Tax strategies for high income earners

If you are high income earners, it’s sensible to implement tax minimising strategies. On the other hand, Tax avoidance and evasion is illegal and attracts heavy penalties form ATO.

There are a few strategies that well known as effective tax minimised strategies.

• Negative Gearing
• Work from home allowance
• Maximising your tax offsets
• Reducing your capital gains tax (CGT) liability
• Setting up a discretionary trust to distribute business or investment income

Among all the effective strategies, let’s look at Personal Super Contribution in more details as it is a significant long-term wealth creation strategy. Most Australians know that super is money for retirement. What’s less well known is that you don’t solely have to rely on your bosses’ contributions to grow your super savings. Two ways of saving the tax from both pre-tax and post-tax.

Pre-tax personal super contribution: Normally known as Salary sacrificing into superannuation. This involves forgoing some of your pre-tax salary/wages and putting it into super instead. This is a tax-effective strategy because super contributions are taxed at the concessional rate of 15% in Australia. This rate is lower than the lowest marginal tax rate.

After-tax personal super contribution: Prior to 1st July 2017, you needed to be self-employed to claim personal super contributions on tax. Now you may be able to claim a tax deduction for personal contributions even if you are a salary employee. To be eligible for tax deduction on your return, the contributions must be post-tax.

How does tax deductible super work on my return?

There are two important steps to claim a personal super contribution on your tax return.

• Get in touch with your super fund and tell them you want to claim a deduction for your personal superannuation contributions, AND
• Make sure you get a reply from them BEFORE you lodge your tax return.

Once you hear back from them you can lodge your return. At item D12 – Personal Superannuation Contributions in your tax return, you enter the amount you wish to claim as a deduction on your return.

What are the limits you can claim for both Pre-tax and After-tax?

You can claim up to $25,000 as a tax deduction each year from 1^st July 2017 to 30^th Jun 2021. This has been increased to $27,500 in FY2022 (this is known as the concessional contributions cap). They usually consist of:

• Your employers’ mandatory contributions (minimum 9.5% of your salary and from 1^st July 2021, the guaranteed super contribution rate increased to 10% and continuously increased by 0.5% until to 1^st July 2025)
  • FY2021-22                            10%
  • FY2022-23                            10.5%
  • FY2023-24                            11%
  • FY2024-25                            11.5%
  • FY2025-26                            12%

AND

• Your pre-tax or salary sacrifice contributions

AND

• After-tax contributions

Important Note:

• From 2019-20 financial year, you can accumulate last 5 years unused Super contribution limits and choose to utilize as deduction against the Tax return year at your will.
• To utilize the used limit, your last financial year superfund balance must be lower than $500k.

Putting all together

Let’s look at a simple example to see how it all works.

Jack is a finance manager and every year he earns a salary $100,000, so far for 2018-19 financial year his boss paid $10,000 (Guaranteed Super Contribution) into his super fund.

Jack has also salary sacrificed (pre-tax) $2,000 into his super fund. Jack has some extra savings and decides to add $3,000 into his super account before 30 June each year. He already paid tax on that money so it’s considered an after-tax contribution. Prior to lodging his return Jack lets his fund know that he plans to claim the $5,000 personal contribution on his tax return (both pre-tax and after tax). He receives a letter back from his super fund to acknowledge his intention to claim the deduction.

The next is how jack can claim the unused Super contribution Limit:

For FY 2018-2019: Based on pre- and after-tax contribution, he has unused super limit left as $25,000-$10,000 -$5,000=$10,000

For FY 2019-2020: With the same contribution. he has accumulated unused fund $10,000+$10,000=$20,000

For FY2020-2021: he didn’t make any extra contribution for that year. He has accumulated unused fund $20,000+($25,000-$10,000)=$35,000

In FY2021-2022: Jack received $50,000 bonus and he wants to make extra contribution and utilized all the unused limit balance in the current finance year.

So, Jack contribution additional $35,000 from prior year unused balance + current year remaining ($25,000-$10,000-$5,000=$10,000), total $45,000 into Personal Super Contribution declaration in his tax return section D12. By doing this, he has saved significant amount of the tax for this financial year.

As we can see, personal super contribution is a great tax strategy to maximize your income. But your financial situation is just yours. The only way to truly minimize your tax and maximize your income for your situation is to go one step further: contact a qualified tax expert.

How we can help

• Our team of qualified accountant can help to plan and implement legal tax minimisation strategies.   
• We provide tax planning services for both individuals and businesses.
• Contact us today to discuss how we can help you and/or your business.