Q: I earn $110,000 a year and my only superannuation savings are compulsory employer contributions. I am thinking of using salary sacrifice to increase my contributions but I understand there are new personal contribution rules. How do they work?
A: It has become easier to make additional contributions to superannuation. New arrangements took effect on July 1 that allow people to make voluntary contributions to super on their own behalf and claim a tax deduction in their personal tax return.
People aged 65 to 75 will need to meet a work test to claim the deduction.
With your earnings of $110,000 you would receive a mandatory employer contribution of $10,450 a year (9.5 per cent of salary).
At the end of the financial year you could take $14,550 from savings and contribute it to super, taking your contributions for the year to the limit of $25,000.
When you lodge your tax return you will be able to claim a personal superannuation deduction on the contribution. This will produce a tax saving of $5075, which is 39 per cent (including the Medicare levy) of $14,550.
The contribution will be taxed at 15 per cent when it goes into super ($2183), so your overall tax saving would be $3492, a 24 per cent return on the $14,550 contribution.
As contribution caps continue to be reduced, it is no longer possible to make large contributions close to retirement. You need to build super savings in a meaningful way from a much younger age.
The salary sacrifice system remains in place. It continues to be a good option because it makes the savings automatic and the tax benefit is immediate because it is pre-tax dollars that are contributed.
However, you now have another way of making deductible personal contributions.
Jonathan Philpot is a wealth management partner at HLB Mann Judd