Making the most of your super contributions

Making the most of your super contributions

Written by James Weir

James’s specialises in the theory and best practice of portfolio construction and management. His success within national and international investment banks led him to become a Co-Founder of Steward Wealth and he is a regular columnist for the Australian Financial Review.
June 24, 2014
Making the most of your super contributions is a smart way to both reduce your tax and help yourself in retirement.  If you’re at an age where you can contribute to superannuation and you’re paying more than 15% tax then it may make good sense to try to maximise your concessional (or pre-tax) super contributions as part of your annual tax planning plus you’ll get a guaranteed after tax return.

How the numbers stack up

Let’s take the example of Lisa, who is 52 years old and earns $120,000 p.a. At her age she is able to make total concessional super contributions of $25,000 in the 2014 financial year, which includes the $11,100 her employer contributes under the Super Guarantee scheme.

That means Lisa can contribute an extra $13,900 to her super fund and only pay the concessional tax rate of 15% on it. By contrast, if she takes the money and puts it in the bank she’ll have to pay her usual marginal tax rate of 37%. That difference between the two tax rates provides a guaranteed 22% benefit, which is worth $3,058 to her.

At the end of the day, Lisa’s take home pay will be reduced by $8,757, but she’s added an extra $11,815 into super for her retirement. Consider it a forced savings program if you like.

Here’s how it looks for Lisa comparing maximising her super contributions versus just taking the compulsory super contributions:

With no super contribution With super contribution
Income $120,000 $120,000
SG contribution $11,100 $11,100
Personal super contribution $0 $13,900
Tax on super contribution $0 $2,085
Net amount contributed to super $11,100 $22,915
Tax payable on income $32,347 $27,204
Take home pay $87,653 $78,896
Difference in take home pay $0 -$8,757
Total tax paid $32,347 $29,289
Tax saved $0 $3,058

 

Obviously, if you have good uses for the extra take home pay, like paying off debt, then it might not be such a straightforward decision. ASIC has a website that helps you calculate whether you’re better off paying down your mortgage or contributing to your super fund.

A couple of other points to remember are that you want to make sure you don’t exceed your concessional contribution limits (which we’ve written about before here). Whilst you’ll no longer be charged an excess contributions penalty tax, any amounts over your concessional limits will be non-concessional and will be taxed at your marginal tax rate. You would effectively be making an after-tax super contribution.

Plus, to be entitled to a tax deduction for your concessional contribution in financial year 2014, the money needs to have been received and credited by your super fund before 30 June 2014. That normally means making sure you’ve made the payments a few days ahead, including for electronic transfers.

Finally, in calculating your tax benefit, if you earn more than $300,000 your concessional super tax rate is 30%, not 15%. You still get a guaranteed after-tax benefit on your money, it’s just not as much.

We’re here to help

If that sounds a bit complicated, remember we’re here to help you so if you’d like to talk to us about your super contributions, or any other tax or financial planning matters, please do get in touch.

This article reflects the views of the author and not necessarily the views of Steward Wealth.

This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product. You should seek advice from Steward Wealth who can consider if the general advice is right for you.

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