Last Drinks Tax Deductible Super Contribution 30 June Deadline
It’s June and so many of us are thinking about any last minute tax deductions we can achieve. In the 2018/19 financial year almost all tax-payers can make a private, personal contribution into their superannuation fund and then claim the contribution as a personal deduction when they do their tax return.
You can contribute any amount provided that your total concessional contributions are not more than $25,000 in a particular financial year. Remember, the compulsory 9.5% superannuation guarantee contributions from your employer and any regular or bonus salary sacrifice contributions to super are all included within this $25,000 limit.
So, if your employer has contributed $10,000 on your behalf, you may be able to make a further contribution of $15,000.
Those over age 65 need to be a little careful as additional eligibility rules may apply, such as a work test.
The ability to make personal deductible superannuation contributions is quite new. Until recently, the only way to make additional deductible contributions was to organise a salary sacrifice with your employer. While regular salary sacrifice to super is great it left some people out. Some employers restricted it to permanent employees, charged a fee or placed restrictions when you could alter the arrangements. Other employees found that the irregularity of their income due to casual or contract employment meant that a regular amount each pay was just not practical. Now the contributions are simply between you and your super fund and they can be done towards the end of the financial year when you know where you are at – your employer does not even need to know that you have made them. This might come in handy next time you ask for a pay rise!
Your personal contributions will be taxed at 15% when they arrive into the superannuation fund. Provided your personal marginal tax rate is more than 15%, then the amount that you save in tax will be more than the amount that the super fund pays in tax. The rule of thumb is that salary sacrifice is tax effective for people with taxable income above around $37,000 per year.
For example, if your tax rate is 37.5%, and you contribute an extra $10,000, you will receive a personal tax deduction of $3750. So the contribution only costs you $6,250 from your hip pocket ($10,000 you contribute less the $3750 tax rebate you will receive when you do your tax return). Within the super fund, only $1,500 will be paid as tax.
You have given up $6250 of spending power and acquired an asset worth $8500. That’s an immediate, guaranteed return of $2250 – 36% of the $6,250 that the contribution actually cost you.
A guaranteed return of 36% is absolutely outstanding. You simply can’t beat it.
Before you jump in you will need to think through whether you can afford to contribute the funds. Money contributed into super must stay there until you meet a condition of release. The most common condition of release is reaching retirement age. So, by making a contribution into your super fund, you are agreeing to keep the money there until you retire. That is why the government offers the tax incentive: to encourage us to save for our retirement.
Remember that to claim the tax deduction for the 2018/19 financial year your contribution needs to be received by the super fund before 30 June 2019, including all the relevant paper work.
Before you make an extra contribution, we recommend you come to talk to us to discuss whether extra personal contributions make sense in your case.
If you are thinking about tax, why not register for our webinar on Getting ready for tax time. We’ll be covering a range of issues including how to prepare for your tax return and how to get a bit more organized for the next tax year.
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