The end of financial year may seem like months away, but now is the time to think about opportunities to put money into superannuation.
Until recent times, employees have generally been restricted to only two ways to make voluntary superannuation contributions:
- The first is making a ‘non-concessional’ contribution. This is where an individual transfers assets or, more commonly, contributes cash into their super. These contributions are not tax deductible.
- The second method is via a ‘salary sacrifice’ contribution. This is where an individual arranges with their employer to contribute part of their normal salary to their superannuation fund. This is an extra contribution that is taxed like any other employer contribution, rather than being taxed at the individual’s personal income tax rates.
New rules
Previously, only sole traders, self employed business owners or those not working were able to make one-off ‘concessional’ (tax deductible) contributions to super. The rules changed in 2017, but not many people know about them or how they work.
The new rules allow anyone under age 65 (or under 75 and still working) to contribute to their super and claim a tax deduction. This may not seem like a big deal, but the new rules do create some interesting opportunities, for example:
- Say you have been meaning to salary sacrifice but didn’t get it set up with your payroll at the start of the financial year. Now you can make a ‘catch up’ contribution at the end of the financial year to get closer to your contribution limit.
- This ‘catch up’ contribution strategy is not only good for boosting your superannuation savings, it can also be used to increase your tax deductions in a financial year where you have a one-off tax event, such as a capital gain, a large distribution from investments or have received a bonus.
- Sometimes the preservation restrictions of super put people off contributing more; what if things change and they need access to those funds after all? The new contribution rules allow employees to defer their extra superannuation contributions until later in the financial year, providing more time to work out what savings they can afford to set aside for retirement.
It is important to be aware that concessional contributions are limited to $25,000 per individual per financial year. This includes all employer contributions, salary sacrifice, catch up concessional contributions and any other contributions for which you gain a tax benefit.
What to watch out for
A word of warning, super contributions are counted on the day they are received by your super fund, not the day the contribution is made. This means if you leave your catch up contribution until the 30th June, you risk having it counted against your contributions for the following financial year, and potentially miss out on the tax benefits you were trying to achieve.
Some other things to note when making voluntary super contributions:
- Personal contributions are only tax deductible if you ask your super fund to treat them that way and the fund agrees to do so. There is paperwork you need to fill out that has strict deadlines.
- There are some extra rules for individuals aged between 65 and 74 to be allowed to make voluntary contributions.
- Check your selected investment strategy before you make your contribution to ensure this remains consistent with how you want your new funds to be allocated.
- Always get advice from your financial adviser about your specific situation, because additional superannuation contributions are not effective for everyone.
If you prefer a ‘set and forget’ approach then regular salary sacrifice still works well, however for those that want flexibility to vary their contributions based on their cashflow requirements or tax status each year, then the new contribution rules make this possible.
Hamish Landreth, a Certified Financial Adviser®, has been helping his clients navigate their finances for over 10 years. If you don’t want to go it alone and would like help reviewing your superannuation strategy you can contact Hamish at Prosperity Advisers on 07 3839 1755 or hlandreth@prosperity.com.au.
This example contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. If you decide to purchase or vary a financial product, your financial adviser, Hillross Financial Services Limited and other companies within the AMP Group may receive fees and other benefits. The fees will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Please contact us if you want more information. Prosperity Wealth Advisers Pty Ltd (ABN 32 141 396 376), Authorised Representative and Credit Representative of Hillross Financial Services Ltd, Australian Financial Services Licensee and Australian Credit Licensee 232 706.