your wage, you make a personal contribution from your bank account and then claim a tax deduction for that contribution when you submit your tax return. Again, these types of contributions will incur contributions tax.
Reducing or Eliminating CGT through Super Contributions
If you sell a business or a business asset and the sale results in a realised capital gain that will be assessed for capital gains tax purposes; you may be able to reduce or disregard the capital gain by applying one of the Small Business CGT concessions.
One such Small Business CGT concession is the Small Business Retirement Exemption. This exemption allows you to exclude up to a lifetime capital gain amount of $500,000 from CGT, by contributing the exempt amount to a complying superannuation fund.
Concessional Tax on Super Investment Earnings
The other concessional tax associated with super is the tax concessions on super earnings.
All earnings, including realised capital gains, derived from investments within a superannuation accumulation account are taxed at a maximum of 15%. This is a lower tax rate than the average working person’s marginal tax rate.
Furthermore, once you retire and convert your super to an income stream, all investment earnings are received completely tax free.
Read more here: Tax on Super Earnings
At What Age Can I Withdraw My Super Without Paying Any Tax?
You are able to withdraw your super without paying any tax from age 60. However, there are also ways to withdraw your super without paying any tax while under age 60.
Once you reach age 60, all lump sum super withdrawals and all super pension income is received tax free.
If you are over your preservation age but under age 60, the tax-free component portion of a lump sum or income stream will also be received tax-free, whereas the taxable portion of a lump sum is only tax free up to the lifetime low rate cap of $235,000 and the taxable portion of pension income is taxed at your marginal tax rate, minus a 15% tax offset.
For a rare few of you, your super balance may include an untaxed component, which will incur higher amounts of tax, even when aged 60 or over.
This video I made explains when you can access your super tax-free:
How Can I Reduce My Taxable Income with Super?
To reduce your super taxable income with super, you need to either make salary sacrifice super contributions or personal concessional contributions, as described above.
To reduce the taxable income within super, you might consider choosing to invest in assets with tax-effective income, such as Australian shares with franking credits, or you may consider owning an investment within super for longer than 12 months to get a 1/3rd discount on CGT once sold, or you might convert your super accumulation account to a pension account for tax-free earnings, if eligible.
Regardless of which ways you choose to take advantage of superannuation tax concessions, getting personal financial advice prior to implementing any superannuation strategies is essential – not only to optimise your overall financial strategy, but also to ensure it is implemented correctly and appropriately for your needs.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year-olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.
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