People can do crazy things to try to reduce their tax bill. To claim a tax deduction, you typically have to incur an expense. And that’s the main problem: when you spend money, you’ve got less left. So, typically, people have to spend money to create a tax deduction. Sure, they get the tax back. But unless your tax rate is 100% (and no one’s is), you still lose money. Doing something just to get a tax deduction makes no sense.
Except… In one case. As of last financial year, almost all tax-payers can make a private, personal contribution into their superannuation fund. They can then claim this ‘expense’ as a personal deduction when they do their tax return. You can contribute any amount provided that your total concessional contributions do not exceed $25,000 in a particular year. This $25,000 limit includes any compulsory 9.5% superannuation guarantee contributions your employer makes on your behalf.
So, if your employer has put $10,000 into super on your behalf, you can make a personal contribution of up to $15,000 more. If your personal tax rate is 39% (including the Medicare levy), then a $15,000 contribution will qualify you for a tax deduction of $5925. This means that you spend $15,000 but you effectively get back $5925. In this way, you actually only spend $9075.
The really good bit is this: unlike virtually every other expense that creates a tax deduction, the $15,000 remains yours. It stays in your super fund. Yes, the super fund pays tax on it. But the tax rate within superannuation is only 15%. So, after tax, the super fund has $12,750 remaining in it.
Stop and think about those numbers. After tax, you have spent $9075. And your super fund has been boosted by $12,750. If you spend $9075 to create an asset worth $12,750, you have made an immediate profit of $3675. Not bad. Not bad at all. In fact, if you really like maths, you could look at the profit of $3675 as an immediate 40% return on your investment of $9075.
Even better, the $12,750 will now be invested within your superannuation fund – where investment earnings are taxed no more than 15%.
There is, of course, a quid pro quo. The $12,750 is ‘locked up’ within superannuation until you reach retirement age. Obviously, the older you are, the sooner that will be; your money will be locked up for less time. On the flipside, the younger you are, the longer that money will remain within superannuation, hopefully (and presumably) compounding to create increased wealth for when you eventually reach the age when you can make a withdrawal.
So, as the end of this financial year approaches, you should be thinking about whether you can afford to make any extra contributions into super. There are some rules that apply and boxes that need to be ticked, so we encourage you to get in touch to discuss whether and how you can incur an expense without actually losing any money.