Smart Super Strategies
Which superannuation strategies are right for you?
To see which ones may suit you, start by reading the “If you” column and to find out more, you can click on the strategy name.
Before implementing any of these strategies, we recommend you speak with your Newcastle Financial Planner.
Sacrifice pre-tax Salary into super
If You…
Are an employee and would like to make regular concessionally taxed super contributions
You may want to…
Arrange for your employer to contribute some of your pre-tax salary or a bonus into super
So you can…
• Increase your retirement savings
• Pay less tax on your employment income
Make Tax deductible super contributions
If You…
Earn taxable income and would like to make concessionally taxed super contributions
You may want to…
Make an after-tax super contribution and claim a tax deduction
So you can…
• Increase your retirement savings
• Pay less tax on your income
Contribute to super and offset capital gains
If You…
Make a taxable capital gain on the sale of an asset and want to use some of the money to boost your super tax-effectively
You may want to…
Make an after-tax super contribution and claim a tax deduction
So you can…
• Increase your retirement savings
• Reduced or eliminate your CGT
Top up super with ‘catch up’ contributions
If You…
Have not used up your concessional contribution cap each eligible financial year and have the capacity to make a larger concessionally taxed contribution this financial year
You may want to…
Make concessionally taxed super contributions exceeding the annual cap of $27,500 this financial year
So you can…
• Maximise concessionally taxed contributions
• Rebuild super after withdrawals or reduced contributions due to COVID
• Reduce or eliminate CGT
• Pay less tax on salary, bonus or employment termination payments
Split super contributions to your spouse
If You…
Have a spouse and could benefit from transferring some of your super to them
You may want to…
Split some of your concessionally taxed super contributions into your spouse’s account
So you can…
• Grow your spouse’s super
• Maximise tax-free retirement savings as a couple
• Help to fund your spouse’s insurance policies
• Maximise your social security entitlements
1. Sacrifice pre-tax Salary into super
Contributing some of your pre-tax salary, wages or a bonus into super could help you to reduce your tax and invest more for your retirement.
How does it work?
With this strategy, known as salary sacrifice, you need to arrange for your employer to contribute some of your pre‑tax salary, wages or bonus directly into your super fund. The amount you contribute will generally be taxed at the concessional rate of 15%, not your marginal rate which could be up to 47%. Depending on your circumstances, this strategy could reduce the tax you pay on your salary, wages or bonus by up to 32%.
Also, by paying less tax, you can make a larger after-tax investment for your retirement, as the case study below illustrates
What income can be salary sacrificed?
You can only sacrifice income that relates to future employment and entitlements that have not been accrued.
With salary and wages, the arrangement needs to be in place before you perform the work that entitles you to the salary or wages.
With a bonus, the arrangement needs to be made before the bonus entitlement is determined.
The arrangement, which should be documented and signed by you and your employer, should include details such as the amount to be sacrificed into super and the frequency of the contributions.
Other key considerations
• Salary sacrifice contributions count towards the ‘concessional contribution’ cap. This cap is $27,500 in FY 2022/23, or may be higher if you didn’t contribute
the full cap of $25,000 in FY 2018/19, 2019/20 or 2020/21 , or $27,500 in 2021/22, and are eligible to make ‘catch-up’ contributions. Penalties apply if you exceed the cap.
• You can’t access super until you meet certain conditions.
• Another way you may be able to grow your super tax-effectively is to make personal deductible contributions.
Salary Sacrifice Case Study
William, aged 45, was recently promoted and has received a pay rise of $5,000, bringing his total salary to $90,000 pa. He’s paid off most of his mortgage, plans to retire in 20 years and wants to use his pay rise to boost his retirement savings. After speaking to his Newcastle Financial Planner, he decides to sacrifice the extra $5,000 into super each year.
By using this strategy, he’ll save on tax and have an extra $975 in the first year to invest into super, when compared to receiving the $5,000 as after-tax salary (see Table 1).
If he continued to salary sacrifice this amount into super, this could lead to William having an additional $150,394 in his super after 20 years (see Table 2).
