Super is a tax advantaged structure and super contributions are mainly about tax concessions or seeking them out. But contributions come in a number of shapes and sizes from tax deductible and non-deductible contributions to tax offsets and government payments. So how do you make sure the concessions are accessed?
Say you had enough savings to put $10,000 into super this financial year and your spouse is earning a modest amount. Should you make the contribution in your name and get the benefits of the tax deduction or split some of it with your spouse or give it all to your spouse to access the concessions?
As usual with financial planning the answer is nearly always, it depends.
Let’s look at Terry and Linda who are nearing retirement and have $10,000 in their savings account which they wish to contribute to super.
Terry is 58, has a salary package of $120,000 which includes his employer’s Super Guarantee (SG) contribution of $9,543 plus a salary sacrifice amount of $10,000. Linda earns a salary of $33,500 of which her employer contributes $3,325 in SG contributions. Terry has $645,000 in his super fund and Linda has $265,000 in her fund.
The question facing Terry and Linda is, how should the $10,000 be contributed to maximise the benefit/return available under the tax rules? Should it be made as deductible contributions, co-contribution, spouse contribution or any other concessions that are available?
From 1 July 2017 one of the benefits of the superannuation reforms is that individuals who qualify can claim a tax deduction for superannuation contributions. When combined with other tax-deductible contributions, like SG and salary sacrifice contributions, there’s a limit of $25,000 before any excess concessional contributions penalties apply.
With Terry and Linda there is a bit of wriggle room available which could allow them both to make tax deductible contributions to super.
For Terry, a tax-deductible contribution of up to $5,457 could be made before he goes over his concessional contributions cap after taking his SG and salary sacrifice contributions into account.
And for Linda, a tax-deductible contribution of up to $21,675 could be made after taking her SG contributions into account before her concessional contributions cap is exceeded.
There is a tax benefit of Terry claiming a tax deduction of $5,457 for contributions and Linda claiming what’s left over, $4,543 as a deduction.
As Terry’s tax rate plus Medicare is 39 per cent he will get a net tax benefit of 24 per cent after taking the 15 per cent tax paid by the fund on the contributions. For Linda the net tax benefit is six per cent after taking into account her tax rate of 19 per cent plus Medicare but not taking into account any other tax concessions for her. This will give them a combined net tax benefit of $1,582.26 ($272.58 for Linda and $1,309.68 for Terry).
While this may sound good for them to get a combined tax benefit of nearly 16% of the $10,000 contribution to super – there’s more than one way of skinning the superannuation contribution cat. Linda could make a non-concessional contribution to qualify for the co-contribution and Terry could make a spouse contribution to qualify for a tax offset of up to $540.
The co-contribution is a pretty simple concession if you qualify as the Australian Taxation Office (ATO) does all the calculations and pays the amount to the super fund directly.
If you make a non-concessional contribution to super and adjusted taxable income is less than the maximum threshold of $52,697 for the 2018/19 financial year, then some co-contribution is payable. If you are under the lower adjusted income threshold of $37,697 and you make a non-concessional contribution of at least $1,000 you may qualify for a co-contribution of up to $500.
Terry can’t qualify for the co-contribution if he makes a non-concessional contribution as his income exceeds the maximum threshold. However, if Linda makes a non-concessional contribution of $1,000 she will qualify for a co-contribution of up to $500. That’s a tax benefit for Linda equal to 50 per cent of the non-concessional contribution.
Where a non-concessional contribution of up to $3,000 is made by a person for their low income earning spouse they could be eligible for a tax offset of $540 which is applied against the contributor’s tax payable.
A low income earning spouse is where his or her adjusted taxable income is no more than $40,000. However, the $540 tax offset equal to 18 per cent of the non-concessional contribution is reduced if the spouse earns between $37,000 and $40,000.
If Terry was to make a non-concessional contribution of up to $3,000 for Linda, he would qualify for a low income spouse tax offset of up to $540.
The trick now is to work out the best order in which contributions should be made to get the best tax outcome.
The co-contribution sounds the best to start with. If Linda makes a non-concessional contribution of $1,000 as she will qualify for a tax benefit of up to 50 per cent as the government would make a co-contribution of up to $500.
The next seems to be Terry making a tax-deductible contribution of up to $5,457 as the net tax benefit of that contribution will be $1,309.68 for him. This provides a tax benefit equal to 24 per cent of the concessional contribution.
The next option would be for Terry to make a low income spouse contribution for Linda as a non-concessional contribution of up to $3,000 as the tax offset will provide him with a tax benefit of up to 18 per cent of the contribution made for her.
Finally, whatever is left over of the $10,000 after making those contributions, Linda may be able to make a tax-deductible contribution to super which would provide her with a tax benefit equal to six per cent of the contribution she makes.
If Terry claims a personal tax deduction for a contribution of $5,547 and makes a spouse contribution of $3,000 it will leave $1,453 out of the $10,000 which Linda could make as a non-concessional contribution or $1,000 to qualify for the co-contribution and $453 as a deductible contribution. The tax benefit from the deductible contribution would be about $27.18 or six per cent of the amount claimed as a deduction.
Table one shows the potential tax benefits of the various contributions that Terry and Linda could make to super for the 2018/19 tax year.
Table 1: Potential tax benefits of various contributions
Contribution made by Terry
Contribution made by Linda
net tax saving
Return on investment in super
Personal super contribution claimed as tax deduction
Personal contribution for spouse
But wait – there’s more!
As Linda has an adjusted income of less than $37,000 she will also qualify for a low-income superannuation tax offset (LISTO) of 15 per cent on any concessional contributions including her employer’s SG contributions.
This is because she may pay less tax if those contributions had been paid to her as income. Again, just like the co-contribution, the ATO calculates the amount of the LISTO and pays it directly to Linda’s superannuation fund.
In the end, it all depends on how Terry and Linda wish to maximise the benefits of super either by claiming a tax deduction for contributions, qualifying for the co-contribution or as a reduction in tax payable with the low-income spouse tax offset.
Graeme Colley is executive manager at SMSF provider SuperConcepts.