With the end of financial year approaching now is the time to review your wealth planning and talk with your adviser or accountant about tax saving strategies that could be used before June 30.
Planning could be done to optimise your financial position and take advantage of opportunities to reduce your personal taxable income.
Reduce your tax with a deductible contribution to super
Superannuation is considered the most tax effective place for wealth to be invested during retirement as during pension phase earnings are tax-free. The tax-free pension cap will increase from the current $1.7 million to $1.9 million from 1 July 2023. Where possible, individuals should strive to achieve the maximum tax-free pension balance by the time they retire. Building a strong super balance requires the benefit of time so planning should begin early to make the most of deductible contribution limits.
The annual deductible contribution limit is $27,500 for most and includes contributions made by your employer or amounts you claim a personal tax deduction for. For those with a super balance over $500,000 any unused part of this annual limit is lost.
Pre 30 June is a good time to check the deductible contributions made to your super account and consider making extra contributions to make the most of your limit. Making extra contributions up to your limit could reduce your taxable income and potentially reduce your tax.
Extra contributions can be made direct to the superannuation account or via salary sacrifice. Salary sacrifice can be an automated savings option and provides an immediate tax benefit.
Those with a super balance under $500,000 may have the chance to contribute more than their annual contribution limit if they have unused deductible contributions over the past 5 years. Where cashflow allows and taxable income warrants, the unused contributions can be effective in reducing taxable income, particularly in years where an investment was sold leading to a large capital gain.
Take the example of Fran who sold an investment property during the 2022/23 financial year. Fran owned the property for many years and made a capital gain of $185,000 on the sale (after the 50% CGT discount). Fran has a super balance under $500,000 and has unused deductible contributions of $130,000, being $102,500 in carried forward amounts plus the 2023FY limit of $27,500.
By adding $130,000 of the sales proceeds to her super as a deductible contribution Fran reduces her taxable income from $185,000 to $55,000. Fran has also significantly increased her superannuation savings.
You may consider making an after-tax contribution to your spouse’s super of up to $3,000 if they are not working or earning a low income. This is a way to boost their balance and could also benefit you as you may qualify for a tax offset of up to $540.
If you earn less than $57,016 during the 2022/23 FY and 10% or more of your income is from employment or running a business, you may consider making an after-tax contribution to super as you may qualify for the government co-contribution of up to $500.
Superannuation contribution rules are very complex. It is a good idea to seek advice to find out if you can benefit from any of these strategies.
Please reach out to your HLB contact to review your personal situation.
This article was first published in Personal Wealth Adviser, Issue 6.
Lindzi Caputo is a Financial Adviser of HLB Mann Judd Wealth Management (NSW) Pty Ltd (AFSL 526052) ABN 65 106 772 696