Reduce your income tax using Super!

Yes this is possible! It is called Salary Sacrificing.

This is when you tell your employer to take some of your income and put it into super before they tax you – therefore you reduce your tax and boost your super at the same time.

However, things have changed a few years ago the government made it possible to allow everyone to add to their super fund with after-tax funds and then claim a tax deduction at the end of the financial year.

So if you have some funds in a savings account, and want to top-up your super or reduce your income tax and you are under your concessional contributions (important to note that there is a contribution cap of $25,000 which includes the 9.5% of your salary your employer already puts in) you can top up your super. You have to send in an intent to claim a tax deduction form – before 30th June – and then when you see your accountant they can claim back the tax.

So, I’m sure you are wondering where this is going – Let’s say you have sold an investment and made some money – firstly well done.

Secondly, do you know what tax you are likely to pay on the money you have made?

Here is an example:

This $1000 will be added to your taxable income and taxed at your marginal tax rate.

Now you will also receive a 50% discount if you keep the asset for longer than 12 months before selling it. This is a very simplified version of Capital Gains Tax and as such don’t rely on this when making decisions seek out a professional.

So we all purchase investments to make money and don’t want to lose it to the Tax Man, so what if I told you there is a way you can purchase an investment, watch it grow and in a few years add most if not all of the gain to your superfund and keep it out of the hands of the taxman.

Well here is how we can do that, from 1st July 2017 the government brought in the carry forward contributions rule – predominantly aimed at helping woman who leave the workforce to bring up children, the ability to top-up their superfund over and above the usual $25,000 – in essence allowing them to play catch up. As long as you have less than $500,000 in superannuation and you are eligible to make a concessional contribution at the time, then you have a ticket to the game and can carry forward up to 5 years’ worth of unused concessional contributions caps.

So from a planning sense how does this work, let’s say you purchase an investment property in 2018/19 for $400,000 you hold it through to 2022/23 and then sell it for $600,000 – your capital gain is $200,000 with a 50% discount you need to add $100,000 to your assessable income. At the top marginal tax rate this would be a tax of $49,000, so your effective gain is $151,000 from the property sale. Or we use the Carry forward rule:

As you can see, we have been able to use 5 years’ worth of unused contributions to reduce the capital gain to $25,000 which at the top marginal tax rate is $12,250 tax which means you have effectively kept $187,750 of your capital gain. Which is a difference of $36,750.

Now that’s some serious cash.

If you have a capital gain or will have one in the future please speak to us about how we can plan to assist you with this.

Get in contact with us today.