As the clock ticks down to the end of the financial year, there are two small superannuation strategies we wanted to remind you about. Neither will make you a millionaire, but good financial management is often a combination of many small, smart moves.
The Commonwealth will give eligible recipients up to $500 into their super fund if they make a non-concessional contribution of up to $1,000 before 30 June. A non-concessional contribution is one for which you do not claim a tax deduction. It is often described as an ‘after-tax’ contribution. Because it is made with after-tax money, your super fund will not pay tax on it.
So, if you are eligible for the full co-contribution, you will give up $1,000 in current purchasing power but your superfund will end up with $1,500 with which to invest.
To be eligible for the full co-contribution, your taxable income for the current year must be $41,112 or less. If it is, and you contribute the full $1,000, you will receive $500. The amount that you receive reduces as your income rises. By the time your income has reached $56,112, you will not receive any co-contribution.
The co-contribution will obviously help you if your income is less than $56,112. But it can also help if you have a partner who earns less than that. It can also be helpful if you have an adult child who is a low-income earner, perhaps because they are studying or only working part time. In this last case, while it may mean that money is ‘locked up’ in super for 40 years or more, that also means that the money will compound for longer. If we assume an inflation-adjusted return of 5% per year, then $1500 in super today would compound to be worth $12,000 (in today’s money) in just over 40 years’ time.
The co-contribution is only available to people aged 71 or under on June 30. It is not available to anyone whose super balance is more than the transfer cap (which currently is moving from $1.6 million to $1.7 million). Of course, if you have more than $1.7 million already in super, an extra $500 from the Commonwealth might not mean that much to you anyway!
As long as your super fund has your tax file number, the ATO will match your super fund’s records with your taxable income and pay the co-contribution directly into your account.
Couples where one partner receives relatively little taxable income can also make use of the ‘spouse contribution’ rules. In these cases, where one partner has taxable income below $37,000 and their partner makes a non-concessional contribution of up to $3,000, the higher-income earning partner can also receive up to $540 as a tax offset in their personal taxes. So, if the full $540 is claimed, then the higher income earning partner will have given up $2460 of spending power now (being the $3,000 they have contributed less the $540 in tax that they save). The lower income earning partner will have an asset of $3,000 in their super fund. So, the couple between them have ‘bought’ $3,000 worth of assets in a super fund but ‘spent’ only $2,460 to do so.
The rate at which the offset is paid also reduces as the low-income earning partner’s income rises. But in this case, the rate of reduction is quite steep. If the low-income earning partner earns $40,000 or more, the Commonwealth will not provide any offset at all.
Once again, the partner who receives the $3,000 cannot have so much already in super that they exceed the transfer cap ($1.7 million already in super). Which is kind of fair enough!
Low Income Super Tax Offset
Finally, here is an automatic adjustment that occurs for anyone with a low taxable income this year.
One of the anomalies of our super and tax system is that employer contributions into a super fund are taxed at 15%. For people earning middle to high incomes, this is lower than their personal tax rate and so they pay less tax on super than they would on personal income. But for people on incomes less than $18,200, it is higher than the marginal rate of tax that they pay on their personal income.
For this reason, people with taxable incomes below $37,000 for the year to June 30 can receive up to $500 ‘back’ in tax that has been paid on employer contributions during the year. The basic idea is that money contributed into super is taxed more lightly (or at least, no more heavily) than money received directly as income. The tax is ‘paid back’ into the super fund.