As we approach the end of the financial year 2023, there are a number of smart strategies individuals can implement to give their super a boost and legitimately reduce tax
2023 EOFY superannuation tax strategies. We take a look at what strategies are available to take advantage of superannuation rules and get a tax break.
As we approach the end of the financial year, there are a number of smart strategies you can consider to help you to boost your superannuation and make the most of what you have. Bonus, may also help you to reduce your individual tax liability.
Currently, most employees receive super guarantee (SG) contributions from their employer of at least 10%1 of their salary. Adding to these contributions directly from your gross (pre-tax) salary can be an easy and tax-effective way to top up your super. This is called salary sacrifice. Some of the benefits of salary sacrifice are:
It’s simple, automatic and consistent. You do not pay income tax on salary sacrifice contributions to super (up to certain limits). Your super contributions are generally taxed at 15%2, which may represent a significant tax saving, depending on your marginal tax rate.
By making a salary sacrifice contribution, you can reduce your taxable income.
The difference in taxation may mean more money is available to invest in super than if you were to receive the money as after-tax income and then invest it.
Future earnings on contributions made to super are concessionally taxed at a maximum of 15%. Note that you are subject to a general concessional contributions cap of $27,500 for the 2022-23 financial year. However, you may have a higher concessional cap for the financial year if you’re eligible to carry forward unused concessional cap amounts from previous years. SG contributions and personal tax-deductible contributions also count towards your concessional cap.
Personal tax-deductible contributions -
Prior to 2017-18, only people who were substantially self-employed or earning passive income could claim a tax deduction for personal superannuation contributions.
However from 2017-18, this requirement has been removed so that all eligible contributors can claim a tax deduction for their personal contributions. This means that employees who were previously unable to make a personal tax-deductible contribution may now be eligible. While still subject to the concessional contributions cap of $27,500 (or a higher amount if you’re eligible to carry forward unused concessional cap amounts from previous years), this strategy may prove timely if you have made a considerable capital gain from the sale of a property or shares – as your deductible contribution to your super fund may help to offset your assessable capital gain. Not only could it reduce your marginal tax rate, it may also boost your super balance for retirement.
Note that if you are not able to claim your super contributions as a tax deduction (for example, your income for the year is too low), they will be treated as after-tax (non-concessional) contributions.
Take advantage of the government co-contribution
To encourage you to save for your retirement, if your total income3 is $42,016 pa or less and you make a $1,000 personal after-tax contribution to super, the Government will contribute $500 to your super.
The co-contribution is calculated as 50% of your after tax contribution, but the maximum $500 government co-contribution also reduces by 3.333 cents for every dollar you earn over $42,016 pa and ceases once your total income reaches $57,016 pa.
When determining eligibility for the Government co-contribution, earnings that are salary sacrificed to super and reportable fringe benefits come under the definition of total income. If you fit within the income thresholds outlined above, and satisfy some other conditions, contributing to your super from your after-tax salary before the end of the financial year may be a great way to top up your super, and get an extra boost from the government.
Other eligibility criteria applies to qualify for a Government co-contribution. Your financial adviser can give you the latest updates and more information on this opportunity.
Split super contributions with your spouse
If you have a spouse, you are permitted to transfer certain super contributions from the previous financial year over to the super account of your partner. If the receiving spouse is over preservation age at the time of the split request, he or she must declare that they are not retired. Splits cannot be done once the receiving spouse turns 65. You can do this every year, generally once the financial year has ended. Up to 85% of taxable (concessional) contributions such as SG, salary sacrifice and personal tax-deductible contributions made to super can be transferred (the amount that can be transferred is also limited to your concessional contributions cap).
There are several reasons for considering splitting super with your spouse:
If you and your spouse are both between preservation age and age 59, withdrawing the money from two members accounts may result in a larger amount of the withdrawal being tax-free.
Transferring contributions from the younger spouse to the older spouse could enable you to access more retirement money earlier.
Transferring money from the older spouse to the younger spouse could enable the older spouse to receive more Age Pension by delaying the date at which their super becomes an assessable asset.
Splitting superannuation monies does not count towards the receiving spouse's contributions cap.4
To help equalise balances between you and your spouse. From 1 July 2017, a ‘transfer balance cap’ applies to limit the total amount of super savings you can use to commence retirement phase income streams (where earnings on assets are tax free). This cap is $1.7 million in the 2022-23 financial year. Because this cap applies on an individual basis, equalising super balances between members of a couple can ensure that both members stay below this cap.
