Yahoo Finance Slash your tax bill with this super move
The end of the financial year is fast approaching, so it's time to act now if you want to slash your tax bill.
A big tax bill would add insult to economic injury right now. But that’s what awaits millions of Aussies as we head into the final weeks of the financial year.
Maybe you haven’t had sufficient tax withheld through the pay-as-you-go system or have sold an asset on which you have to pay tax. Either way, you need to start minimising your tax bill now to keep your hard-earned money for yourself.
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Otherwise, in a little over six weeks, you will have no choice but to foot the (potentially big) bill.
The big-saving super solution
One of the most effective ways to cut a large tax bill is to shelter money in super. This is particularly possible if you have realised a capital gain in the tax year by selling an investment property or shares. Hopefully, there is still cash left to stash and subsequently slash your tax bill.
You can make an after-tax contribution to super, and then submit a form to your super fund to claim it as a tax deduction. This “intent to claim” form – if accepted – converts your after-tax contribution to a before-tax one. Quite simply, the amount you contribute is then deducted from your assessable income, so you pay tax on that much less.
For example, if you are a high income earner in the 45 per cent tax bracket, a $10,000 contribution would cut your tax bill by $4,700. The catch is that the contribution needs to be made in the tax year in which you realised the gain.
The fine print dos and don’ts
While super contributions represent a big opportunity for Aussies with a large, looming tax bill, there are restrictions. Personal deductible contributions go towards your concessional or before-tax contributions cap, but so do any superannuation contributions your employer has paid, which is 10.5 per cent of your salary. Any salary sacrifice contributions you have arranged over and above your employer’s also count towards the allowable limit.
In total, all of these contributions must come to no more than $27,500 (for the 2022/2023 tax year).
But there is a loophole that could help you squirrel away more.
The carry forward rule
From the 2018/2019 tax year, you are able to carry forward unused concessional contribution cap amounts. This was a welcome change that allows people who have taken time off paid work to raise children, to catch up.
In fact, you can really think of these as catch-up contributions. The beauty is that they can be made for up to five years after and on a rolling basis meaning you can save it for when you might be more able to afford it, such as when you’re sitting on profits from some type of asset sale.
To be eligible, you must have a super balance of less than $500,000. And note that in the relevant years before the 2021-2022 tax year, the concessional cap was a slightly lower $25,000.
Finally, if your income and superannuation contributions are above $250,000, be aware that you will be required to pay extra tax called Division 293 Tax. This is an extra 15 per cent on top of the 15 per cent super contribution rate, so a total of 30 per cent (although this is still below the 47 per cent top personal rate).
But the bottom line is, an allowable super contribution claimed as a deduction could dramatically cut your tax this year, and you even get all the money back at retirement.
Nicole Pedersen-McKinnon is the author of How to Get Mortgage-Free Like Me, available at www.nicolessmartmoney.com. Follow Nicole on Facebook, Twitter and Instagram.
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