Tax Deductible Superannuation contributions - pros and cons?

G'day all,

Seeking the wise ones here who can offer their viewpoints of claiming or not to claim.

I am a self funded retiree (medically retired and 51 yrs old). I live off my investment income streams.

I joined a Superannuation fund (Industry fund) in 2019 and voluntarily contribute $25,000 per annum. I understand that is the maximum non-taxable amount. I started this up as a way of growing additional wealth without the usual taxes from investing in equities.

I also realise that I am entitled to claim an income tax deduction for that amount (or lesser).

From what I read I therefore would be entitled to reduce my income tax liability by $25,000 less. E.g. if I earned $65,000 taxable income, then the taxable income reduces to $40,000.

However, it is not a free lunch. That is because in order to obtain that reduced taxable income, I would be taxed 15% on the $25,000 in my Super fund. 15% of $25,000 is $3750.00. That means my annual superannuation contribution would be reduced to $21,250.00.

Con: Over the years, my Super investment is reduced by that much per annum, meaning less performance of my Super fund and hence less retirement income.

Pro: I get to keep more cash in my bank account, which I can then use to invest in other asset classes (albeit being subject to tax!).

By doing a very rough calculation, the amount of income tax saved minus the $3750.00 Super fee, I think I would be in front by around $4,000 to $5,000.

I also see that I need to submit the relevant form "Notice of intent to claim or vary a deduction for personal super contributions" to my Super Fund, receive confirmation of that form and have that done before I lodge my tax return.

Would appreciate what others do/don't do.

 

Hey Mad,

Seems like you have a pretty good handle on the tax implications.

You've not provided your personal taxable income, however you do seem to have a tax 'arbitrage' there as your are saving tax overall after the 15% tax on the contributions.

You need to not perceive your personal investments and super investments as two separate things - they all belong to you - so if you can use super contributions to reduce your tax, then you overall have more to invest / grow and set you up in comfort for the rest of your life.

Did you make the $25k contributions before or after 30 June 2019? If after, you may actually be able to make another $25k contribution before 30 June 2020 (if your total superannuation balance is under $500k and less any other concessional (employer) contributions that may have been made for you before 30 June 2019). This is the catch-up contributions system.

You can wait until your taxable income personally has been calculated before you decide to claim (and how much you want to claim) - this enables you to optimise your tax.

Also, as you've said you're 'medically retired' - does this mean you are 'totally and permanently disabled' - i.e. you have access to draw down your super? There may be some strategies available with your super if this is the case. If you've made the decision to stop working early by choice due to health reasons, then those strategies won't be available.

Have you ever obtained advice from a financial adviser who could work through these items? Or even an accountant?

KK

 

Thanks for the tips. Not not savvy, just learnt some really hard lessons.

I was medically retired in 2016 with a 'Total Permanent Disability' classification. I was given a lump sum compensation payment and panicked in 2016 because the lump sum settlement payout was not enough to generate enough income and live off without that lump sum capital depleting to zero eventually way before I would likely die (80 years old average death age for a male)
I was in a very bad way psychologically and had my doctors sign a withdrawal authority to withdraw my Superannuation. Stupidly, using the TPD early withdrawal entitlement, I withdrew all of it, instead of partial, thinking I could invest it all and live off the income streams. I don't want to think about that because I cannot get back into that particular scheme as it has closed to new members and they won't let me back in.

(For people with PTSD and the like, this is not such a good idea as we are not thinking straight when in bad relapse state and prone to really bad decisions. We are targets to people who see us as vulnerable 'suckers' in the finance, real estate, or anything money related industries)

I have opened a new Super account after a financial adviser talked in general about the tax benefits. I chose HostPlus. I have just under $50,000. I invested $25,000 before FYE 2019 and $25,000 at the beginning of FYE 2020.
Taxable income is well under $100,000. 32.5% tax rate

I did not know about the additional 'catch up contributions' system. I read the link but find it hard to understand. My accountant never gives me advice. They just do tax returns. I seem to only ever be able to find this stuff out by reading it online.

I have seen a couple of financial advisers but the advice was just general. My accountants have just only ever done my tax returns and never reply to my questions regarding advice. Financial advisers in my experience have only ever just wanted to get me to sign up to investment fund products with high fees and average performance. I have made bad choices based off financial advice as well.