2. Make Tax deductible super contributions
By making a personal super contribution and claiming the amount as a tax deduction, you may be able to pay less tax and invest more in super.
How does the strategy work?
If you make a personal super contribution, you may be able to claim the contribution as a tax deduction and reduce your taxable income. The contribution will generally be taxed in the fund at the concessional rate of up to 15%, instead of your marginal tax rate which could be up to 47%.
Depending on your circumstances, this strategy could result in a tax saving of up to 32% and enable you to increase your super.
How do you claim the deduction?
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. 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.
Make sure you can utilise the deduction It is generally not tax-effective to claim a tax deduction for an amount that reduces your assessable income below the threshold at which the 19% marginal tax rate is payable. This is because you would end up paying more tax on the super contribution than you would save from claiming the deduction.
Other key considerations
• Personal deductible contributions count towards the ‘concessional contribution’ cap. This cap is $27,500 in FY 2022/23, or may be higher if you didn’t contribute the full $25,000 in FY 2018/19, 2019/20 or 2020/21, or the full $27,500 in 2021/22, and are eligible to make ‘catch-up’ contributions.
Penalties apply if you exceed the cap.
• You can’t access super until you meet certain conditions.
• If you are an employee, another way you may be able to grow your super tax effectively is to make salary sacrifice contributions.
Make tax deductible super contributions - Case Study
Bob, aged 55, is self-employed, earns $80,000 pa and pays tax at a marginal rate of 34.5% (including the Medicare levy). He’s paid off most of his mortgage, plans to retire in 10 years and wants to boost his retirement savings.
After speaking to his Newcastle Financial Adviser, he decides to make a personal super contribution of $10,000 and claim the amount as a tax deduction.
By using this strategy, he’ll increase his super balance. Also, by claiming the contribution as a tax deduction, the net tax saving will be $1,950.
Salary sacrifice contributions
If you are an employee, you may want to arrange with your employer to contribute some of your pre-tax salary into super. This is known as ‘salary sacrifice’.
Like making personal deductible contributions, salary sacrifice may enable you to boost your super tax-effectively. There are, however, a range of issues you should consider before deciding to use this strategy. Your financial adviser can help you determine whether you should consider salary sacrifice instead of (or in addition to) making personal deductible contributions.
3. Contribute to super and offset capital gains
When contributing to super, claiming a portion of the contribution as a tax deduction could enable you to pay less capital gains tax and increase your retirement savings.
How does the strategy work?
Cashing out a non-super investment, paying capital gains tax (CGT) and using the remaining amount to make a personal super contribution can be a powerful strategy. This is because the low tax rate payable on investment earnings in super could more than compensate for your CGT liability over the longer term.
However, if you meet certain conditions, you may want to claim a portion of your super contribution as a tax deduction. By doing this, you could use the tax deduction to offset some (or all) of your taxable capital gain and reduce (or eliminate) your CGT liability. While the tax-deductible portion of your
super contribution will be taxed at 15% in the fund, this strategy could enable you to make a larger super investment and retire with even more money to meet your living expenses.
How do you claim the deduction?
To be eligible to claim the super contribution as a tax deduction, you need to submit a valid ‘Notice of Intent’ form. You will also need to receive an acknowledgement from the super fund before you complete your tax return, start a pension or withdraw or rollover money from the fund to which you made your personal contribution.
Make sure you can utilise the deduction
It is generally not tax-effective to claim a tax deduction for an amount that reduces your assessable income below the threshold at which the 19% marginal tax rate is payable. This is because you would end up paying more tax on the super contribution than you would save from claiming the deduction.
Other key considerations
• Personal deductible contributions count towards the ‘concessional contribution’ cap (which is $27,500 in 2022/23) and tax penalties apply if you exceed the cap.
• You can’t access super until you meet certain conditions.
• If you did not use up your concessional contribution cap in 2018/19, 2019/20, 2020/21 or 2021/22 and meet certain conditions, you may be eligible to carry
forward the unused cap amount. This could enable you to make concessional contributions exceeding the annual cap in 2022/23 or the following financial years.
