Less enjoyably than Father’s Day, but less unpleasantly than a birthday after 40, tax time pounces on us every year.
Love it. Loathe it. Ignore it. Your choice.
June 30 offers a series of little decisions, some of which can be short-term profitable, some are long-term profitable, while some allow you to “play God” with your tax position, as you wish.
Too many think these choices are simply avoidable. Same people whose financial future planning is: “Woo-hoo! Two more days till payday!”
They are, pardon me, idiots.
I’m not talking to those people today. Only sensible people, who understand financial opportunity. Why? Because the end of the financial year comes with “use it or lose it” deadlines.
There is always talk about “bringing forward expenses” before 30 June to get tax deductions. It is usually accompanied by advice to potentially “push back income” until after July 1.
Sometimes a crucial pointed is missed. Will you move into a higher or lower tax bracket next year? If you’re likely to earn more next financial year, then consider doing the reverse. Consider pulling forward income and pushing back expenses.
Most important today is super. June 30 is a critical use-it-or-lose-it day for your retirement savings.
Sure, most employees get the Superannuation Guarantee of 9.5 per cent without having to think about it.
But that won’t be enough for most people to retire on. This is why the government is increasing the SG to 12 per cent. But smart people want to do more with their super.
June 30 is critical for maximising super contributions and for the self-employed.
Salary sacrificing can allow you to get more money into super, tax effectively. You forego income now to put it into super, usually at a lower tax rate.
If you’re earning $120,000 a year, your marginal tax rate is 39 per cent. You could either take $10,000 of salary and receive $6100 after tax, or you put it into super instead and have $8500 go into your fund. That’s an extra $2400 that you haven’t paid in tax, that’s now working for your retirement.
The savings partly depend on your marginal tax rate. For those between $37,000 and $80,000, the deal is nearly as good. Take the $10,000 as income and receive $6550 in the hand, or $8500 into your super fund. An extra $1950 helping make your retirement a better place.
The problem is that we’re mid-June and salary sacrifice can only be for income not yet earned. Check with your pay office. It might be too late to do it this year, unless you can sign something for them today. If you’ve got a savings buffer and can forgo a few weeks of income, consider it.
If you can’t, then get set up now for next financial year. Even a small, ongoing, contribution to super will have a big impact down the road, with super’s low tax rates.
Hmm, super for the self-employed. They don’t have to contribute. If it hasn’t been a stellar year, the temptation can be to not make a super contribution (even if they know they should).
Do it! If you’ve earned more than $37,000 for the year, do it. Save some tax. If you’ve earned less than $37,000, do it anyway and you’ll get a portion of your super tax rebated (known as the Low-Income Super Contribution).
There are other good super deductions to consider at this time of year also, including the government co-contribution and a tax offset for contributions to low-income spouse’s accounts.
The government co-contribution has been neutered in recent years. It’s now a maximum of $500 for those earning up to $34,488, phasing out at an income of $49,488. To qualify, make an after-tax contribution of up to $1000.
There’s also a tax offset of up to $540 (18 per cent) of an amount of up to $3000 contributed to a super account for a spouse earning up to $10,800. It cuts out between there and $13,800.
Don’t forget, when making super contributions, that there are essentially two categories and both come with limits. Concessional contributions haven’t been taxed before entering super and they come with limits of $30,000 for the under 50s and $35,000 for the over 50s.
Then there are the “non-concessional contributions” for after-tax money, for which the limit is $180,000 a year, which have a whole other set of rules. A topic for another day – speak to your adviser.