Paying your employee’s superannuation on time, in full, is essential. Especially now that the introduction of Superstream means that superannuation funds will report employers who fail to meet their payment obligations to the ATO.
What if I told you that making this payment early, rather than late, is actually a effective tax planning tool?
A bit of background information
Each time your employees come to work they accumulate a superannuation entitlement. The current rate for superannuation is 9.5%. Some employees don’t qualify for superannuation payments but for the purpose of this exercise I’m focus on those that do.
At the end of each financial quarter (e.g. July to September, or January to March) we need to pay this superannuation amount into the employee’s super fund.
These payments are due on the 28th day of the month after the quarter ends. For example superannuation that relates to the January to March quarter is due on the 28th of April.
What most business owners are not aware of is the fact that until the superannuation is paid it is not deductible and if you miss the payment deadline (the 28th) the amount is no longer deductible at all, even after you pay…but you still have to pay!
How does this strategy work?
Your employees superannuation payments for the April to June quarter are due on the 28th of July.
If we pay them on time they are not claimed as a deduction until next year because they were paid after 30 June.
If you paid $100,000 in wages during the March to June quarter that’s $9,500 of superannuation you’ll need to pay in July. This payment will be claimed as a deduction next year.
What if we brought the payment forward? Just one month? You’d get the tax deduction in this financial year. Assuming you are managing your business cashflow well the money should be set aside each time you process payroll. If the money is just sitting there, why not bring the deduction forward?
Assuming you pay an average of 30% tax the $9,500 payment, which you have to make in July anyway, would reduce this years tax bill by $2,850 if you paid in June!. That’s extra cash in your bank account now rather than after you lodge next years tax return.
Option 1 – No Tax Planning: Pay the $9,500 superannuation bill in July (next financial year):
You make the $9,500 Superanuation payment in July 2018.
The $2,850 Tax Deduction is received in September 2019, or later depending on when you lodge your tax return.
This means you don’t get the cashflow benefit of the payment for over 12 months after you pay it!
Option 2 – With Tax Planning: Pay the $9,500 superannuation bill in June (this financial year):
You make the $9,500 Superannuation payment in June 2018.
The $2,850 Tax Deduction is received in September 2018, or earlier depending on when you lodge your company tax return.
The net result is $2,850 of cash in your bank account 12-18 months faster just by making the superannuation payment 1 month early. I know a few $thousand here and there may not seem like much but this is an easy win and it’s just one of the tax planning options you should be exploring with your accountant at this time of year (April-June).
Other Points to Notes
1. You need to make your payment before business closes on 30 June. The funds must have left your bank account. Ideally, process the amounts at least 3 working days before 30 June.
2. Paying your superannuation obligations early might inadvertently push your employees over their contribution cap for the year and be detrimental to them. Currently your employees can contribute a maximum of $25,000 per year to their superannuation fund.
Profit First Australia
A common issue during Tax Planning is a lack of cash. All the great ideas in the world are useless if you don’t have the cash available to implement them. This is just one of the many reasons we recommend Profit First. If the system is up and running in your business the money required to implement this and many other tax planning strategies will have been accumulated through-out the year. When you reach year end it’s just a matter of chatting with your accountant and implementing the plan!
If you’re interested in getting your cashflow on track you can learn more about Profit First Australia here.
What should you do next?
- Look out for more tax planning tips in the coming weeks!
- Ensure you and your accountant are working towards a year end tax planning strategy, and
- If your accountant isn’t doing tax planning then contact us!