Contribute to super and offset capital gains tax - Case Study
Lisa, aged 42, is self-employed, earns a taxable income of $90,000 pa and has a share portfolio worth $50,000. She wants to sell her shares and invest the money in super so she can boost her retirement savings. The sale of these shares will crystallise a taxable capital gain of $10,000.
She could make a personal after-tax super contribution of $46,550 (after keeping $3,450 to pay CGT on the sale of the shares).
However, her adviser suggests that a better approach may be to invest the full sale proceeds of $50,000 in super and claim $10,000 as a tax deduction, subject to receiving tax advice from her registered tax agent.
By doing this, she can use the deduction to offset her taxable capital gain of $10,000 and eliminate her CGT liability of $3,450.
While the deductible contribution will be taxed at 15% in the super fund, this strategy will enable her to invest an additional $1,950 in super for her retirement.
² This figure is after the 50% general CGT discount (that is available because Lisa has owned the shares for more than 12 months) and assumes she has no capital losses to offset her taxable capital gain.
³ Based on a marginal tax rate of 32.5%, plus Medicare levy of 2%.
4. Top up super with ‘catch up’ contributions
If you have not fully used your concessional cap in a prior financial year, you may be eligible to use these unused carried forward amounts in a later year. Depending on your circumstances, this could help you to maximise tax-effective super contributions and invest more for retirement.
How does the strategy work?
Since 1 July 2018, if your concessional contributions (CCs) in a financial year are below the annual CC cap, you’re able to accrue these unused amounts and carry them forward for up to five years. If you meet certain eligibility rules, you’ll be able to make larger CCs in a later financial year.
This may give you greater flexibility to make larger CCs when your circumstances allow. This may be helpful if, for example, you have irregular employment income or have had time out of the workforce.
What’s the benefit?
The amount you contribute will generally be taxed at the concessional rate of up to 15%. Once contributed, any earnings will also be taxed at a concessional rate, rather than your marginal rate, which could be up to 47%.
Depending on your circumstances, this strategy could result in a tax saving of up to 32% and enable you to increase your super.
Key conditions
To be eligible to utilise your carried forward CCs by making a catch-up contribution you must:
• have a ‘total superannuation balance’3 below $500,000 on the prior 30 June
• be under 75 and meet the work test rules (or be eligible to apply the work test exemption) if you’re aged 67 to 74, and
• have unused CC cap amounts accrued from one of the five prior financial years (but not before 2018/19).
Accruing unused CC cap amounts
The first financial year you could accrue unused CCs was in 2018/19. This means that the first year you were able to use these carried forward CCs was in 2019/20. Unused CC amounts can be carried forward for up to five years before they expire.
Case study
In FY 2018/19, 2019/20 and 2020/21, Fatima made CCs of $15,000, which was $10,000 less than the annual CC cap of $25,000. Fatima took 12 months maternity leave from 1 July 2021 and didn’t make any CCs in FY 2021/22.
From 1 July 2022, Fatima returns to full-time work where her employer contributions (CCs) will again total $15,000 in 2022/23. This is $12,500 less than the annual cap that applies in this financial year ($27,500).
Fatima receives an inheritance of $35,000 in 2022/23 that she wants to contribute to super.
The table below shows how she can carry forward unused CCs to make catch up contributions in 2022/23 or later years.
Other key considerations
• It’s important to check your total CCs for the financial year from all sources before adjusting your contribution strategy.
CCs include:
– contributions made for you by your employer
– salary sacrifice contributions, and
– personal contributions that you claim a tax deduction for.
• Salary sacrificing may reduce other benefits such as leave loading and holiday pay.
• For personal deductible contributions, you need to lodge a ‘Notice of Intent’ form and receive an acknowledgement from the super fund before certain timeframes, and also before starting a pension, withdrawal or rollover.
• If you are not eligible to make catch-up CCs, tax penalties apply if you exceed the annual CC cap of $27,500 in FY 2022/23.
• You can’t access super until you meet certain conditions.
5. Split super contributions to your spouse
Splitting super contributions to your spouse’s super account may help to boost their retirement savings and provide a range of other benefits.
How does the strategy work?
You may be able to split (transfer) eligible concessional contributions (CCs) that you’ve made or received to your spouse’s super account.
