The Bull

Saturday 20

October, 2018 5:58 PM



Super & Retirement question

Commencing a transition to retirement strategy while still adding to super - Part 2

Commencing a transition to retirement strategy while still adding to super - Part 2 Jeremy Gillman-Wells

In Jeremy's recent article "Commencing a transition to retirement strategy while still adding to super" he says (with reference to the 2009/10 financial year):

"Secondly, at $30,000 taxable income you have optimised your personal tax situation. There is no point salary sacrificing below this level as things like low income earners rebate take you to a personal tax position that is lower than 15%. There is no point in paying 15% tax on super contributions if you would actually pay less tax by NOT paying it into super. So just make sure that your taxable income is not less than $30,000 pa due to salary sacrifice."

I am confused by this as I thought that although the threshold between the 15% and 30% tax rates was $30,000 for 2007-2008, it was increased to $34,000 for 2008-2009 and to $35,000 for 2009-2010 - as shown on the ATO website.

So if you salary sacrificed to $30,000 for 2009/10, wouldn't you would be sacrificing $5,000 more than the optimum? Regards Neil

Answer:

Just before we start, I'd like to mention that I am not a tax agent or qualified tax expert. The following is information that I have picked up through my casual reading of the ATO website (as you do!!). You should always run your own tax situation through your tax agent or accountant.
 
So back to the question...yep, on the surface your analysis looks right. But then you have to remember that we have one of the most complicated tax systems in the world.
 
Quite simply, rebates and offsets are more powerful than tax deductions. So if you can maximise rebates, then you can generally get yourself into a better overall tax position. That is, for most people, the goal is to pay the lowest amount of total tax to the ATO, not the lowest percentage tax bracket.
 
I have included analysis below which is based on a lot of assumptions. You will need to take into account your own situation...which could include deductions for rental properties, non cash deductions such as depreciation, imputation credits, eligibility for mature age tax offset and the list goes on. The general principle remains: if you get close to $30,000 of taxable income for the financial year, then you have "optimised" your tax position whilst also boosting your retirement savings to the maximum possible extent.
 
So here is an example for financial year 2009/10 of someone between the age of 50 and 55 with earnings of $73,400 pa as a wage. That's it, a simple scenario:

Chart

So now let's get this person down to taxable income of $30,000 (or close to with the view to get the maximum possible into super). This will help to:

- reduce tax,

- reduce Medicare Levy,

- give maximum access to Low Income Earner's Rebate (which phases out over income of $30,000), and

- will allow the maximum $50,000 into superannuation as a concessional contribution.

Chart

The total contribution to super is $50,000 (the maximum concessional contribution without breaching the cap) . The total tax saved versus doing nothing is $7,761. This tax saving is effectively now in super as additional retirement savings. Low income earner's tax offset has reduced tax, dollar for dollar, by $1,350 (the maximum you can get).
 
Now let's look at what happens in relation to total tax paid if this person only salary sacrificed enough into super to get taxable income down to $35,000 (where the 30% tax bracket starts). In this scenario, less goes into super and more money is left in the hand to spend. However because taxable income is higher, more Medicare Levy is paid and less low income earner's offset is received resulting in $275 more tax being paid overall.

Chart

Granted the difference is only $275 for the year, but it is a saving none-the-less. Most people would rather have $275 extra in their super than hand it over to the ATO. Hopefully this explains why I said:

"Secondly, at $30,000 taxable income you have optimised your personal tax situation. There is no point salary sacrificing below this level as things like low income earners rebate take you to a personal tax position that is lower than 15%. There is no point in paying 15% tax on super contributions if you would actually pay less tax by NOT paying it into super. So just make sure that your taxable income is not less than $30,000 pa due to salary sacrifice".
 
Always remember that your own situation could have a myriad of inputs that modify the outcome of this analysis, so it's always good to check your thoughts with a professional adviser.

By Jeremy Gillman-Wells, Financial Planner, Bentham Financial Group 

Jeremy Gillman-Wells is an Authorised Representatives of AMP Financial Planning Pty Limited   | ABN 89 051 208 327 | AFS Licence No 232706. In order to get the latest newsletter, click here.

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