By Rosi Pilgrim*

As we’re at the start of a new financial year, now’s a good time to start thinking about ways to minimise your tax bill. And who doesn’t like to save tax? One of the easiest and most effective ways to reduce personal income tax paid is to contribute to super. 

There are two ways this can be achieved.

1. Salary sacrificing

Most full-time workers pay income tax on their salary. Every pay period, some of your salary is paid to you, and some is sent to the Australian Taxation Office (ATO) as pay as you go (PAYG) withholding. You have the option to ask your employer to pay some of your salary directly to your super fund as a contribution rather than have it included in what is taxed. This is ‘salary sacrificing’ into your super. 

Your take-home pay goes down and your super balance goes up. The great thing about salary sacrificing is that most workers would pay less tax on the money going into super than if it were paid to them as salary. 

A person on the average full-time salary in Australia of around $90,000 a year would typically have a personal income tax rate of 34.5 percent. By comparison, their super fund would only pay 15 percent on any amounts that are salary sacrificed into super. 

For example, if $100 is put into super each week, the super balance will increase by $85 (a 15 percent super contributions tax must be paid). If that $100 was paid in salary, then the person would have received only $65.50 (after applying the income tax rate of 34.5 percent). 

That’s a big saving and adds up over time. 

Salary sacrificing can be an easy way to save into super as your employer is doing the heavy lifting by making a pre-tax payment directly to your super account for you – you simply need to make the initial request to advise how much of your pre-tax wages you’d like to contribute per pay period. 

2. Personal Deductible Contribution 

The other way to save tax on super contributions is to make a contribution yourself, rather than via your employer. This is called a Personal Deductible Contribution. 

Simply make an after-tax lump sum contribution to super and then claim a tax deduction. These contributions may come directly from money that is sitting in a bank account

There is some paperwork involved which requires the completion of an ATO form called a Notice of intent to claim or vary a deduction for personal super contributionsThis needs to be submitted to your super fund before you lodge your personal income tax return for the financial year in which you made the contribution, and before the end of the next financial year. 

The fund will then apply the 15 percent contributions tax and send confirmation of the transaction. At the end of the financial year, you can claim the tax deduction to reduce your final income tax bill. 

A personal deductible contribution can be made at any time during the financial year. 

Take note

There is a limit on annual contributions. This concessional (pre-tax) contribution has a cap of $27,500 and includes the contributions employers make on behalf of workers. In certain circumstances, unused portions of this annual cap can be rolled over into following years, thereby allowing larger contributions.

(A non-concessional contribution to super is where no tax concession is claimed and it has a cap of $110,000pa.)

It’s important to note that you won’t have immediate access to any money put into super, so people ought to weigh up the benefits of putting their money into super or whether they have more pressing financial commitments. Super will generally become accessible to most people when they are at least 60 years of age and leave work. 

We have provided basic information here that may apply to Australian workers in an effort to help them better understand tax and super. It can get complicated, so it’s best to get professional advice on individual circumstances.  

Contact us to find out more about strategies and objectives that suit you.

*Rosi Pilgrim has been a financial planner for over 17 years, specialising in the areas of superannuation and retirement planning. Rosi is a Certified Financial Planner and holds a Master of Financial Planning and Bachelor of Business.

Any advice in this article is general in nature and has been issued by LGSS Pty Limited (ABN 68 078 003 497) (AFSL 383558), as Trustee for Local Government Super (ABN 28 901 371 321)(‘Active Super’). The advice does not take into account your personal objectives, financial situation or needs. Before acting on it, you should consider the appropriateness of it having regard to these matters. If you would like advice that takes into account your personal circumstances, please contact a financial adviser.