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12 Clever EOFY Tax & Super Strategies to Retire Early
It’s tax season! Let’s kick it off with some savvy strategies to boost your finances and set the stage for a brighter retirement.
Beware the pitfall: numerous high earners fall short of their retirement goals by underestimating their yearly super contributions.
1. Salary sacrifice
Is an agreement between you and your employer to pay some of your pre-tax salary into super. This is often very tax effective. The amount you contribute to super is taxed at up to 15% (and up to 30% if your income is over $250,000 p.a.) rather than your marginal tax rate, which might be up to 47%. Salary sacrificed amounts to super are considered concessional contributions.
Depending on your circumstances, this strategy could result in a tax saving of up to 32% on the growth of your investments and enable you to increase your super.
2. Personal deductible contributions
You can usually make your own personal contributions and claim a tax deduction for them to achieve the same tax outcome as salary sacrifice. This is a concessional contribution.
You can make a personal super contribution before 30 June and claim a tax deduction if you:
▪ want to tax-effectively top up employer super and salary sacrifice contributions
▪ terminate employment and receive taxable employment termination payments, or lump sum unused leave entitlements
▪ receive bonuses, or
▪ have taxable investment income and taxable capital gains from the sale of CGT assets.
To be eligible to claim the super contribution as a tax deduction, you need to submit a valid ‘Notice of Intent’ form to your super fund within required time frames. You will also need to receive an acknowledgement from the super fund before you complete your tax return, start a pension, withdraw or rollover money from the fund to which you made your personal contribution.
Did you know the annual concessional contribution cap is increasing to $30,000 in FY 2024/25 as well as the Superannuation Guarantee contributions rate which is going from 11% to 11.5% of your salary.
3. Non-concessional contributions (NCCs)
NCC’s are personal contributions to super made from post-tax income or available capital, exempt from contributions tax.
There’s an annual cap for NCCs, currently set at $110,000 for 2023/24, four times the annual concessional contribution (CC) cap.
Individuals under 75 as of 1 July in a financial year can potentially bring forward up to two years of NCCs, allowing for a larger upfront contribution.
Starting July 1 this year, the annual NCC cap increases to $120,000, with a new three-year bring-forward option rising to $360,000.
Timing is crucial when activating the new NCC bring-forward rule. Many clients have already contributed $110,000 this year and plan to trigger the three-year bring forward next year, potentially adding $360,000 more.
This could mean each parent can inject $470,000 into their super within the next two months!
4. Spouse contributions
By contributing to your spouse’s superannuation, you can enhance their retirement savings.
Eligible individuals can receive a tax offset of up to $540 by making super contributions of up to $3,000 into their spouse’s account if their spouse earns $37,000 or less annually in 2023/24.
This contribution falls under the non-concessional category.
5. Contribution splitting
Contribution splitting offers the option to redirect a portion of your superannuation into your partner’s account.
A client may choose to divide qualifying concessional contributions from the previous financial year into their spouse’s super account in the subsequent year.
This strategy can assist eligible clients in harmonising their super balances as a couple.
If there is a plan to split personal deductible contributions, the Notice of Intent must be submitted and confirmed by the fund prior to initiating the contribution splitting process.
6. Catch-up contributions
If your concessional contributions (CCs) in a given financial year fall below the annual cap, you can carry forward these unused amounts for up to five years. This allows you to potentially contribute more in a future year if you meet eligibility criteria.
The flexibility to make larger contributions when suitable can be beneficial, especially if you experience irregular income or have a significant capital gains tax liability.
To utilise your carried forward CCs via catch-up contributions, your total superannuation balance must be under $500,000 as of the previous 30th of June, and you must have unused CC cap amounts accumulated from the past five financial years.
Your spouse has the opportunity to enhance their super account by making an after-tax contribution.
This action could lead to a government contribution of up to $500, known as a ‘co-contribution.’
For your spouse to qualify for the maximum co-contribution in the financial year 2023/24, they must contribute $1,000 or more to their super while earning $43,445 or less.
8. Double deductions (SMSFs)
An SMSF member can strategically boost their tax benefits by making a personal contribution in one financial year, claiming the deduction, and aligning it with the following year’s concessional contribution cap.
This tactic maximises the deductible amount in any given fiscal year.
For personal contributions to an SMSF, timely allocation to the member’s account is crucial, typically within 28 days after the end of the following month post-contribution.
For instance, a contribution made on 1 June must be allocated by 28 July to enable the member to claim a tax deduction for their super contribution in the year of contribution.
9. Manage Div 293 tax
Division 293 tax is an additional levy on super contributions, decreasing tax benefits for individuals with combined income and concessional contributions exceeding $250,000 for Division 293.
The first-time liability for Div 293 tax may arise in the upcoming financial year due to factors like redundancy, termination payments, or significant capital gains in 2023/24.
Eligibility for catch-up contributions could raise a person’s CC cap, potentially leading to higher Division 293 tax obligations. Nonetheless, individuals subject to Div 293 tax will pay a lower overall tax on their CCs compared to the marginal tax rate on taxable income.
Payment of Division 293 Tax can be made using personal funds or by opting to withdraw it from any existing superannuation accounts.
10. Buy insurance inside super
Purchasing insurance within your superannuation fund offers tax benefits. Life and Total Permanent Disability (TPD) insurance premiums are tax-deductible when owned by your super fund. However, the same policy isn’t tax-deductible when held in your personal name.
Moreover, income protection payments can be made from your super fund to avoid impacting your personal cash flow.
11. Pre-pay deductible expenses
To accelerate the tax deduction and lower taxable income in 2023/24, consider pre-paying specific expenses.
If you anticipate a decrease in your marginal tax rate starting July 1, 2024, due to the Stage 3 tax cuts, advancing the deduction to 2023/24 could yield additional advantages.
Examples of deductible expenses eligible for pre-payment include:
– Premiums for income protection policies held outside superannuation
– Interest on fixed-rate investment loans
– Costs related to a rental property
– Work-related subscriptions
12. Manage CGT on asset sales
There are a range of strategies that could be used to manage capital gains tax (CGT) that may be payable when disposing of assets. These include:
▪ deferring the sale until the asset has been held for 12 months to benefit from the 50% CGT discount
▪ deferring the sale to another financial year if taxable income will be lower
▪ spreading the sale over several years to smooth out the impact on taxable income in any given year
▪ selling assets that trigger a capital loss to offset gains made on other assets in the same financial year
▪ offsetting any realised capital losses against gains from assets not eligible for the 50% discount, and
▪ making a personal deductible super contribution (perhaps by also utilising the catch-up rules) to offset some or all of a taxable capital gain from the sale of an asset in the same financial year.
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