In a previous edition of this tax tips series I looked at the tax planning benefits of paying your employees superannuation contributions early. This time I’m focusing on your own, personal superannuation contributions.

…but before I do, a quick disclaimer!

**Superannuation is a financial product. As such only Individuals and businesses who hold an Australian Financial Services license or their authorised representatives can directly advise on the flow of funds in and out of your superannuation fund. My aim here is to provide general advice focused purely on the tax differences that can be achieved using superannuation tax rates.**

Ok, now that the legal nonsense is covered lets look at some tax savings!

How does this strategy work?

Superannuation is what we refer to as a ‘concessionally taxed environment’. What that means is that superfunds only pay 15% tax under normal circumstances even though they generate huge profits every year. The federal government allows them to enjoy this concession because they abide by a strict set of rules and in the long-term they take some of the strain off the welfare system.

As you would expect, tax accountants and financial planners look for opportunities to use this reduced tax rate to achieve favourable outcomes for their clients…or at least they should!

Lets look at how you can use superannuation to achieve a tax saving.

Sample Information – Scenario

Your business has made a profit of $150,000 for the current financial year before tax and owner’s pay. Well done! It’s now June 2018 and you are preparing your tax strategy for the 2018 year, which is about to end.

The current tax-deductible superannuation contribution limit is $25,000. You want to know the potential tax savings you can achieve by maxing out your super contributions for the year.

Option 1 – No Superannuation Contributions

The whole business profit of $150,000 is paid to you as the business owner and you pay tax on the money at your normal marginal rates.

Based on current marginal tax rates you will pay $46,132.00 in tax (including Medicare levy).

Option 2 – Contribute $25,000 to superannuation:

In this example $25,000 in cash will be contributed to your superannuation fund. The remaining $125,000 Profit is paid to you as the business owner and you pay tax at your normal marginal rates.

1. Based on current marginal tax rates you will pay $36,382.00 in tax (including Medicare levy) personally.
2. The superfund will pay $3,750 in tax on the $25,000 contribution you make (15%).

The total tax paid under this option is $40,132.00

The net result is a $6,000 saving on total tax paid on your business profits for the year.

Other Points to Note

  • While we have achieved a tax saving of $6,000 it is important to remember that the net superannuation contribution ($25,000 – $3,750) is trapped in your superfund under the normal rules. That is not necessarily a bad thing, just good to remember.
  • Tax is by no means the only thing you should consider when making the decision to contribute to superannuation. All the elements of your long term financial strategy should be considered. If you don’t have one it might be time to see a financial planner.
  • If you process yourself through the payroll module like your other employees then super contributions are already happening. The difference is these contributions are compulsory. During tax planning you will need to ensure that you adjust the year end contribution for any amounts you have put in during the year so that the total does not exceed $25,000.
  • The tax savings achieved through this system vary greatly depending on how much you earn each year. Taxpayers who earn more than $180,000 per year will see larger savings while those earning $50,000 a year in profit may see no savings at all. It’s important to run the numbers first!

Profit First Australia

Clearly, for the sample strategy to play out as described you would need to have $25,000 of cash available to contribute to superannuation. If all the cash is gone then any advice I give you is useless.

This is where Profit First comes in. If you want to create a situation in which you can realistically take advantage of these sorts of opportunities you need to plan and save. My usual recommendation is to set aside some of your owner’s pay each week/fortnight/month in preparation for year end. Then it’s just a matter of chatting with your Accountant and Financial planner before making the contribution.

If you don’t currently use Profit First in your business you can learn more about the system here.

Next Steps

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!