Taxation

If you’re not already making salary-sacrifice contributions into super, consider it. A person earning $100,000 who sacrifices $300 every fortnight will have only $185 taken from their pay, generating an instant fortnightly tax break of $115. The benefit is generated by the fact that super contributions are taxed at only 15 per cent, rather than at a personal tax rate.

Let’s look at Henry who earns $100,000 each year and is considering salary sacrificing $10,000 a year to super, on top of the compulsory 9 per cent contribution paid by his employer.

Henry’s dilemma is whether he should invest using the salary sacrifice option or pay tax on his $10,000 surplus income and then invest it outside super.

By salary sacrificing, he will be $2350 a year ahead because $8500 is going into his super fund (after 15 per cent contributions tax) and so there’s more to be invested. By contrast, if he doesn’t salary sacrifice, he’ll by paying $3850 in tax, leaving only $6150 to be invested. In 20 years that can make a sizeable difference – $146,206 to be exact (adjusted for inflation, that’s equivalent to $80,951 today).

That’s how much more his super will be worth than his non-super investment – as more was going into the former and also thanks to compound growth on the bigger amount. After 20 years his super investment is worth $353,334 (not adjusted for inflation) compared to $207,128 if he’d invested after-tax money outside super.

Lower tax bracket

The other benefit of salary sacrificing is that it can lower your tax bracket. Colonial First State’s Deborah Wixted says people just over the $80,000 or $180,000 tax thresholds can drop into the lower bracket by salary sacrificing.

Splitting super into a partner’s account can be particularly strategic when one is close to retirement. Once a person starts to draw a pension from super, not only are pension payments tax-free if they are 60 or over but all earnings on assets held by the pension are tax-free as well.

Let’s look at how Gary, 55, and Susan, 50, can think strategically about splitting their super contributions so that they pay almost $9000 less in tax.

They both want to retire in five years, and want $120,000 combined income each year in retirement.

Colonial First State’s Wixted has assumed Gary has $180,000 in super and Susan has $340,000. The couple has other savings and investments they want to put into super due to the tax savings.

“As Gary will be 60 on retirement and his pension payments will be tax free, the strategy is to maximise his pension payments and only draw minimum payments from Susan’s pension,” says Wixted.

Both make a $50,000 concessional contribution to super in 2012 and then four annual contributions of $25,000 each as current rules allow – that’s $150,000 each in the next five years. (We are basing this on current rules that mean next year is the last time those over 50 can make a concessional super contribution of $50,000 before it halves to $25,000 a year.) Their combined balance at retirement will be $1,022,349.

Clever pensions

But the interesting bit comes when Susan decides whether she should split some of her super contributions into Gary’s account.

If she does not, he will have $401,336 in his account and she will have $621,013 in hers. The tax on their pension payments for the first five years of their retirement (until she turns 60) will be $31,429.

But if she splits all her contributions over the next five years into Gary’s super account, he will have $528,568 and she will have $493,781.

Because Gary’s pension account balance is higher they can draw more from it in the first five years, which will be tax-free. They will also receive an income from Susan’s account but it can be lower and therefore the tax will be lower too – $22,839.

That’s a tax saving of $8590 over five years. It may not seem huge but it’s a significant saving at a time when there is no more employment income flowing into the family coffers.