Boosting super contributions
Written and accurate as at: Feb 03, 2016 Current Stats & Facts
Video
Video: Morningstar's Christine St Anne and David Simon
Video Transcript
Christine St Anne: With June coming up, it's time to look at some inter-financially strategies. Today I'm joined by Westpac's David Simon to give us his take on some super-specific strategies. David, welcome.
David Simon: Thanks, Christine.
St Anne: David, there has been quite a few changes in superannuation. Is it still tax effective?
Simon: Yeah, sure. Look, I mean, superannuation is just a tax structure, and even though there is a lot of changes or a lot of suggestions and proposed changes around superannuation, it still remains the most tax effective structure in the Australian tax system. So a modular tax rate has a tax rate up to $0.465 in the dollar, which once you include Medicare, a company has a flat rate of tax of 30 per cent. But indeed superannuation whilst in accumulation phase has a tax rate of only 15 per cent, and indeed if you go to pension phase, it still remains at zero tax rate. So it's still a very applicable structure for investors.
St Anne: David, well, let's look at the current system. What sort of contributions could people make before the end of the financial year?
Simon: Superannuation is just one tax entity. So it's important that people have diversification, not just of asset classes, but indeed of tax entities. So there are so many changes around superannuation and they will continue to occur. As indeed, changes around individual's tax rates and what else. So it's really important that people are diversified around their tax structures to make sure they protect themselves somewhat around legislation.
But importantly, superannuation still, as I mentioned, does remain a very, very tax efficient vehicle for people to save for their retirement. Now, there are two different ways you can actually contribute to super. There is one way which is before tax and another way which is after-tax. Some of the examples of before tax contributions are going to be quite familiar. So that’s – it starts with the statutory employer contribution, so that’s about to go up. It's still currently 9 per cent, but that's about to go up and progressively up to 12 per cent over the next few years, and that's effectively your employer making contributions on your behalf into super.
You can also, as an employee, elect a salary sacrifice, and that's effectively to withhold some of the cash you receive from your employer and have your employer contribute that money in superannuation on your behalf before it's taxed at your marginal tax rate. Ideally, that would offer a more concessional tax rate for most Australians than otherwise.
The other form would be if you're self-employed. If you're self-employed, you are actually able to make a personal deduction, but indeed claim a tax deduction on that contribution right up to the cap of $25,000. So they are more the common before tax contributions.
The after-tax contributions include something called a non-concessional contribution, and that indeed has its own cap. So you can contribute – if you're aged 65 or below, you can actually contribute up to $150,000 per year as an after-tax contribution, or indeed you can bring forward three years’ worth of contributions and make a one-off one contribution of $450,000. Effectively that goes into the super fund tax free, and ideally it can come out tax free as well. So it's a really smart way to boost your retirement savings and transfer your assets from a taxable environment, your marginal tax rate, into a low-outbound tax rate through super.
You can make that contribution through cash, but indeed you can also make that contribution by using other investment security, such as listed shares. So you can effectively in specie transfer some shares into superannuation as after-tax contribution. That will cause a capital trigger event, which may or may not include tax. But eventually once it goes into the environment, it's certainly efficient from that point of view.
Other types of contributions include – that are after-tax include a co-contribution, where the government will provide an additional contribution on behalf of the superannuant, if they are a low income earner. So there are a variety of different methods people can boost their retirement savings.
St Anne: What about tax deductions? Can people look at that perhaps in the context of, say, capital gains?
Simon: Yeah indeed. So for an investor that – there are things that – some assets and I’ll use direct shares as an example. So, let’s say, an investor has direct shares in their own name, and then decides to have – make an after-tax contribution into superannuation whilst holding those shares and retaining those equities, that could create a capital gain event.
If that does create a capital gain event, they could – if they are self-employed or if they are an unsupported person, they could actually declare some of that transfer as what we call a concessional contribution or a personal deductible contribution. In turn, offset some of that capital gain, or if not all of it, by declaring some of that transfer as a tax deductible contribution.
St Anne: Finally, David, what about spouses? Do they have a role to play in some tax effective strategies?
Simon: I mean, look, there is two things around spouses. If you’re in a situation where you’ve got a primary income earner and a lower income earner being a spouse member, as long as they are earning a very low income – at up to $13,800, the primary income earner can actually contribute up to $3,000 as an after-tax contribution into their lower income earner spouse, and then actually declare or receive a $540 rebate in their tax return, which is effectively 18 per cent of the spouse contribution.
Another method of using the spouse is, if there is a one member that’s materially close to the age of 60, then the younger one can actually share their contributions or split their contributions to the older one. The benefit of that is that they are closer to 60, meaning that they can access their superannuation earlier than the younger spouse, but also access it tax free as well.
Christine St Anne: David, thanks so much for your super insights today.
David Simon: My pleasure. Thank you.