At the end of June, there will be a number of changes to superannuation happening. So now is a great time to think about and plan a review of your superannuation strategies to maximise your future outcomes.
Let’s start with a look at what’s happening from July 1.
- The biggie is the superannuation guarantee rises from 9.5% to 10%. Many people will see an overall increase in what they earn each year. However, if you’re paid above award wages, but paid a salary package, you might find your take-home salary drops to accommodate the super increase. Best talk to your employer now so you can be prepared for any unanticipated changes. And if you’re an employer, talk to your accountant to see how it will impact your cash flows moving forward.
- Contribution caps are changing. Concessional contribution caps (how much you can contribute each year as part of salary sacrifice – paid before tax) are rising from $25K to 27.5K. It’s not a big jump but if you contributed an extra $2.5K a year for just 10 years at the beginning of your career that could add up to an extra $100K over the lifetime of your superannuation accrual period. Non-concessional contributions caps (what you can pay in after-tax) will increase from $100K to $110K.
- The transfer balance cap increases (the total individual superannuation account balance that you can make extra contributions to) from $1.6M to $1.7M
- The temporary measure to halve the minimum income drawdown for individuals with an account-based pension has been extended a year with minimum income requirements reverting back to normal levels July 2022.
So that’s what’s happening as of July 1, 2021. BUT…more importantly, let’s look at what superannuation strategies you can employ to make your super work harder for you from the end of the financial year.
Superannuation strategies for you to consider
- Maximise your tax-deductible super contributions (through salary sacrifice) – if you’re earning even a mid tax bracket salary, you’re paying around 32.5% on each dollar over $45K you earn (37% after $120K and 45% after 180K). When you contribute a greater proportion than just that of the employer-paid superannuation guarantee to superannuation before tax, you’re only paying 15% tax on each dollar AND…although you earn the same amount, it drops your taxable income so you pay less tax on what you receive in hand too. Just make sure a: you can still live on the amount you’re being paid and b: you’re not going over the concessional contribution cap ($27.5K as of July 2021) as the fines can be harsh. Remember to count all your sources of income/employer contributions.
- Consider a one-off after-tax contribution to your super – Contributing ‘after tax’ dollars to your super account can be a solid way to earn investment income in a way that can be very tax effective. Let’s say you put $100K into investments and they earn you a tidy return of $10K. You’ll need to declare that $10K as part of your tax return and pay your marginal tax rate on the earnings (let’s say that’s 37% or $3.7K). If you take that same $100K and put it into your super and make the same return of $10K – you’ll only be taxed at 15% or $1.5K, which means you’ll have ended the year with an extra $2.2K in your super account to earn next years’ returns. Again, just be aware that the non-concessional contribution cap for account balances under $1.6M in 2020 is $100K and in 2021, it’s $110K for account balances under $1.7M. Check with your accountant to see if you can bring forward after-tax contributions from the previous two years into one year.
- Think about contributing to your spouse’s superannuation – If your spouse/partner earns a low-middle income (earning $40K or less), you might be able to make contributions to their superannuation account on their behalf (after-tax) and claim a tax offset. In FY21, you might be able to claim a maximum $540 tax offset. Between $37-$40K, the tax offset reduces until it reaches $0 (once your spouse earns more than $40K).
- Check if you’re eligible for a government co-contribution on your superannuation – Low to middle-income earners might enjoy an extra super contribution from the government of up to $500 if you add to your superannuation paying in after-tax dollars, earn less than $54.8K, have a superannuation balance of less than $1.6million and are under 71 years of age. A great way for low-middle income workers to top up their super, especially if you’re on a transition to retirement, on part-year parental leave, etc.
- Make a sizeable downsizer contribution – if you’re looking to downsize your home, you’ve lived there for more than 10 years and you’re over 65 (although this is likely to be lowered in coming years to 60), you may be able to contribute up to $300K (each) from the sale of your home. It doesn’t count to your before or after-tax caps or the limit on your total super account balance. Whilst it might tie up your money for a while, if you put that same $x,000 in the bank or investments, you’ll pay your marginal tax rate on the earnings – especially important if you’re still earning a salary of some sort.
A final word of warning on these superannuation strategies:
There are strict limits on what you can contribute to your super account each year and when you’re eligible for them. So before you consider these superannuation strategies for yourself and make any extra contributions, it’s best to talk to your licensed accounting or financial professional to ensure you’re not going to get yourself into trouble.
And that’s where we can help. If you’d like help navigating the rules around superannuation and what’s possible for you, we’d be delighted to talk. You can call us on 02 6023 1700 or drop us a note via the form below.