Background
Claim Up to $25K Tax Deduction: Fima’s Tax-Free Strategy
Fima and Mack, a visionary couple in their late forties, contemplated their next strategic move. Their journey, marked by a shared passion for real estate and a portfolio of positively geared properties, was poised to enter a new chapter focused on superannuation. Eying the potential to marry their real estate acumen with their retirement planning, they considered establishing a Self-Managed Super Fund (SMSF) to expand their property ventures within the super framework.
This strategic move aims to leverage their existing expertise in real estate while optimising their retirement savings. Mack has already optimised his super contributions through salary sacrifice, securing notable tax benefits. Fima, with a super balance of $150,000, is now exploring the most effective ways to boost her superannuation and maximise tax efficiencies. This case study will delve into the couple’s strategic journey to enhance their superannuation contributions while simultaneously optimising their tax deductions.
Findings
- Fima currently earns an annual income of $110,000, with her superannuation balance standing at $150,000.
- The couple has accumulated savings exceeding $200,000.
- They have the capacity to make the maximum allowable contributions to their superannuation, aiming to both boost their retirement savings and achieve tax efficiency.
Catch-Up Contribution Rule
The Catch-Up Contribution rule offers a flexible approach for individuals aiming to bolster their superannuation. This rule allows the carry forward of unused concessional cap amounts from previous years, enhancing the potential for increased contributions in subsequent years. Eligibility for this strategy hinges on two key criteria:
- Your total superannuation balance must be below $500,000 as of 30 June of the preceding financial year.
- You have unused concessional contributions cap amounts from any of the 5 previous years, starting from the 2018–19 financial year.
The amount you can carry forward and utilise in subsequent years is directly correlated with the contributions you’ve made in previous years. This opportunity is also available to individuals who might not have been members of a super fund or who didn’t contribute during the entire period, permitting the carry forward of unused cap amounts from up to the past 5 financial years.
The rule prioritises the oldest unused cap amounts, meaning any surplus from the 2018–19 financial year would be the first to be applied towards increasing your current cap, followed by subsequent years. It’s important to note that these unused cap amounts have a lifespan of 5 years; for instance, any unused amount from 2018–19 not utilised by the end of the 2023–24 financial year will expire.
Source – ATO
Tax Strategy & Implementation Plan
Fima can utilise the catch-up contribution strategy for her superannuation. This approach is ideal for individuals like Fima, whose super balance is below $500,000 on the prior 30 June, and who have not fully utilised their concessional super contributions in the past 5 years.
Concessional Cap Utilisation
| Financial Year | Concessional Cap | Used Contribution | Unused Contribution |
|---|---|---|---|
| 2018-19 | $25,000 | $0.00 | $25,000 |
| 2019-20 | $25,000 | $0.00 | $25,000 |
| 2020-21 | $25,000 | $10,000 | $15,000 |
| 2021-22 | $27,500 | $12,500 | $15,000 |
| 2022-23 | $27,500 | $12,500 | $15,000 |
For the 2023-24 financial year, Fima is eligible to contribute up to $27,500 as her annual concessional cap. In addition, she can utilise the $95,000 accumulated in unused concessional contributions from the previous 5 years. This strategic move not only enhances her super balance but also provides a tax-efficient way to grow her retirement savings.
It is crucial for Fima to act before 30 June 2024 to leverage the unused $25,000 from the 2018-19 financial year, as it will no longer be available after this date.
Tax Outcome
Fima and Mack have chosen to make a concessional contribution of $90,000, strategically reducing her taxable income to fall below the low-income threshold. With Fima’s current salary at $110,000, this substantial $90,000 tax deduction from the concessional contribution will bring her taxable income down to $20,000. This strategy will effectively reduce her personal tax liability to zero by leveraging tax-free allowances and low-income thresholds.
Conclusion
By adopting a focused approach to superannuation contributions, Fima is poised to significantly enhance her super balance. This case study underscores the advantages of strategic financial and tax planning, especially for individuals with lower super balances aiming to simultaneously increase their tax deductions and super funds. With the expert guidance of Investax Group, Fima is well on her way to maximizing the potential of her super fund.
If you haven’t sufficiently contributed to your super, the ATO essentially offers you a chance to catch up on your contributions. Missing the catch-up contribution for the 2019 Financial Year by the 2024 Financial Year means losing this opportunity forever. If you’re uncertain about the tax benefits, please don’t hesitate to contact Investax for information on the tax implications.
Pro Tips
- Start Early, Plan Ahead: Don’t wait until the end of the financial year to think about your super contributions. Review your super balance and contribution caps regularly to make informed decisions ahead of time.
- Understand the Rules: Familiarise yourself with the catch-up contribution rules and other superannuation policies. Knowing the ins and outs can help you maximise your contributions without breaching caps.
- Consult a Professional: Superannuation and tax laws can be complex and subject to change. Consider seeking advice from a tax specialist like Investax to tailor a strategy that best suits your financial situation and goals.
- Leverage Unused Caps: If you have had years with lower income, or if you haven’t fully utilised your concessional contribution caps, make the most of the catch-up contribution opportunity to boost your super and reduce taxable income.
- Balance Risk and Reward: While maximising super contributions can offer tax benefits, ensure it aligns with your broader financial plan, including liquidity needs and investment risk tolerance.
- Consider Your Partner: If you have a spouse, consider how you can optimise your super contributions as a couple. Strategies like spouse contributions or contribution splitting might offer additional benefits.