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Small sacrifice to set you on the road to retirement

Increasing discussion around raising the pension age, changes to age pension eligibility and higher taxes make it more important than ever for people to plan ahead for a financially
secure retirement.

Finding extra cash for savings at the end of the month can be a tall order. But if you follow the adage that you won’t miss what you never had, then salary sacrifice can be a tax effective way to save for retirement.

It is done by entering into a written agreement with your employer to ‘sacrifice’ part of your pre-tax salary into your superannuation fund. In exchange, your contribution is taxed at the  concessional rate of 15 per cent instead of your marginal tax rate.[i]

Tax savings

Depending on your marginal tax rate, the tax savings can be significant. For example, the difference between the top marginal tax rate of 45 per cent* and the 15 per cent concessional rate is 30 per cent.

However, the government’s generosity does have limits. If you earn more than $300,000 a year you can make the same concessional contributions but the tax rate rises from 15 per cent to 30 per cent.

And no matter how much you earn, all concessional super contributions including salary sacrifice and your employer’s 9.25 per cent super guarantee payments are capped
depending on your age.

Up until 30 June 2014 the maximum concessional contribution is $25,000 a year up to age 60. The caps rise to $35,000 for people aged 60 and over.

From 1 July 2014 anyone aged 50 and over will also be able to contribute up to $35,000 a year at the concessional rate of 15 per cent.

You can also make additional contributions to super from your after tax income. These are called nonconcessional contributions and are currently capped at $150,000 a year.

The non-concessional cap is expected to rise to $180,000 a year after 1 July 2014, with a maximum of $540,000 allowable over three years under what is known as the bring-forward rule.

That means that anyone considering making a large non-concessional contribution using the bring-forward rule may be better holding off until after June 2014.

Avoid penalties

It is important to keep track of all your super contributions because the Australian Taxation Office may charge a penalty if the caps are breached. [ii]

The harsh penalty regime of previous years has been softened recently in recognition of the fact that most breaches are accidental. Even so, any excess concessional contributions may
be taxed at your marginal tax rate.

Under changes announced in the Budget, if you inadvertantly breach the non-concessional contribution cap you can withdraw the excess and earnings will be taxed at your marginal rate. If you leave the excess contributions in your fund they will be taxed at the top marginal rate.

Contributing additional amounts to superannuation can be a tax effective way to boost your retirement nest egg, as the table below illustrates. But like most things to do with superannuation and tax it can be complicated and there are rules.

Case Study
Please contact us on (08) 8132 9288 to discuss how salary sacrifice could help you achieve your retirement goals or leave a comment below.

^John, General Manager, Professional Services

General Advice Warning: This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial advice prior to acting on this information.
Investment Performance: Past performance is not a reliable guide to future returns as future returns may differ from and be more or less volatile than past returns.
Disclosure: Beyond Bank Australia Wealth Management is a trading name of Eastwoods Wealth Management Pty Ltd ABN 17 008 167 002 AFSL 237853.

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