Ask An Adviser - What Is The Best Tax Strategy When Contributing To Super?

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Nigel Baker

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Hi Pauli,

Your question, “What is the best tax strategy when contributing to super?”, is a great one and some careful planning considerations are required.

I understand that you have a capital gains tax obligation from an investment property sold, you have $300k in super, $11k in current year concessional contributions, $50k in carry forward contributions, and $330k in non-concessional contributions that you could add this year.

This reply is of course general in nature because we don’t know everything about you, so will cover off as best we can given the information we have.

Your situation is quite complex as we will talk about contributions, tax, and different types of tax so I do recommend that you seek professional advice before making a decision.

First, let’s discuss the concessional contributions. For our readers these are your contributions made by your employer or you can make a personal contribution as well. The annual limit is $27,500 which includes contributions from all employers and any personal contributions that you wish to count as a concessional contribution. The reason you may decide to top up your contribution, in addition to boosting your superannuation balance, is that this will reduce your taxable income as these contributions are tax deductible.

Long-term superannuation is generally a good strategy in Australia as it is a low taxed retirement savings structure however, it is important to check the immediate tax trade off. Concessional contributions are taxed at 15% when the funds enter your super fund, so if you are on a low tax bracket you may be better off in the short-term keeping the funds for living expenses or, for example, reducing debt.

Pauli, as your taxable income is $130k your marginal rate of tax is higher than 15% so in the first instance, topping up your concessional contribution to $27,500 has merit.

The second part of your question is whether you top up your contributions using the carry forward contributions. What is this?  For anyone with a superannuation balance of less than $500,000 the rules allow you to contribute more than $27,500 as a catch-up contribution.

-Your total super balance needs to be less than $500,000 on 30 June of the previous financial year.
-You can only carry forward unused concessional contributions from 1 July 2018, noting that the cap was $25,000 up until 30 June 21.
-Unused cap amounts can only be carried forward for five years before they expire (i.e., the earliest of the five years rolls off the carried forward amount)

This may be an effective strategy if you:

-Have excess cash.
-A high tax liability
-Have no other effective strategy for the funds – e.g. reducing debt
-Do not need access to the funds until retirement

The last point is very important. Pauli, we don’t have your age so, if you are relatively young you will need to ensure that you are comfortable locking up these funds until retirement age. Currently access to super generally starts at age 60, but also be aware that tax laws can change.

So, Pauli, for you, making the catch-up contributions could make sense given you appear to have a capital gains tax liability and a relatively high tax rate compared to the contributions tax rate. I’d need to know more about you and your situation to make a personal recommendation.

Division 293 tax is a tax paid when your income is above $250,000. Your contributions are taxed an additional 15% so making the total tax 30%. This is still lower than the marginal rate at that income level of 45% or 47% including the 2% Medicare levy.

For you Pauli, the things to consider:

-If you make the catch-up contributions will the additional concessional tax of 15%, be more than the tax payable on your normal income?
-Will div 293 apply and if it does, will this negate the immediate benefit of the contributions?
-What are your long-term plans, and does it make sense to add more to super now or use the funds elsewhere?

Given the complexity of your situation, I highly recommend speaking with an adviser.

Nigel Baker B. Com, CFP, CA.
Managing Director
Arch Capital
02 9905 9001
www.archcapital.com.au

While the Adviser Ratings Website facilitates the question and answer functionality, all such communications are between users and authorised financial advisers, of which Adviser Ratings has no affiliation. Adviser Ratings is not the advice provider and does not provide financial product advice and only provides information that is general in nature.

Article by:

Nigel Baker

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