With only a few weeks left in this financial year, time is running out to maximise your super options.
Outside of our home, the amount we have in superannuation savings is often our second-biggest investment asset.
With the end of the financial year fast approaching, now is a good time to check your super options, especially in terms of potentially getting more personal contributions into your super fund account before 30 June.
Even small additional contributions have the potential to boost your retirement savings, thanks to the low tax rates on super contributions, potential investment earnings, and compounding growth over the long term.
Importantly, make sure you leave enough time for your super fund to process any personal contributions you make so they’re deposited into your account before 30 June.
Here’s five ways you may be able to add to your super contributions.
1. Make pre-tax contributions
The first, and easiest, step is to see if you have any capacity (and spare money) to make extra pre-tax contributions into your super account.
Pre-tax contributions are payments made into your super fund that are concessionally taxed at a rate of 15% instead of your normal marginal tax rate. As such, they’re referred to as concessional contributions.
You’re able to have up to $27,500 in concessional contributions deposited into your super account each financial year, including the Superannuation Guarantee payments made by your employer and any extra personal contributions you choose to make.
If you’re currently below the annual limit you could make one or more personal contributions into your super account before 30 June .
This can be done either from your pre-tax salary via a salary-sacrifice arrangement through your employer, or by using your after-tax money.
If you use after-tax money you may be able to claim a tax deduction in your next tax return (keeping in mind concessional contributions are taxed at 15%).
However, in order to do this, you must complete an Australian Tax Office (ATO) form advising your super fund that you intend to claim a tax deduction. You must also receive an acknowledgement from your super fund.
Be aware that if you exceed the total annual limit of $27,500 at 30 June the ATO may require you to pay additional tax.
To avoid exceeding the annual limit it’s important to add up your employer contributions during the financial year plus any extra contributions you’ve already made, and then calculate the concessional contributions balance that’s left.
2. Make a catch-up contribution
You may have another option available that will enable you to get more concessional contributions into your super account before 30 June.
That depends on whether you’ve used up your maximum non-concessional contributions in previous years.
In 2018-19 the Federal Government introduced rules allowing people to carry forward their unused concessional contributions for up to five financial years.
For example, if $20,000 in concessional contributions were made into your super account last financial year, you may be able to take advantage of your unused $7,500 gap from last year and roll it over into this financial year’s contributions.
This $7,500 would be in addition to the maximum $27,500 in allowable concessional contributions that can be made this financial year (allowing you to contribute up to $35,000 in this example).
For many Australians the unused portion of concessional contributions available from previous financial years may amount to tens of thousands of dollars.
The caveats are that you must have made concessional contributions in the financial year that exceeded your general concessional contributions cap, and your total super balance must be below $500,000 as at 30 June of the previous financial year.
You can view and manage your concessional contributions and carry-forward concessional contributions by accessing the ATO’s online services by logging in to your myGov website account.
3. Make non-concessional contributions
Non-concessional contributions are after-tax personal contributions you may be able to make into your super fund, which can’t be claimed as a tax deduction.
They’re separate from your annual concessional contributions and are subject to their own annual limits.
Typically, non-concessional contributions are made using the proceeds from larger asset sales such as from a home or investment property. But there’s no minimum non-concessional contribution amount.
The non-concessional contributions limit is $110,000 each financial year. However, under what’s known as the “three-year pull-forward rule”, you may be able to make a $330,000 non-concessional contribution in one financial year.
You’re then unable to make further non-concessional contributions for the next three financial years.
If you have more than $330,000 to contribute in total, you could make use of the annual $110,000 limit before 30 June this financial year. Then, from 1 July, you could use the three-year pull-forward rule to contribute up to another $330,000.
Seek professional advice if needed as there are circumstances where the “bring-forward” rule does not apply.
The main advantage of making non-concessional contributions is to accumulate more of your money inside the super system.
Earnings from any investments inside your super account before age 60 are taxed at 15%. After age 60, if you access your super as a pension income stream, your investment earnings and the payments you receive are tax free.
4. Super splitting with your spouse
The ATO allows couples to split up to 85 per cent of their annual employer concessional contributions, as well as additional salary sacrifice and personal super contributions.
But any splitting of contributions must be done following the end of the financial year in which the super contributions were made.
Super splitting can be done at any age, but a spouse must be either less than their applicable preservation age (the age at which they can access their super) or between their preservation age and 65 years, and not retired.
Couples wanting to split their super contributions first need to check whether their super fund allows it.
The full guidelines around splitting, including eligibility and the application form that needs to be completed, are available on the ATO’s website.
5. Make a downsizer contribution
Although this option isn’t strictly tied to the financial year end, you may be able to contribute up to $300,000 into your super fund using proceeds from selling your principal place of residence if you’re aged 55 or older. Couples can contribute up to $300,000 into their super each.
A downsizer contribution forms part of the tax-free component in your super fund. It can be made in addition to standard annual non-concessional super contributions limit ($110,000), and doesn’t count towards your personal super contributions limit.
Ultimately, however, any downsizer contribution you make will count towards your tax-free transfer balance limit when you eventually move your super into pension phase.
There are a range of conditions around downsizer contributions, and it’s prudent to check these on the ATO website.
You or your spouse must have owned your home for 10 years or more prior to the sale, with your ownership calculated from the date of settlement when you bought your home.
There’s also a strict definition of what constitutes a home. It must be in Australia and can’t be a caravan, houseboat, or a mobile home.
You’re unable to use the downsizer scheme to deposit funds from the sale of an investment property. These can only be done through a non-concessional (tax-paid) super contribution.
A downsizer super contribution must be made within 90 days after you receive the proceeds of your home sale. The ATO will allow for a longer period due to circumstances beyond your control.
It’s prudent to check these conditions and your eligibility on the ATO website or seek tailored advice from a financial adviser.
Consider an adviser
Super and retirement planning is a complex area.
Take care to understand the contributions types and limits carefully as there are significant tax penalties for exceeding the applicable contributions caps.
If you’re unsure about your super options before 30 June and need some advice, consider consulting a licensed financial adviser.
We are here to offer guidance to help you achieve your financial and life goals. Reach out to us by calling 08 82314709 or at info@centrawealth.com.au.
Article courtesy of Vanguard.
