Hi, I'm a 28-year-old self-employed male wondering whether I should invest my surplus cash flow via super (deductible contributions) or in my own name personally? I'm worried about tying up my money for such a long time but am aware of the tax benefits if I'm in the 37-cent tax bracket.
Sam in Curtin, WA
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As with any investment the decision on whether to contribute additional money to your superannuation fund should be made within the framework of a broader investment (financial) plan.
There are certainly tax benefits to making deductible (concessional) superannuation contributions such as you touch on in your question. The higher your income, the higher the marginal tax rate you will pay on your income and the more significant the tax savings you will receive from making concessional superannuation contributions.
Concessional superannuation contributions are taxed at a flat 15% when they are received by your super fund (the tax is paid by your super fund out of the money you contribute). If you are currently earning between $90,001 and $180,000 your marginal tax rate on every dollar of income in this bracket is 39% (37% income tax plus 2% Medicare levy) and the super fund pays tax of 15% on your contributions, therefore you are saving 24% tax for every dollar contributed e.g. a concessional contribution of $25,000 that brings your individual taxable income down from $180,000 to $155,000 will save you $9,750 of tax and the super fund will pay $3,750 contributions tax, so net tax saving will be $6,000 (importantly the $9,750 is in your pocket and the $3,750 has come out of the super fund).
When making personal superannuation contributions it is imperative that you advise your super fund after the end of the financial year that you intend to claim those contributions as a tax deduction in your income tax return. They will send you a form (or you can download one from the ATO website https://www.ato.gov.au/Forms/Notice-of-intent-to-claim-or-vary-a-deduction-for-personal-super-contributions/) which you will need to complete and return to your super fund advising them of how much you are claiming as a tax deduction. They will then send you a confirmation letter which you should file with your tax return or provide to your accountant. This confirmation letter needs to be received before you lodge your tax return to be eligible for the deduction.
Investing in super is certainly a long-term strategy due to the limitations of accessing these funds. At 28 you’ve got a long working life ahead of you and are most likely just heading towards your more affluent working years (as your business grows and you gain more experience). Whether or not you invest this money into super may also be largely dependent upon whether or not you have purchased or plan to purchase a residence, as repaying non-deductible home loan debt (via an offset account) can be a very simple and powerful way to create wealth as well (as your main residence is not subject to capital gains tax and you can’t claim a tax deduction for the interest on the loan if you are not using the residence for income earning activities).
Finally, it is also worth noting that from 1 July 2018 the Federal Government introduced the ability to make catch-up concessional superannuation contributions. Prior to this legislation the annual contribution caps (limits) were known as ‘use it or lose it’ meaning that if you didn’t make a contribution in any given financial year you could not catch up for that missed contribution in a later financial year. Thanks to the introduction of this new legislation, those individuals with less than $500,000 in their super fund (as at 30 June of the previous year) who did not contribute up to the maximum $25,000 concessional contributions in 2018/19 or 2019/20 can now make concessional catchup contributions in 2020/21 (this is in addition to the $25,000 concessional contribution cap for the 2020/21 financial year).
As with any advice (especially superannuation as the laws can be complex and timing is essential) please speak with your accountant or licensed financial adviser.
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