Are you missing this tax loophole?

They say there are two certainties in life – death and taxes. This is what makes it even sweeter when we find a loophole or two around the old taxman. While your accountant may be finding you all sorts of tax time bonuses, are you taking advantage of the easiest option of all? I’m talking about superannuation – stop yawning – which is a great way to take advantage of legal tax loopholes.

So here’s your quick cheat sheet to super, contributions and tax.

Superannuation and tax

Lets start with the basics. Superannuation is money put aside into an investment account that you can’t access until you reach preservation age (that is a fancy term for the age you can legally start accessing the money). 

It is mandatory in Australia for employers to pay 10.5% of your pre-tax salary into a registered superannuation account – this is known as the Superannuation Guarantee. 

As a note, if you are a higher income earner, your employer may not be paying 10.5% of your pre-tax salary if this amount would result in you going over the contribution caps. These pre-tax payments – or contributions up to a specified value – are taxed at 15% (plus an additional 15% may apply to higher income earners). This may be less than your application marginal tax rate (but read on later to see how the government accounts for those who have a lower applicable marginal tax rate).

Any earnings made within your superannuation account are typically taxed at a rate of 15% (compared to your marginal tax rate) less any applicable franking credits. This of course changes once you have reached preservation age. Generally speaking, any income you draw from your superannuation at this point is tax free.

Making contributions to superannuation

There are a few types of contributions you can make to superannuation and they each have a different tax treatment.

Concessional contributions

These are payments made to your superannuation from your pre-tax salary. They can be made by your employer – or you can choose to make additional payments yourself through salary sacrifice. There is a cap on how much you can contribute of $27,500 for FY22/23. Contributions under this cap are taxed at a rate of 15%.

It’s worth mentioning that an additional 15% tax is applicable to the concessional contributions of high income earners – those earning $250,000 or above including their super.

Those who earn under $37,000 can apply to receive a rebate of up to $500 into their superannuation accounts through the Low Income Superannuation Tax Offset – this is to account for the fact that the 15% rate applied to their Superannuation Guarantee payments would be more than the marginal tax rate applicable to them and therefore would be unfair compared to others.

If you haven’t hit the cap in previous years, you can use a rule called the Carry-Forward Rule for up to five years previously to catch up the amount you were under. If you access this, your superannuation balance needs to be below $500,000 as at the end of the previous financial year.

Non-concessional contributions

These are payments made to your superannuation from your after-tax salary. You can contribute up to $110,000 for FY22/23 or you can roll three years worth of non-concessional contributions to the value of $330,000 (i.e. say your contributions for 22/23. 23/24 and 24/25, then if you wanted, you could contribute again in the tax year for 25/26). This is known as the Bring-forward rule and the contributions must not bring your balance to over $1.7million (this is known as the Transfer Cap).

You’ve already paid tax at your marginal rate on these contributions but once these are part of your superannuation, any earnings on this are typically taxed at 15% unlike to earnings on investments outside of superannuation, which are subject to tax at your marginal tax rate.

Four additional tax loops you might not know about

The following contributions are often the ones you might not know about – and actually, if you are a woman, you probably should know about. After all, women typically retire with significantly less in their super than men so one – or all – of these could be part of your strategy to stop the gap from a range of reasons such as career gaps or part-time work.

Super co-contribution

If you earn less than $57,016 in FY22/23 and contribute up to $1000 after-tax to your superannuation account, you might be eligible for a government co-contribution of up to $500.

Spousal contributions

If you have a partner who earns less than $40,000, you can claim a tax offset of up to $540 if you make an after-tax contribution of up to $3000 to their superannuation account.

Contributions splitting

You can also split your concessional contributions (pre-tax) with your partner if you choose as long as both of your total concessional contributions remain under the cap of $27,500. This is something that is done after the end of the tax year and you need to speak to your superannuation fund to arrange it.

Downsizer contribution

If you are 60 years or older and sell your primary residence, held for at least 10 years, you may be able to contribute up to $300,000 from the proceeds in a lump sum to your superannuation.

If you do decide to send some money to your super, don’t forget a few things…

• Check where your contributions are up to for the year so you don’t go over the caps.
• Have a good look at ATO.gov.au to make sure you are eligible for anything you are considering.
• Consider talking to a professional like a financial adviser or accountant about all your options.

This article is part of our Investment Guide series. If there is a topic you would like to learn about next, please leave a comment below.

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Frequently asked questions (FAQs)

What is superannuation?

Superannuation is money put aside into an investment account that you can’t access until you reach preservation age.

What is Superannuation Guarantee?

This refers to the mandatory concessional contributions your employer makes to your superannuation of 10.5% of your pre-tax salary.

What is your preservation age?

This is the age you can legally access the money in your superannuation and ranges based on when you were born.

What is a concessional contribution?

These are payments made to your superannuation from your pre-tax salary and typically made by your employer. It is typically taxed at 15% with an additional 15% applicable to higher income earners. There is a cap of $27,500 for FY22/23.

What is a non-concessional contribution?

These are payments made to your superannuation from your after-tax salary. You can contribute up to $110,000 for FY22/23 or use the bring-forward rule to roll together three years of non-concessional contributions up to $330,000.