It alarms me when I think about how many prospect clients I’ve seen over the years that were not aware of some common strategies that could save them significant tax and increase their retirement savings. Even after telling many of these prospect clients what the benefits are, how it may work, and the fact they are legitimate strategies people still disbelieve you and think it’s to good to be true or just some dodgy tax scam. Many of these people continue on the same path doing the same thing they have always done and continue to complain about how much tax their paying.
Every Australian has an amazing opportunity to save tax legitimately, save for their retirement and contribute to the prosperity of our nation but for much of it, it goes unnoticed. Simply put it’s our amazing superannuation system, in the first instance this allows people to save considerable tax with some tax concessions during their working years and accumulate wealth for their retirement. The second stage is at retirement or pre-retirement when you can transfer your wealth in this system to a pension scheme where there is no tax on the earnings. It’s the only legitimate structure we have in Australia where the earnings on your capital are not taxed, a tax free structure!
The easiest way to explain the first part of this is to compare the tax rates when you take the income in your hand versus when you contribute to super. In the most simplistic terms if you are paying tax in the $37,001-$80,000 tax bracket you are currently paying tax at an estimated 34% including the current medicare levy versus paying tax at a rate of 15% when you divert your before tax salary to super in the form of a contribution otherwise know as concessional contribution. This means that for every $100 you divert to super in this form you are saving $19 in tax. This is the equivalent to getting a 19% return on your contribution before the funds are even invested in any particular investment option. When we consider someone on the highest marginal tax bracket when you are earning in excess of $180,000 per annum the tax rate including the medicare levy is 46.5% for any income above this level. This means that the tax benefits are magnified to a saving of $31.50 on every $100 that is diverted to super as a concessional contribution or an equivalent 31.5% savings in tax savings. Whilst your money is invested in super the income on the capital is generally taxed at a rate of 15% versus what you would be paying on your marginal tax rate if you had the money invested outside of super, therefore saving further tax.
There are of course many factors to consider when assessing the appropriateness of such a strategy like legibility to contribute to super, tax offsets, capital gains and losses, superannuation contribution limits, cash flow considerations, estate planning , social security benefits, opportunities with partners and spouses etc. This is not an exhaustive list but only a few to highlight the importance of the need to get personal financial advice as it can be a complex area and an adviser can explain this to you in simple easy to understand terms.
The second stage is even better than the first, once you meet the Superannuation preservation age, currently 55 for those born prior or on the 30th of June 1960, age increases in stages for years later, but at this point you could commence a pension with your super. In this phase there is no tax on the earnings of your capital, however when you commence a pensions there are some rules around the income you must draw out of the scheme and how the income to the individual is taxed. This is determined and can vary based on your age at the time and the type of contributions made over your lifetime. For ages between 55 and 59, some of it may be taxed with a tax offset, other parts may be tax free. At age 60 generally speaking most income from a superannuation pension scheme is tax free and not tax assessable. The exception to this is for some Government pension schemes and other schemes where there is a portion of untaxed element in the scheme. Again it’s critical that you get advice on these strategies as we have seen some prospective clients where they have attempted this themselves and in some cases been to their detriment because of a lack of knowledge.
Remember that superannuation is only a tax structure that is designed to help people to save for their retirement with the benefit of some tax concessions along the way and generally speaking tax free income at retirement. There are no guarantees on the performance of superannuation and this is only determined by the investments you choose to invest in, this is basically the same for any investment. Many people blame their superannuation for their losses during the GFC but it comes down to understanding what your investment options are, the likely risks and returns attached and then making an informed decision. There were many that lost money through the GFC and there were many that didn’t because they had chosen not to risk their capital and left their money in things such as term deposits and cash. I’m not saying there is a right or wrong investment, it boils down to each individual as to their personal comfort, investment experience and life stage. Don’t just do something because you heard someone else is, get some personal advice and then consider whether it’s appropriate for your circumstances. When you’re informed the odds are likely that you’ll make better choices and not so many mistakes.
The point of this article is to highlight that many of us have an opportunity to save tax on our income, at the same time save for our retirement and have ultimately tax free income in our retirement years. What an amazing opportunity and one that should not be missed out on. At the very minimum everyone should get a better understanding of how our superannuation system works and the potential benefits. Many of these benefits are only getting magnified as personal taxes begin to increase and therefore becoming more important to know about them now than ever before.
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