1. Increase personal super contributions
What? Concessional contributions are pre-tax contributions to super. They include your employer’s compulsory contributions, salary sacrifice contributions or personal tax-deductible contributions if you’re eligible. However, there are caps on how much you can contribute per financial year before additional tax applies – in the case of concessional contributions, $30,000 for those aged 48 or under on 30 June 2014, and $35,000 for anybody aged 49 or over on the same date. If you have not already reached your concessional cap, you can consider making additional contributions to your super before 30 June 2015.
Why? For most Australians earning under $300,000 pa, these contributions attract a tax rate of 15% (instead of being taxed at your marginal tax rate). If your marginal tax rate is over 15%, this can be a very effective way to reduce your tax bill.
Result: Boost your superannuation balance and reduce your tax bill.
2. Seek a government co-contribution
What? If your total income is $34,488 pa or less, and you have made at least $1,000 in after-tax contributions to your super, the Government could top up your contribution by another $500 (other eligibility conditions apply). In fact, those earning up to $49,488 pa can take advantage of this co-contribution, however, the maximum amount you receive reduces as income rises above the base of $34,488 pa or as your level of after-tax contributions reduces.
Why? This initiative encourages people to add to their superannuation account.
Result: Especially if you’re young, these bonus contributions can make a meaningful difference. If you’re in your mid to late 20s, consider this very basic compound interest calculation – $1500 deposited annually for 40 years (a total of $60,000), at an annual interest rate of 5%, will be worth $181, 2001.
3. Sacrifice your surprise salary
What? One of the most powerful ways to boost retirement wealth tax-effectively is to salary sacrifice into super. This is best done gradually throughout the year, but can also include end of financial year bonuses or pay rises. Speak with your employer about setting this up.
Why? Salary and bonuses paid to you are taxed at your usual rate, or more if they bump you up into the next bracket. Direct this extra income towards super (check you’re not breaching your concessional contributions cap) and you’ll potentially reduce your taxable income and personal tax bill, while the tax paid on the salary sacrifice is generally only 15%.
Result: If you are on a tax rate of 32.5% (every dollar earned over $37,000 pa), 37% (every dollar earned over $80,000 pa) or 45% (every dollar earned over $180,000 pa), then you could see this rate reduced to 15% for the sacrificed funds2. Note: anybody with total income (including fringe benefits and certain super contribution amounts) of more than $300,000 pa pays 30% tax on part or all of their concessional contributions.
4. Check your Low Income Super Contribution eligibility
What? Those earning $37,000 pa or less may be eligible for the Low Income Super Contribution (LISC) of up to $500. The amount automatically added to your super account is 15% of the amount of your concessional contributions (including super guarantee and salary sacrifice or personal tax deductible contributions if eligible) up to a maximum. This effectively pays back any tax on those contributions.
Why? This payment helps boost super balances of low-income earners. It should also encourage people to ensure they claim all work-related expenses in order to bring their annual income down to the LISC eligibility level of $37,000 pa.
Result: The LISC means part or all of the concessional contributions made to your super fund are tax-free.
5. Contribute to your spouse's super
What? If you have a spouse, your spouse is under the age of 65 or satisfies a work test and is aged 65 to 69, and earns $10,800 pa or less, the first $3,000 you contribute to their super fund could receive an 18% tax offset. This offset slides down to zero once their income hits $13,800 pa.
Why? You receive a tax offset of up to $540 and your spouse’s superannuation balance is boosted.
Result: You lose less income to tax and your spouse's super balance is boosted. And at retirement the two of you enjoy greater combined wealth.
6. Gather your investment and work-related expenses
What? Costs related to producing investment or work income, whether they be around accounting, advice, management fees, interest payments on loans, repair costs, uniforms, dry cleaning, motor vehicles etc, may be tax deductible.
Why? Investment and work expenses can pay you back by helping to reduce your taxable income. So collect all eligible receipts from the financial year to report in your tax return. And while we’re on the topic, don’t forget your receipts for charitable donations too.
Result: A reduction in taxable income means less funds leaving your account in the form of tax, and a greater chance of a refund.
7. Pre-pay investment loan interest
What? You may be able to pre-pay up to 12 months of interest on an investment loan.
Why? Interest charges on investment loans are generally tax deductible.
Result: Pay interest on investment loans in advance during this financial year and it could reduce your taxable income.
8. Pre-pay income protection insurance premiums
What? As with investment loan interest, you may be able to pay up to 12 months of income protection (IP) insurance premiums in advance.
Why? IP insurance premiums are generally tax deductible.
Result: Paying tax deductible premiums in advance can reduce your taxable income this financial year.
9. Plan the use of your tax refund
What? Make a plan before a tax refund enters your account as to how it is best utilised.
Why? Many treat their tax refund as a bonus, as extra spending money. But if used well it can make a serious difference, whether it is being invested to save a home deposit, paying off high-interest debt, being put away in a savings account or simply going into your super.
Result: Using simple compound interest calculations (ASIC MoneySmart calculator), if you deposit a tax refund of $1,000 per year for 10 years into an investment account earning 5% per year compounded annually, ignoring fees, it will be worth $12,578.
Don’t forget, there may be other strategies which are also suitable for your personal situation. Please speak with your financial adviser to find out what other opportunities you could take advantage of by no later than 30 June 2015.
1 This figure was calculated using ASIC MoneySmart Compound Interest Calculator – taxes, fees and other costs not taken into account.
2 Other levies may also apply in addition to these rates.