Eligible CCs include employer super contributions and personal super contributions for which you have claimed a tax deduction.
Contribution splitting can be a great way to increase your spouse’s super savings particularly where they, for example:
• are not working
• have had time out of the workforce, or
• have a lower super balance.
What’s the benefit?
In addition to boosting your spouse’s retirement savings, there may be other benefits depending on your specific circumstances. Help to cover insurance premiums Contribution splitting can help to pay your spouse’s insurance premiums for policies they hold inside super. This may be beneficial during times where your spouse has reduced their working hours or is out of the workforce and their contributions have reduced.
Maximise tax-free retirement savings
A limit applies to how much super can be transferred into ‘retirement phase’ income streams, where investment earnings are taxed at 0%. Contribution splitting may help you take better advantage of these limits as a couple and maximise the total amount you can hold tax-effectively when you retire.
Maximise Age Pension
If you have a younger spouse who is under their Age Pension age, contribution splitting may help to maximise your Centrelink entitlements. Superannuation held in the ‘accumulation phase’ is not assessed for social security purposes until the account holder reaches their Age Pension age. Splitting super to your younger spouse may therefore reduce the assets assessed when your entitlement is calculated, potentially increasing your Age Pension payments.
What contributions can be split?
Only eligible CCs can be split to your spouse, such as superannuation guarantee (SG), salary sacrifice and personal deductible contributions. Non-concessional or ‘after-tax’ contributions cannot be split.
Generally, the maximum amount that can be split is the lesser of:
• 85% of your CCs for the year (after taking into account 15% contributions tax), or
• your CC cap for the financial year.
The CC cap is $27,500 in 2021/22 and 2022/23. However, if you’re eligible to make larger CCs in a financial year using the ‘catch-up’ contribution rule rule, your applicable CC cap may be higher. You can generally only split CCs made in the previous financial year. Also, you need to request to split your CCs in writing to the trustee of your super fund within 12 months after the end of the financial year the CCs were made to your super fund (unless you’re going to roll over your balance or close your account).
Case study
Lucy would like to split some of her eligible CCs from 2021/22 to her husband Luke’s (age 40) super fund in 2022/23. In FY 2021/22, her employer contributed
$20,000 to her super fund and her CC cap was $27,500. The maximum amount that Lucy can split to Luke is the lesser of:
• $17,000 (85% of the $20,000 contributed by her employer), and
• $27,500 (her CC cap in 2021/22).
Lucy elects to split $15,000 of her CCs to Luke’s super fund and submits the contribution splitting application form to her fund in 2022/23.
Her super fund transfers $15,000 to Luke’s super fund. This won’t reduce Lucy’s CCs for the financial year and the transfer won’t be assessed as a contribution against Luke’s contribution caps.
Note: If Lucy was eligible to make larger CCs in 2021/22 using the ‘catch-up’ contribution rule, her CC cap may be greater than $27,500. This may increase the maximum amount of contributions she could potentially split to Luke if she made larger CCs in that financial year.
Is your spouse eligible?
To be eligible to split your super to your spouse, they must be either:
• under their ‘preservation age’2, or
• between their preservation age and under 65 and declare they are not currently retired for superannuation purposes.
Once your spouse reaches age 65, they are no longer eligible to receive a contribution split from your super.
Other key considerations
• Contribution splitting may be used by married couples, de facto partners and same sex couples.
• Contributions split to your spouse:
– will form part of the taxable component of your spouse’s super account
– don’t count towards their CC cap, as they have already counted towards your CC cap in the year the contributions were made to your account.
• The split amount is fully preserved in the receiving spouse’s account and they can’t access their super until they meet certain conditions.
• Where a personal deductible contribution forms part or all of the amount to be split, a Notice of Intent to claim a tax deduction must be lodged and acknowledged by the super fund prior to the contribution split being processed.
• If you’re intending to rollover or withdraw your entire benefit and you wish to split CCs made in the same financial year or from the previous financial year, the split must be completed prior to the rollover or withdrawal request being processed.
• It’s not compulsory for a super fund to offer contribution splitting. You will need to check with your fund to see if they allow it.
