Are you getting the most from your super?

With half of the financial year almost gone, time is running out to make the most of the tax benefits available to you via your super. The good news if you are expecting a work bonus is that you may be able to reduce your 2010/11 financial year tax bill, and keep more of your hard-earned money for yourself!

Under the current super system, the amount that can be tax-effectively contributed into a super fund (e.g. Super Guarantee contributions your employer pays and salary sacrifice contributions) is limited to $50,000 a year for those aged 50 and over, and $25,000 a year for those under 50.

This system works on a use-it-or-lose-it basis – meaning that if you don’t make the most of your annual limit, you lose the opportunity to reduce your tax bill and increase your retirement savings via concessional super contributions for that year.

More importantly, if you’re aged 50 and over, from 1 July 2012 (i.e. in one more financial year) your limit will fall to around $25,000 per year, making it even more difficult to tax-effectively pour large sums of money into super to reach your retirement goals.

Even though many people over age 50 will consider a “building for retirement” strategy to increase retirement benefits, these strategies work best with larger balances, so opportunities to grow your super in a tax effective way should not be wasted.

So the old adage of make hay while the sun shines is especially relevant to employees who are expecting to receive a bonus in 2011 because in many cases, employers will provide their employees with an opportunity to salary sacrifice bonuses (before tax) into their super.

By taking up this opportunity, not only are you likely to keep more of your bonus, you’ll also be making the most of the additional tax-effective benefits provided by super.

For example:

Christian is a 50 year old earning $105,000 a year, and receives $9,450 (i.e. 9%) in compulsory super contributions from his employer. He is also currently salary sacrificing $500 a week from his pay into super. As a result, he will make a total of $35,450 in before-tax contributions into super this year – and he would miss out on any additional tax benefits from the remaining $14,550 of his annual $50,000 contribution limit.

As Christian has achieved his key targets in 2010, he is expecting to be rewarded with a performance bonus which (if he is eligible) will be paid in March 2011. As Christian’s entitlement to a bonus is still to be determined, this presents a perfect opportunity to make the most of the remaining contribution limit for the 2010/11 financial year – but he will have to act quickly.

Let’s assume that Christian will receive a $14,550 bonus, and let’s compare the benefits of salary sacrificing his bonus payment into super, rather than taking it as cash.

	Taking bonus as cash	Salary sacrificing bonus
Original bonus amount	$14,550	$14,550
Less personal income tax (38.5%)	$5,602	-
Less super contributions tax (15%)	-	$2,183
Remaining bonus (after-tax)	$8,948	$12,367
Tax saving benefit	-	$3,419

By arranging, in advance, for his employer to sacrifice his bonus into super, Christian pays less tax on his bonus, meaning that he keeps much more of his money, and it is working for him in a more tax-effective way – helping him to make the most of the super concessions that are currently available.

Remember, Christian only has one more financial year before his concessional super tax benefits are halved. So, by making the most of this opportunity today Christian will make significant progress towards owning his tomorrow, sooner.

Christian must remember, that all money contributed to super are preserved. Therefore, he will not be able to access his money until he meets a condition of release.

Want more information?

It is important to note that there are significant tax implications if contributions limits are exceeded. So, to see if this strategy can work for you or to simply find out how you can get the most out of your super, please call us today.

What you need to know
Information current as at November 2010.  This article contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.  Some of the information in this article is based on our interpretation of the law. It is a summary of the subject matter covered and is not intended to be comprehensive legal, tax or financial advice. No reader should act on the basis of this article without obtaining specific professional advice. If you decide to purchase or vary a financial product, your financial planner, our practice, AMP Financial Planning and other companies within the AMP Group will receive fees and other benefits, which will be a percentage of the premium you pay and/or the advice fee you agree with us.  Further details are available from your planner or AMP Financial Planning Pty Limited, telephone 1300 157 173.