Tax deductible superannuation contributions can be very beneficial as discussed last week. It is also possible to make non-tax-deductible contributions to super. They are called non-concessional contributions and the limits on amounts allowed are much higher.
The maximum is $110,000 per year. However fund members can also bring forward two future years’ contributions and make a one-off contribution of up to $330,000 provided no further amounts are put in until three years have passed.
Why put large sums of money into super? While the contributions don’t provide tax deductions, the earnings within super funds are lowly taxed – fifteen per cent on income and ten per cent on capital gains. These are much lower than most personal and company income tax rates.
People who have cash available and are keen to build up their super for retirement will be most interested. Extra lump sums can build up smaller balances and help ensure enough is saved to provide an adequate retirement income. The money can come from savings, sales of property or assets, or inheritances.
Super account balances can be converted at retirement to account-based pensions that earn returns entirely tax-free and provide regular, reliable income for the retiree.
Following a rule change last July personal super contributions can now be made by members up until they reach age 75, even if they aren’t working. This provides a valuable opportunity for retirees approaching that age to move money from non-super investments into tax-free pensions.
Non-tax-deductible super contributions can also be used to reduce or eliminate the tax on super benefits after the member passes away. Most super accounts include a large proportion of ‘taxable component’. These amounts are taxed at least fifteen per cent when inherited by non-dependent beneficiaries.
The tax that adult children must pay can be very large, sometimes $50,000 or more, depending on the account balance and components. Eliminating this can be a major benefit to them.
It is possible to move benefits from the taxable to the tax-free component of the super account. This is done by withdrawing money and recontributing it back into the same fund or another. These strategies are complex and the best options for each person vary depending on their circumstances.
Withdrawals of up to $330,000 followed by recontributions can achieve the desired death benefit tax reduction. This action may need to be repeated before age 75, after which no further contributions are allowed. Financial advisers can help plan the ideal personal strategy based on circumstances.