By Steve Blizard 31 July 2017
FEWER than one in 10 Australians are contributing extra into their superannuation, potentially costing themselves thousands of dollars a year in missed government giveaways.
A new study examining more than one million super fund accounts has found that 92 percent of savers only have the compulsory 9.5 per cent employer contributions paid into their super, which experts say is not enough to afford a comfortable retirement.
Research by global investment group, Vanguard, shows that some free money incentives, such as $500 for co-contributions and $540 for spouse contributions, have only been used by one percent or less of super fund members.
“You wouldn’t walk past $500 if it was in an envelope on the footpath on the way to work,” said Vanguard head of market strategy, Robin Bowerman.
“The inertia factor is pretty strong” he added.
New contribution rules
One important aspect of the latest super reforms, in place since July 1, is new changes to the contribution rules.
Being aware of these changes is essential for anyone, especially couples, looking to make the most of super’s tax concessions in the post-2017 super world.
While there have been significant contribution cuts to both tax-concessional and after-tax contributions, a series of other adjustments offer the scope to make contributing to super a new ballgame in terms of strategy.
New rules for personal tax-deductible contributions, spouse contributions and the future right to make catch-up contributions when coupled with existing salary-sacrifice and spouse super splitting strategies could be very useful for couples seeking to benefit jointly from retirement saving arrangements.
With the new $25,000 maximum pre-tax concessional super cap impacting the high income earner in the family, couples may find it beneficial to restructure how they contribute to their spouse’s fund.
Being aware of the difference when contributing to super can result in substantial long term tax savings.
While there are still considerable opportunities to make after tax non-concessional super contributions, the spouse tax offset and the super co-contribution should now be the first port of call.
Spouse Tax Offset
A tax offset is an entitlement to reduce your income tax bill by a nominated amount, if you comply with certain rules.
For instance, where a couple has one partner earning a low income, less than $37,000 according to the spouse tax offset rules and one member contributes $3000 to their partner’s super, this can reduce their tax bill by $540.
What is different about the new spouse tax offset rules is that in the past an offset entitlement was only available where a spouse’s income was less than $13,800, but this has now trebled to a maximum income of $40,000.
This represents a big expansion of this entitlement.
Beyond $37,000 and up to $40,000, the tax offset is reduced according to a formula of 18 percent of income above this amount until it phases out at $40,000.
Case Study One
For example, if James has income of $37,500 (which is $500 above $37,000) and his partner Suzie contributes $3000 to his super, she will be entitled to a tax offset of $450.
This is calculated as 18 percent of the lesser of $3000 reduced by every dollar earned above $37,000, in this instance $500.
The $450 offset entitlement is 18 percent of $2500.
The spouse tax offset of up to $540 will remain for any member, whether married or de facto, prepared to contribute $3000 to their partner’s super.
So, if James annual income was only $35,000, Suzie would be entitled to the full $540 tax rebate on her $3000 super contribution.
Due to the previous low income limit, the spouse offset has rarely been used by super savers – hence for many it was “off the radar”.
However, with the threshold now increased to $40,000, this means more people will be able to access the offset, growing their super fund more tax effectively.
Case Study One
Emma (age 46) and Mason are married and living together.
Emma’s income is $38,000 and they are both Australian residents.
Emma has not exceeded her non-concessional contributions cap, and her total super balance is under $1.6 million.
Mason wishes to make a super contribution of $3,000 on Emma’s behalf, to her complying super fund.
Before 1 July 2017, Emma’s income would be too high and therefore Mason would not have been eligible for a tax offset if he had made a spouse contribution.
Under the new arrangements from 1 July this year, Emma’s income is under the increased threshold, so Mason is now eligible for a tax offset.
However, as Emma earns more than $37,000 per year, Mason will not receive the maximum tax offset of $540.
Instead, Mason calculates his entitlement as 18 percent of the lesser of:
■ $3,000 reduced by every dollar over $37,000 that Emma earns
■ the value of spouse contributions.
Emma earns $1,000 over the $37,000 income threshold, so Mason’s tax offset is $360.
This is calculated as 18 percent of $2,000 ($3,000 reduced by the $1,000 that Emma earned over the $37,000 income threshold).
This amount is less than the value of the spouse contributions ($3,000).
While the benefit on offer has limits, extending the current spouse tax offset will assist more couples to support each other in saving for retirement, better targeting super tax concessions to low-income earners and people with interrupted work patterns.
Disclaimer: The advice in this article is general in nature and readers should seek their own professional advice before making any financial decisions.