Superannuation offers various ways to add to your wealth with the most obvious being tax concessional contributions where pre-tax income seeks to benefit from the 15 per cent concessional tax rate instead of being taxed at your personal rate which could be up to 46.5 per cent.
As far as the pre-tax income is concerned this can come from a range of sources that is generally taxable salary from employment or taxable income earned from self-employment. It can also be taxable income earned by anyone from any pursuit, under the age of 65.
An investment portfolio that generates taxable income is one possibility or a source that may not be commonly associated with making tax deductable contributions to super; that is public servants who have been pensioned off.
One of the risks of being a public servant is job security as you get older. Whenever government is looking to save money, one approach it can employ is offering its older workers - those aged over 50 - early retirement, especially those entitled to super under a defined benefit arrangement.
Defined benefit super is where most of the benefit paid comes from government revenue and is usually a significant proportion of your salary when you stopped working - such as two-thirds. Such super is regarded as a major attraction of becoming a public servant, especially as the income is also generally indexed to inflation.
While being promised two-thirds of your final work salary income as an indexed pension for the rest of your life by a government employer with a spouse entitled to two-thirds of this when you die is highly regarded, it is not so exciting for anyone under the age of 60 who takes early retirement as this income is fully taxable.
Those who do take such benefits can employ a super-related tax management strategy. For example, instead of paying 34 per cent tax on income from $80,000 to $180,000 and 46.5 per cent on income greater than this, the strategy allows the tax rate to be halved and even more.
This involves making a tax deductable contribution into super which could be up to $25,000 for the current 2013-14 financial year. This action reduces the pension's taxable income by the amount contributed.
While the taxable contribution is up to 15 per cent tax that is paid by the super fund to the Australian Taxation Office, transferring money to super can save the retiree the difference between this and the tax plus Medicare Levy that won't be paid because part of the pension has been contributed to super.
For instance, if a pension of $62,000 is reduced to $37,000 by a $25,000 super contribution, instead of tax plus Medicare of 34 per cent being levied on the $25,000 or $8500, there will be a net tax saving of $4750 once the 15 per cent contributions tax has been deducted.
This strategy can be used up until the age of 65 years for someone who has decided they want to retire and not work for wages again. However, this strategy can't be employed if you work as well as taking your super.
This strategy is most effective for those under the age of 60, as defined benefit pension retirees become entitled to a 10 per cent tax offset from this age onwards. This offset, known as the untaxed superannuation tax offset, is calculated in a similar way to the 15 per cent tax offset that anyone under the age of 60 (taking an account based pension) is entitled to claim.
Both these offsets are calculated very simply by applying the offset percent to the pension income received and then offsetting this against any tax liability.
The 10 per cent offset is for a $62,000 defined benefit pension, for example, creates an entitlement to reduce tax by $6200. As tax on $62,000 is just under $12,560, the offset reduces the tax bill to $6360.
A variation of the super contribution strategy can be applied from the age of 60, as you don't want to pay tax on a super contribution where you could reduce the tax on your pension to zero.
The most likely circumstance for making a deductible contribution to super from sources such as investment income or a taxable defined benefit pension is where taxable income is about the tax-free threshold of $18,000.
The strategy can be implemented through any super fund arrangement.
Where someone has a self-managed super fund for other reasons this can also be used and quite effective, especially where the fund has investments in direct shares that are entitled to dividend imputation tax credits that can reduce tax, including contributions tax.
If you have any questions on implementing a contributions strategy, contact one of our accountants today on 02 9299 7044.