The big changes to super won't change how tax effective it is, writes Paul Farrugia.
Superannuation is really just an environment for you to accumulate money, but from a tax perspective it is one of the best places you can find.
Super is a tax effective structure because:
- money you contribute before tax (Superannuation Guarantee, salary sacrifice and personal tax-deductible contributions) are generally taxed at 15 per cent, which is lower than most people’s marginal tax rates (though high-income earners may pay an additional 15 per cent)
- interest, investment income and capital gains inside super are also taxed at a maximum 15 per cent.
The trade-off for these tax perks is that your money is ‘preserved’ until retirement, so you can’t generally access it until you have reached your preservation age (55 to 60, depending on your date of birth).
How much tax can you save?
Any benefit you can get for the 2016-17 financial year depends on the marginal tax rate you’re currently paying. The below table outlines your marginal tax rate, what you pay on pre-tax super contributions and the difference between the two.
As you can see, the differences in the tax rate between your usual marginal tax and tax you'd pay on concessional super contributions are significant.
How it’s all changing
The rules governing superannuation will change significantly from July 1, 2017, making it more limited as an investment vehicle but not necessarily less tax effective.
That means you have about three months from now to consider if there is any action you should take to make the most of the current, more generous super rules or to comply with the following impending changes.
- Only up to $1.6 million of super savings can be moved into a tax-free retirement income phase.
- Pre-tax contributions are capped at $25,000 a year.
- For those with super balances of less than $500,000, five years’ value of unused concessional contributions can be deposited at once (from July 1, 2018).
- All can make personal tax-deductible super contributions (with a limit of $100,000 from after-tax savings each year).
Make the most of super in four steps
Here are some strategies that could help you make the most of potential savings.
If you ask your employer to put some of your salary into super, before it goes into your pay packet, this amount will be taxed at 15 per cent (if you earn less than $300,000) instead of your marginal tax rate (see table above). In the 2016-17 financial year, you can contribute up to $35,000 if you are already over 50 or turning 50 by June 30, 2017. If you will be under age 50 by June 30, 2017, the concessional contributions cap is $30,000. From July 1, 2017, it will be lowered to $25,000.
2. Consider moving some savings into super
If you have a large amount of cash or other investments outside super that you won’t need to access any time soon, you may consider moving them into super. That way the interest or investment earnings (including any capital gains) would be taxed favourably inside super. Just be careful of capital gains tax if you’re selling any investments to do this and also remember there are limits on the amount you can contribute to super.
3. Consider your life insurance
You can potentially use tax savings and other concessions in super to help you take a higher level of life insurance cover than you may be able to afford outside super. That’s because you can use before-tax income to pay for insurance (e.g. through your pre-tax super contributions), rather than having to pay for it using your regular savings (after tax).
4. Consider a pension account
If you’re over your preservation age and retired, you could start drawing an income by turning your super into a pension account to save even more tax.
What you draw down from super could be used depending on your objectives, whether it is to supplement your income if you reduce your working hours or in some cases provide replacement income to supplement pre-tax contributions.
Everyone’s tax situation is different, so it’s important to get some advice from your accountant and/or financial planner to make sure you’re doing what’s best for you.