If you’re thinking about investing your tax return in shares or a term deposit, you may be better off putting the money into your super instead or in addition to paying down any debt.
Because you’ve already paid tax on this money, you won’t be taxed again when you put it into your super. What’s more, your superannuation earnings are taxed at just 15%. By comparison, if you invested the money outside of super, your earnings would generally be taxed at your marginal tax rate, between 2% and 49% (including Medicare level and Temporary Budget Repair Levy), depending on your income.
Adding a lump sum to your super can also give it a considerable boost over time, thanks to the multiplying power of compound interest. As well as investing your tax return in super, you can do the same with any other lump sum payment you receive, such as a bonus from work, a gift of cash or an inheritance.
If tax has already been paid on any of these lump sums, they’re classed as non-concessional contributions — of which you can contribute up to $180,000 each year.
Don’t forget salary sacrifice
If you didn’t get a tax return this year, or you’ve already earmarked the money for other uses, you can still boost your superannuation savings and save on tax through salary sacrificing — putting a regular amount of your pre-tax income into your super. To make a salary sacrifice payment you can simply arrange for your employer to put part of your salary into your super account with each pay, at a tax rate of 15%. This can be a great benefit if your marginal tax rate is one of the higher rates*, which for 2014 are:
- 32.5% if you’re earning between $37,001 and $80,000
- 37% for those earning between $80,001 and $180,000
- 47 % (Temporary Budget Repair Levy) for people earning $180,001 or more.
There is a $30,000 limit on how much you can contribute in concessional contributions such as salary sacrifice, which rises to $35,000 if you’re 49 years of age or more as at 30 June 2014. Remember, this concessional contributions limit also includes the 9.5% super guarantee that your employer contributes.
If you go over this cap, the amount in excess is taxed at your marginal tax rate (including Medicare level) and subject to additional penalties. If you’re self employed or not working, you may be able to claim any contributions you make as a tax deduction on your individual tax return. Please seek specific tax advice to confirm your eligibility
Ask the experts
To find out more about strategies for boosting your retirement savings, please call Michael Rees-Evans CFP®, our Partner – Wealth Consulting, on (02) 9299 7044 .
* All rates exclude Medicare level of 2% from 1 July 2014.