More super than ever
As of 1 July, superannuation became an even better savings vehicle than ever, with the Government allowing tax-free withdrawals from age 60. Although the window of opportunity to get $1 million into super tax-concessionally may have closed, there are still plenty of ways to take advantage.
But the rules on how much money you can get into super tax-effectively have also changed. In order to encourage people to start saving for retirement at an earlier age, the Government has revamped the limits on both before and after-tax contributions. Knowing the limits will help you maximise your super savings each year, and stop you from paying unnecessary tax. The system is a lot simpler but if you get it wrong the penalties are high.
Before tax limits
Before-tax or concessional contributions are those for which you or your employer can claim a tax-deduction. These include compulsory employer contributions, salary sacrifice and eligible personal or self-employed contributions. From 1 July this year, these contributions should not exceed more than $50,000 if you are aged under 50, or $100,000 if you are 50 or older (until 1 July 2012). If you exceed these limits you will be taxed 31.5% on the excess, on top of the 15% contributions tax paid by your fund. This is equivalent to the top marginal tax rate of 46.5% and to make matters worse, the excess will also count towards your after tax or non-concessional limit.
Of course most people would not reach these limits on compulsory employer contributions alone, in which case salary sacrifice is an extremely effective strategy to boost super. Provided you remain under these limits, the money you salary sacrifice will be taxed at 15% instead of your marginal tax rate, meaning more savings for your retirement. So now is a good time for under-50s to start thinking about salary sacrificing and for over 50s to take advantage of the five-year window.
After tax limits
Since 1 July an annual limit of $150,000 applies to all after-tax (or non-concessional) contributions. This covers any contributions made with after-tax money by yourself or your spouse including any excess concessional contributions, contributions made to claim a co-contribution or transfers from foreign super funds. But if you are under 65 you can average the contributions over three years by making a contribution of up to $450,000.
Those over 65 (but under 75) can still contribute as long as they meet a work test by working 40 hours in 30 consecutive days in that financial year. However they cannot use the averaging provisions. Like with before tax contributions, if you exceed the limit, you will be hit with the maximum tax rate of 46.5%.
Super for the self employed
If you are self-employed you can take advantage of the after-tax limits just like everyone else but there are also new incentives for you to contribute.
For example, you can make an additional after-tax or non-concessional contribution up to a lifetime limit of $1 million from the sale of your business. And as long as you satisfy the 10% rule, meaning less than 10% of your income comes from income and reportable fringe benefits as an employee, you are also eligible for the Government’s co-contribution. Also when you make a before tax or concessional contribution, you will now be entitled to a full tax deduction up to the $50,000 limit. Whereas in the past you were only allowed a partial deduction on contributions over $5,000.
Help to maximise your super
As you can see there are still plenty of ways to take advantage of the tax benefits offered by super but it’s important you know the rules. And remember from now on it’s essential you provide your super fund with your tax file number. Otherwise all before tax contributions will attract the top marginal tax rate of 46.5%.
A financial adviser can help you make sure you have all your bases covered and suggest strategies to ensure you’re maximising your super potential.