EOFY and your superannuation
Posted by Northadvisory on May 26, 2020
The end of the financial year is an excellent time to review your superannuation.
With just over a month left until the 30 June deadline for the 2019/20 financial year, we have some beneficial superannuation tax strategies for you to consider.
Decisions you make today could have a significant impact on your financial position when it’s time for retirement. Cayle Petritsch, Director and Wealth Specialist, discusses these strategies and highlights what you need to know.
Tax-deductible superannuation contributions
Every financial year, the government allows up to $25,000 in tax-deductible contributions to your superannuation. This figure includes your employer’s super guarantee contributions at 9.5%. Cayle explains,
“Annual tax-deductible contributions are capped at $25,000… this includes the employer-paid contributions. So, if your employer pays $20,000 throughout the year, you have an additional $5,000 that you can contribute that same year.
If you have the financial capacity to make the additional contributions up to the cap, it can be highly beneficial for two reasons.
Firstly, the additional contribution could help to reduce your personal tax liability for the year. And secondly, the compounding interest over the next ten, twenty or thirty years before retirement could make a notable difference to your super balance when you are ready to start drawing your pension.”
Lump sum payment or salary sacrifice
There are two different ways that you can make additional super contributions:
• direct lump sum – where you deposit a lump sum directly to your super fund and claim a personal tax deduction, or
• salary sacrifice – where your employer regularly deducts an agreed amount from your pre-tax income and pays the contribution directly into your super fund.
Depending on how much you earn, salary sacrifice could be an effective way to boost your annual super contribution and help you save more for your retirement. These contributions are classified as employer contributions and taxed in the super fund at a maximum rate of 15%, rather than your marginal tax rate. It’s important to calculate your sacrifice correctly to make sure you don’t exceed the annual contribution cap.
Your taxable income is calculated once your salary sacrifice has been deducted from your gross income. By deducting your additional contributions in this manner, you could achieve a significant personal tax saving.
For any additional contributions, timing is critical, Cayle says,
“It is definitely worthwhile considering whether you have the ability to add some money to your super in order to help reduce your tax obligations. But time is running out this year… you have to make sure any additional contributions are processed before 30 June.
Super clearing houses tend to get extremely busy during the last few weeks of June, so the sooner you can process the transaction, the better.”
Minimum pension drawdown rates
The other superannuation element that is important at the end of the financial year is your pension drawdown. Cayle explains,
“If you are drawing a pension from your super fund, you need to make sure that you’ve drawn the minimum before 30 June.
When you have a super fund that is in the pension phase, the majority of funds withdrawn are tax-free…
but this tax-free status relies on you adhering to the legislated minimum that you have to withdraw each year.
If you fail to draw down the minimum, then your super reverts back to the accumulation phase… and that is taxable, so you would be taxed on any income that the fund generates. Once you commence the pension phase, it’s important to keep it going to enjoy the tax-free status of the super fund.
However, this year there have been some changes… the government has temporarily reduced superannuation minimum drawdown requirements for account-based pensions by 50%. This is effective for both the 2019/20 financial year and the 2020/21 year.
This is particularly helpful during the current market downturn… right now if you had to sell assets to raise the cash for your pension drawdown, you’d potentially be selling at a loss. By reducing the pension factor by 50%, the government has helped to minimise people being put in a forced sell situation.”
Speak with your accountant
When it comes to effective superannuation tax strategies, there are many factors that need to be considered. It’s important to seek professional advice when you are making additional contributions to ensure you follow all applicable regulations.