Michelle Watson is a superannuation + tax specialist at a major bank. Michelle started her career in financial advice. Outside her financial chops, she’s not only completing her CA but is a multi-talented classical vocalist too! 🎤👌
1. Err—what is super?
Superannuation is a special investment structure designed to provide a cosy tax environment for your retirement savings to grow.
Contributions + the returns you make within your super are normally taxed at 15%. That’s generally much lower than your income tax rate.
Once your money has been put away to your super fund, it’s locked in until you’ve met a condition of release. If all goes to plan, this is retiring after age 60, or reaching 65. There are a couple of exceptions — for example if you run into medical trouble or severe financial hardship.
These two features — tax effectiveness and the fact that you really can’t touch it — means that superannuation is an ideal savings structure for putting funds away for your future.
2. How much do I need?
Retirement may seem a long way away, and let’s face it, who knows what you might want to do then. But to have a ‘comfortable’ retirement it’s estimated you might need something like $545,000 saved away for a single person (assuming you own your home!), according to the ASFA Retirement Standard.
✋ Carrots team here: it’s actually likely that we’ll need more 😳… But we’ll explain more on this next week!
3. Topping up is super smart
If you’re not self-employed, you’ll already have 9.5% of your pay directed towards super pre-tax — a legal requirement. Which means sneakily in the background, your super is growing. If sneaky growth isn’t enough for you AND you’re looking for a tax effective way to invest, you can put extra money into super. Super smart! Especially if you want to retire earlier…
Employer-agreed salary sacrifice
This is an agreement with your employer to direct some of your pre-tax salary directly to your super fund. Make sure you talk through all the details and formally sign your arrangement, as your employer may be entitled to reduce the super they pay you 📌.
If you’re self-employed, putting money into super is less automatic and therefore really important to pay attention to. It’s easy to think you’d rather use the money today, but you should pay Future You too 😬. Even if it’s just a little!
Without sneaky contributions to grow your funds, you need to consciously work out how to boost your retirement savings — otherwise you’ll be missing out on the tax benefits now and lose out without compounded growth over time, meaning less funds in the future.
4. How much can I contribute?
Because super is taxed so nicely, there are limits to how much money you can put in. Once you exceed these caps, you’ll pay tax at the highest marginal rate (49%!).
So, if you’re self-employed, you can put up to $30K of concessional contributions into your super.
5. How do I top up?
To make a tax-deductible contribution to your super fund:
- Check eligibility: If you’re contributing before 30 June, you need to make sure you meet the ‘10% test’: the income you earn ‘as an employee’ must be less than 10% of your total income 🗃. Self-employed? Big tick! ✔
- Allow enough time! Funds transfers will take a few days to go through📅. If you make a contribution on June 30, your fund may not receive this in time. So your deduction will be for the following year, meaning you miss a whole year of potential retirement savings boosts (boo) 💩.
- Check your super fund’s process. You’ll be able to make the deductions as long as you do so by notifying your fund of your ‘intention to claim’ 📝.You’ll have to do this by the earlier of: a) when you lodge your tax return, or b) the end of the next financial year. Check your fund’s website for the right ‘intention to claim’ form.
- Include your contribution in your income tax return. There’s a special spot just for these when you lodge your tax 🖇!
And of course, you’ll need to figure out how much you can pay according to your cash flow 📊.
It’s a super time to act
You only have 10 days left before the cap reduces and the financial year ends, so it’s a good idea to get cracking ⏱!
Thanks Michelle! 🙌🏽
Michelle started out writing statements of advice, before becoming a specialist in superannuation law. She now spends her days consulting in taxes of almost every kind. She’s a star ⭐.
NB: As always, this article is intended for informative purposes only and is not to be taken as personalised financial advice.