Superannuation Contributions and Separation

Superannuation could be an important vehicle for couples who have been through a financial separation.

Despite frequent changes to its governing rules, superannuation remains, for most people, a tax-effective environment in which to save for retirement.

Here’s a quick Q&A on the “what, why, and how” of contributing to superannuation, and some examples of how they could be useful following a separation.

WHY CONSIDER CONTRIBUTING TO SUPER?

Some super contributions and the investment earnings within super funds are taxed at 15%.

As this is lower than the marginal tax rate for people earning more than $18,200 per annum, less tax is paid on the money going into super than if it was paid to you as normal income.

The higher your marginal tax rate, the greater the benefit.

WHAT TYPES OF CONTRIBUTIONS CAN I MAKE?

Concessional Contributions: These are contributions on which you or your employer has claimed a tax deduction. They are taxed at 15% within the super fund. The annual cap for Concession contributions is $27,500 p.a.

Concessional contributions can include:

• Compulsory employer (Superannuation Guarantee) contributions. Your employer must pay 10.0% (10.5% as from 1 July 2022) on top of your ordinary time earnings to your super fund when you earn more than $450 per month.
• Salary sacrificed contributions made from your pre-tax income.
• Personal contributions on which you claim a tax deduction.

Catch up Concessional Contributions

A rule was brought in in FY 2018/19 which allows the unused portion of your concessional contribution cap to be carried forward and used in future years if your super balance is under $500,000.

This can be especially beneficial for clients who have missed out on some of their concessional contribution caps over the years.

Low Income Superannuation Tax Offset

This is essentially a refund on the tax you’ve paid on contribution into superannuation.

It applies if you earn less than $37,000 per annum and is capped at $500.

This is paid to your super fund and prevents your super contributions from being taxed at a higher rate than your normal income.

Division 293A Tax

If you earn more than $250,000 p.a. you will be taxed an additional 15% on the concessional contributions above this threshold.

This is commonly referred to as “Division 293a Tax”.

Non-concessional contributions: These are contributions into superannuation where a tax deduction has not been claimed (also known as ‘After tax’ contributions). The annual cap for these contributions is $110,000 p.a.

Non-concessional contributions include:

• Personal contributions on which you do not claim a tax deduction, for example, those in excess of the concessional contribution cap.
• Government co-contributions: If your taxable income is less than $56,112, you can make a non-concessional contribution of $1,000 into super and receive a government contribution worth up to $500. This represents a 50% return on investment if you receive the full $500 co-contribution.

THE "BRING FORWARD" RULE

Instead of contributing $110,000 in any one year, the “Bring Forward" rule allows you to contribute up to 3 years’ worth of non-concessional contributions ($330,000 total) in one financial year.

However, when using this provision, you cannot contribute any further funds for a further two years.

The Bring Forward rule could potentially be beneficial for separated spouses who receive large lump sums of cash and are in the lead up to retirement.

They could potentially deposit up to $330,000 into their super fund in one move, to ensure that a portion of their monies are invested in a low tax environment in the lead up to their retirement

Note: you cannot make non-concessional contributions if your total superannuation balance exceeds the general transfer balance cap (the amount that can be transferred to pension phase), currently $1.7 million.

WHO CAN CONTRIBUTE TO SUPER?

You can make personal contributions to super if:

• you are under 67 years of age*
• you are aged between 67 and 75 and were gainfully employed (including self-employed) for at least 40 hours over 30 consecutive days during the financial year*

*Note: The government has passed legislation to remove the work test, and this will come into effect from 1 July 2022. This means that any person under 75 will be able to contribute to super, no matter their work status.

You are eligible for mandated employer contributions, including Super Guarantee payments, regardless of your age.

GET IT RIGHT

A successful super contribution strategy can mean the difference between looking forward to retirement or dreading it.

Super is a complex area and further rules apply in some situations.

Getting things wrong can have severe consequences on your retirement planning, therefore it is important that you talk to your qualified financial planner and get the right advice on the best ways to boost your super. 

Contact your nearest RSM office today! 

This page has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.    
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