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Superannuation contributions: Tax benefits explained

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Question 1: I am currently 64 years of age, and turn 65 in December. I am not employed, don’t receive employer contributions and don’t intend on making additional contributions to my industry super fund.

I have not commenced an income stream yet, and I am in the fortunate position of having a total super balance at June 30, 2020 of $1.43 million, which has grown to be currently $1.65 million. I am familiar with the contribution caps.

Prior to June 30 this year, am I able to make a one-off, tax-free withdrawal of $330,000 and then, from July 1, re-contribute the $330,000?   

This would allow me to take advantage of the new increased non-concessional caps from July 1, but would also mean that my closing total super balance at June 30 this year would be well below the $1.4 million cap amount, enabling me to also trigger the non-concessional ‘bring forward arrangement’ for three years.   

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I am also trying to use the ‘cash out and re-contribution strategy’ to avoid the hidden ‘death tax’ as I have no dependents. Is there something I’ve missed?

As of July 1, 2017, the government introduced the concept of a ‘total super balance’, and initially set this figure at $1.6 million.

Once you reach this figure, you cannot make further after-tax (non-concessional) contributions, but your fund can still accept employer SG and salary-sacrifice contributions.

The total super balance amount will be indexed on July 1, 2021 to $1.7 million.

For the purposes of making further non-concessional contributions, only the total super balance as at the previous June 30 is referenced.

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So, as I understand it, you are proposing to take money out prior to June 30, 2021 to have a lower balance on June 30, in order to make further non-concessional contributions.

As you are over the age of 60, all withdrawals from super can be made tax free.

By doing this, you are reducing your taxable component and increasing the tax-free component of your super, which may have estate planning benefits when you pass away and leave the remaining balance to your beneficiaries.

This is known as a ‘cash out and recontribution strategy’, which I have covered previously.

As of July 1, you will be under the age of 65, and so will be eligible to use the ‘bring forward provisions’ and contribute up to three years’ worth of non-concessional contributions.

The exact amount you can contribute as a non-concessional contribution, based on your total super balance, is shown in the below table:

From what you have outlined, your strategy is achievable. However, it is complex, and timing will be critical.

I have seen many instances where this has been done incorrectly and penalty tax has been applied, so I suggest speaking with your super fund or a financial adviser for further information.

Question 2: I have just found out that the 19 per cent marginal tax rate threshold was increased from $37,000 a year to $45,000 a year.

While this is all well and good, I had dumped a significantly large amount of money into my super in the belief that I will be getting a full-tax deduction worth 32.5c in the dollar. Unfortunately, in doing this I have pushed my overall income level to well below the $45,000 mark.

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Should I still claim the deduction (which is now effectively worth net 4c in the dollar), or leave the money untaxed in the Super, where it is earning well over 4 per cent?

Yours, Frustrated taxpayer trying to use the rules to my maximum personal advantage.

The federal government brought forward its stage two tax cuts to commence July 1, 2020.

As you have stated, the upper threshold of the 19 per cent personal income tax bracket increased from $37,000 to $45,000 (and the upper threshold of the 32.5 per cent personal income tax bracket also increased from $90,000 to $120,000), as per the following table:

As you have also hinted, if you claim a tax deduction on your super contributions, then a 15 per cent contributions tax is applied and you are weighing this up, as you believe you may only receive 4 cents in benefits for every dollar if you are on a marginal tax rate of less then $45,000, and income is taxed at 19 per cent.

Well, paying tax at 15 per cent rather than 19 per cent is still an advantage, and as Medicare is levied on taxable income you also save an additional 2 per cent there.

There may also be further tax advantages depending on your overall tax situation.

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The ‘Low Income Tax Offset’, and the ‘Low and Middle Income Tax Offset’ are both based on taxable income, so by claiming a tax deduction you could reduce your taxable income and receive bigger offsets.

As for the potential to earn “well over 4 per cent”, super funds have been performing strongly recently but are subject to market volatility, which means returns will vary.

If you claimed the tax deduction, then 15 per cent of the contributions would be set aside for contributions tax and receive no future earnings.

However, generally the tax incentives are greater than the potential for future earnings.

I suggest speaking with a tax adviser over your situation.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services.

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives. 

The New Daily is owned by Industry Super Holdings

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