Super splitting is not offered by all funds, so you will need to check whether your fund offers this feature.
Spouse contribution tax offsets
Another potential tax concession is a spouse contribution tax offset. This strategy may be available if you make after tax contributions directly to your spouse’s super account – these are known as eligible spouse contributions. To take advantage of this strategy, your spouse will need to be under age 75. You can open a super account in your spouse’s name and make contributions to that account from your after-tax pay. You can also make these contributions to your spouse’s existing super account.
If your spouse’s assessable income, reportable employer super contributions and reportable fringe benefits are under $37,000 pa, you will receive an 18% tax offset on the first $3,000 you contribute on their behalf, up to $540 pa. The offset operates on a sliding scale and phases out to zero once their income reaches $40,000 pa.
Other eligibility criteria applies to qualify for a spouse contribution tax offset. Speak with your financial adviser for further information.
A word on contributions caps
WARNING- this is detailed! Contact us for personalised advice.
When considering any super strategy, it’s important to assess how much you are contributing to super in any one year. The Government has set annual limits – known as contributions caps.
The contributions caps for the 2022-23 financial year are:
$27,500 (indexed) for pre-tax (concessional) contributions, regardless of age.
You may have a higher concessional cap for the financial year if you’re eligible to carry forward unused concessional cap amounts from previous years
$110,000 for after-tax (non-concessional) contributions, or $330,000 over a three-year period if you are under age 75 any time during the first year (this is known as the ‘bring-forward’ rule).
Your non-concessional cap reduces to Nil once your total super balance (just before the start of the year) is $1.7 million or more.
The cap you have available under the bring forward rule will reduce once your total super balance (just before the start of the first year) is $1.48 million or more.
If you trigger the bring-forward rule in a year, you will miss out on any increase in the standard non-concessional cap that would have applied in year 2 or 3 of your bring-forward period.
In order to make voluntary super contributions, at the time of the contribution, you must be under age 75 (this includes up to 28 days after the end of the month in which you turn 75).
Voluntary contributions generally cannot be made once you have reached age 75.
Where you are making eligible spouse contributions for your spouse, the above age requirements apply to your spouse.
If you intend to claim a tax deduction for your personal contributions and are aged 67 to 74, you must meet the work test (have been employed for gain or reward for 40 hours in a 30 consecutive day period during the financial year) or have qualified for the work test exemption for the year5.
An exception applies for downsizer contributions, which is a contribution of up to $300,000 from the sale proceeds of your eligible home. While you must be aged 60 or over from 1 July 2022 (55 or over from 1 January 2023) and meet a range of criteria to qualify, there is no work test or upper age limit required to make a downsizer contribution.
Mini super checklist
Do I have a record of all my super accounts and contributions?
Does my employer allow salary sacrifice contributions?
What are my current contributions for this financial year?
Can I make a spouse contribution?
Did I make a contribution last year that I could ‘super split’ this financial year?
Should I make a personal tax-deductible superannuation contribution?
Talk to us at Lush Wealth. As Financial Advisors we can help simplify your end of financial year preparations and ensure you maximise the tax benefits.
What you need to know
This information is provided by Lush Wealth Financial Planning Advice Newcastle and Sydney. Online Australia-wide.
Superannuation and retirement strategy is what we do. Get in touch should you wish to chat about how we can work together. Online Australia wide, in - person Sydney and Newcastle.
The information contained in this article is of general nature only and does not take into account the objectives, financial situation or needs of any particular person. Therefore, before making any decision, you should consider the appropriateness of the advice with regards to those matters and seek personal financial, tax and/or legal advice prior to acting on this information. Join the club of Aussies who have their retirement sorted, get in touch today!
1 The SG rate will be 10.5% until end of financial year 2022/23. After that it will increase gradually each financial year by 0.5% until it reaches 12% on 1 July 2025. 2 If your income for Division 293 purposes exceeds $250,000 during the 2022-23 financial year, an additional tax of 15% may apply to all or part of your concessional contributions that do not exceed the cap.
3 Total income equals assessable income plus reportable fringe benefits plus reportable employer super contributions, less business deduction (other than for work related employee deductions or personal super contributions). Thresholds are for the 2022-23 financial year. 4 The original contribution made does count towards the members’ concessional contributions cap. 5 You qualify for the work test exemption for a financial year if you met the work test in the previous year (but not the current year), your total superannuation balance was less than $300,000 just before the start of the financial year and have not used the work test exemption in any previous year.