How to reduce your tax through super

Tax – love it or hate it – is a vital part of our country’s economy, so it’s important to pay our dues when they are due.

However, you might be able to access some concessions that could reduce your tax bill and build your superannuation for retirement.

What are they? Find out below.

Salary sacrifice

Salary sacrificing is the act of re-directing part of your salary, before tax is deducted, into your super fund.

When you salary sacrifice Superannuation, you only pay 15% tax on those inputs, up to your concessional contribution cap (see below).

So if your individual income tax rate is higher than 15%, adding your money to super via salary sacrifice has potential tax benefits.

To illustrate, the Australian Securities and Investments Commission (ASIC) gave an example of how someone could boost their super balance by redirecting a proportion of their pay into salary sacrifice super contributions and make tax savings in the process. Let’s take Jane who earns $90,000, before tax, and decides to redirect $10,000 of her pay into Superannuation:

  Without Super contributions
With a $10,000 salary sacrifice into Super
Taxable income $90,000 $80,000
Take home pay $66,953 $60,853
Total tax $23,047 $19,147
Salary sacrifice contribution in Super (taxed at 15%) $0 $8,500

As you can see, while Jane’s take-home pay is reduced by $6,100, her super balance grows by $8,500 providing a net gain of $2,400.

In addition, the higher your tax bracket, the larger the potential gain as salary sacrifice contributions are capped at 15% tax rate for individuals with income (including before-tax super contributions) up to $300,000 per year.

Limits do apply to the amount of salary sacrifice super contributions, which brings us to the Concessional Contributions Cap. 

Concessional Contributions Cap

When aiming to reduce your tax through super, you need to know the limits of your tax concessions. A concessional contribution cap is one such limit.

To keep it simple: A concessional contribution to your super is a contribution made from your gross salary, that is, before tax has been deducted. This includes your employer’s super guarantee contribution and salary sacrifice, as they both come out of your pay cheque before income tax.

The concessional contributions cap is $30,000 for the 2014/15 financial year for those under 49 years of age on 30 June 2014. If you were aged 49 years or over on 30 June 2014, your concessional contributions cap is $35,000 for the 2014/15 financial year. 

If you exceed this cap in a given financial year, you will be taxed extra on the amount above the cap.

Non-concessional contributions cap

Another limit is the non-concessional cap. The extra contributions you make out of your after-tax salary, or your spouse’s, are considered non-concessional contributions, as they have already been taxed. There is still a limit on how much you can contribute after tax, but it is far higher.

Currently, the non-concessional cap is limited to $180,000.

If you’re interested in learning more about these contributions, visit the ATO’s website, where there are handy videos on both concessional and non-concessional contribution limits.

Spousal contribution

If you and your spouse or partner meet certain requirements, you may be eligible for an 18% tax offset for after-tax contributions into your spouse’s super account of up to $3,000. The maximum available tax offset is $540 where you’ve made a contribution of $3,000.

The following is a list of some of the requirements you need to meet. To find a full list, visit the Australian Taxation Office’s (ATO) website.

You and your partner must:

  • Both be Australian residents at the time of making the contribution(s)
  • Be living together on a permanent basis
  • Your partner’s total assessable income, including employer contributions to super and total fringe benefits, must amount to less than $13,800 per year

As for your super itself, sometimes it is worth reviweing the different options to see if you can find a provider better suited to your needs. Talk to us today to see if Virgin Super fits your lifestyle.

What are your tax-saving super tips?