Super Contributions are not just for the high-income earners
This week, we continue exploring more details around Concessional Contributions and strategies which can benefit you.
Making concessional contributions is often left for the higher income earner of the family as it can reduce their marginal tax rate significantly. This means that they end up with more savings in their super than their partner who may be on a lower taxable income. In the past it did not matter if a couple had unequal super balances as there was no restriction on how much you could have in pension phase. With the introduction of $1.6M cap on pension funds, equalising super balances could mean more of their retirement savings can be held in a tax-free environment.
Cashflow permitting, contributing to super for those whose adjustable taxable income is $37,000 or less can mean a substantial boost to their retirement savings. The Low Income Superannuation Tax Offset (LISTO) is a Commonwealth Government super contribution paid into super accounts to help low income earners save for their retirement. LISTO is essentially a refund of the tax that’s been deducted from your concessional contributions (salary sacrifice and/or employer contributions) over the course of the financial year. Since its capped at $500, by limiting the contribution of $3,333, you are getting the maximum the 15% contribution back.
Lance has recently reduced his hours of work. His wife Margaret is still working full time and their budget indicates that they only need $30,000 from Lance’s income to meet their expenses. Lance earns $32,000 from his business and $5,000 in dividends from some shares he holds. Since he earns more than 10% of his income from his business, his Financial Adviser suggests he contributes $3,333 into his super. Lance is able to save $700 more towards retirement than before. By itself you may feel that $700 is not a significant saving however, it equates to him saving 22% more than what he was before.
|Without Super contribution||With Super contribution|
|Total Income (A)||$37,000||$37,000|
|Amount contributed to super as a concessional contribution (B)||$0||$3,333|
|Taxable Income (C=A-B)||$37,000||$33,667|
|Tax on Income including Medicare (D)||$3,867||$3,167|
|Net Income (E=C-D)||$33,133||$30,500|
|Required Income to meet expenses (F)||$30,000||$30,000|
|Surplus Money in savings account (G=E-F)||$3,133||$500|
|Tax on super contribution (H)||$0||$500|
|Low Income Super Tax Offset Received (I)||$0||$500|
|Net Super Balance (J=B-H+I)||$0||$3,333|
|Total funds saved towards retirement (G+J)||$3,133||$3,833|
Another strategy often not explored is contribution splitting. Contribution splitting provides a superannuation member with the opportunity to split up to 85% of concessional contributions received in a financial year with their spouse. The split is permitted in the year after the contribution has been received by the fund. However, where a member is closing or rolling over their account in the fund, the split can take place in the year of the concessional contribution. The contribution only counts towards the originating spouse’s concessional cap. It does not count towards the receiving spouse’s cap.
In order to make the split, the contribution must first be made to the superannuation fund and credited to the member’s account where it is taxed. The contribution is not made directly to the spouse’s account. The next step is for the member to make an election to split the contribution to the spouse and indicate the amount.
Contributions can be split with a spouse who is under their preservation age regardless whether they work or not; or between their preservation age and 65 and has not met the retirement condition of release.
The super fund will transfer the relevant contributions to an account held by the spouse. The payment of the split contributions to the spouse is referred to as a ‘contributions-splitting super benefit’ and is paid as a rollover super benefit.
A ‘Notice of Intent to Claim or Vary a Deduction’ for personal super contributions must be submitted to the super fund and accepted by the trustee before, or at the same time as, you lodge the super contributions splitting application. The splitting application would otherwise be invalid, as only deductible personal contributions can be split.
While one of the main advantage of splitting is to share the amount saved for retirement between a couple, there are also some additional advantages of this strategy. By splitting the contributions, you can also:
- pay for insurance premiums for a non-working or low-income spouse;
- provide super benefits earlier if you were splitting with an older spouse; or
- improve your Centrelink position by splitting contributions with a younger spouse.
Since the maximum amount that can be split to a spouse is limited to $21,250 (85% of $25,000), contributions splitting is a long-term strategy. Not every super fund needs to allow contribution splitting and hence seeking advice prior to making any contributions is imperative. Speak to your adviser today to ensure you are taking advantage of all the options available to maximise how much you and your spouse save for your retirement.
This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information is intended to be general in nature and is not personal financial advice. It has been prepared without taking into account your particular circumstances and needs. Hypotheticals, illustrations and examples are provided for illustrative purposes only. They should not be relied on to make decisions. Any reference to taxation, legal or other matters are based on Prime’s interpretation of laws existing at the time and may change with time.
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