How you could claim TOO MUCH of a tax deduction on your super contributions!

For the majority of people, making extra contributions into superannuation that you claim a tax deduction on can be a great strategy to reduce your income tax and have a larger portion of your savings invested in the low tax rate environment of superannuation.

However, there are a couple of important exceptions to be aware of!

As a general rule, you should note make and claim a tax deduction for contributions that reduce your total taxable income to below $45,000.

Whilst contributions into superannuation that you claim a tax deduction on are taxed at a flat 15% by the super fund when received, taxable incomes are instead calculated on a scale or marginal tax rate basis as shown below:

Case Study

Let's say you are 60 years old, you have paid off your home loan and you are working part time earning $60,000 per year. You have $100,000 of cash in a savings account so you decide to make a $60,000 contribution. You are eligible to make a $60,000 pre-tax contributions as you have carry forward allowances should you wish to use them.

Scenario 1 - You claim a tax deduction on the full amount

Whilst you can see there is a modest tax saving of $988, this is not the most effective way to do it!

Scenario 2 - You claim only $15,000 as a tax deduction, and you leave the other $45,000 as a non-concessional contribution

As you can see, you save more tax by claiming less of a deduction!

Technically you could claim a tax deduction all the way to the end of the tax free threshold ($18,200), however in this bracket until $45,000, you are only saving 1% of tax per dollar of concessional contribution.

Therefore, it is probably best not to claim this deduction so that the funds are received as a non-concessional contribution which adds to the 'tax free' component of your super when received by future non-tax dependents (most commonly adult children).

One other side note...

For clients earning over $250,000 per year, you should be aware of Division 293 tax.

Division 293 tax is an additional tax on super contributions, reducing the tax concession for individuals whose combined income and concessional contributions for Division 293 purposes is more than $250,000.

Division 293 tax is charged at 15% of the excess over the threshold or the taxable super contributions, whichever is less.

Therefore, for clients earning over $250,000 it may actually be more effective to make extra contributions into their spouses super accounts as the net tax saving may be more, even though they are in a lower marginal tax bracket!

The most compelling contribution deductions are those between $190,000 (when the 47% tax rate starts) and $250,000 (when division 293 tax starts). In this $60,000 income area, generally the tax saving is $0.32 per dollar!

If you need help with your contribution strategy:

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General advice only.