How do I make catch-up salary sacrifice contributions to super?
Boosting your superannuation balance by using salary sacrifice arrangements is a great idea, but there are limits to doing so.
Q: I have $800,000 in an untaxed superannuation fund, being a former government employee, and $100,000 in accumulation phase with a public fund. Over the past five years I have not contributed the maximum concessional contributions allowed and now want to salary sacrifice to reduce tax and to build my super balance. I am proposing to salary sacrifice to the maximum carry-forward unused concessional available for 2023-24. To access this concession, do I merely inform my payroll department or is there paperwork required by the ATO? Dean
A: While making salary sacrifice contributions to superannuation is a great idea, the possibility of giving your super an extra boost by taking advantage of a strategy where you can contribute unused tax concessional contributions from previous years is not as simple as it might seem.
That’s because there is a maximum total super balance amount of $500,000 you cannot exceed to qualify to make such contributions, says financial strategist Theo Marinis, of Adelaide-based Marinis Financial Group.
The entitlement to make additional tax concessional contributions in a financial year utilising unused cap amounts going back up to five years was introduced in July 2018 to provide people with low super balances an opportunity to catch up.
The law that introduced this measure noted that an annual cap on concessional contributions could limit the ability of people with interrupted work patterns or irregular income – quite often women – to accumulate super balances similar to those with more regular income.
An unused contribution is the difference between the normal annual tax concessional contribution entitlement (currently $27,500) and how much is contributed.
In your case, says Marinis, you won’t qualify for the bring-forward entitlement because your total super balance of $800,000 in an untaxed fund plus $100,000 in a public fund easily exceeds the $500,000 threshold.
It means you will only be able to contribute $27,500 a year, which may include actual or notional employer concessional contributions in the case of defined benefit super funds.
If your employer concessional contributions (actual and/or notional) are, say, $11,500 a year, you can elect to salary sacrifice up to $16,000.
The money sacrificed will be taxed within the fund at 15 per cent (assuming Division 293 tax where you pay another 15 per cent tax on concessional contributions when your income exceeds $250,000 does not apply) versus your personal marginal tax rate.
Other issues to bear in mind, says Marinis, are that you may not be permitted to make any salary sacrifice contributions into your existing super fund, depending on the fund’s rules.
You might also not be allowed to salary sacrifice below a gross salary amount under your award.
You should not choose to salary sacrifice below the tax-free threshold – the first $21,884 (which includes the low-income tax offset) of your income (assuming you can afford to reduce your salary that low) as all salary contributions will generally be taxed at 15 per cent by the fund, so why salary sacrifice income that is not subject to personal tax?
Marinis says he would also advise, once all these hurdles are passed, that any salary sacrifice can be valid only if it relates to prospective salary, and this should be confirmed with your employer in writing.
Finally, it is vital to confirm that your employer will not reduce their super guarantee contribution because of the salary sacrifice amount (because salary sacrifice to super is technically an employer super contribution) and that it will not affect any leave entitlements.
To avoid any ambiguity, Marinis recommends that any salary sacrifice communication with an employer must state that the extra amount contributed must be in addition to the super guarantee due on your gross salary. Further, this salary sacrifice should not affect any base/total/gross salary package for leave purposes.
Q: How does the tax-free component of an SMSF change over time with the growth (or fall) in the value of non-concessional contributions? In June 2012, I made an in-specie non-concessional contribution by transferring shares I owned in my personal name to my SMSF. On the day the shares were added, they represented about 5 per cent of my total fund assets. Since then, this contribution has grown significantly and today represents about 45 per cent of the total super fund mix mostly due to growth in the value of the original shares and some changes to the share mix. My belief was that the growth in the in-specie contribution would change the tax-free percentage proportionally but this has not been reflected in the fund status. David
A: An in specie non-concessional contribution of personally owned shares is a contribution of shares on which you have paid personal tax on any capital gains prior to them being contributed as an after-tax amount to a superannuation accumulation account.
As such, the value of the contributions will be regarded as tax-free, says Michael Hallinan, an executive consultant at SUPERCentral, which is part of Townsends Lawyers in Sydney.
What is significant about such contributions is that any increase in their value will not affect the value of the tax-free component. It’s the dollar value of the contribution at the date of receipt that determines the tax-free component.
Given that the earnings and growth (where an asset is sold) on non-concessional contributions are taxable, allocations of earnings and growth to a superannuation accumulation account are not tax-free, says SMSF auditor Belinda Aisbett of SuperSphere in Melbourne.
When you make a tax-free contribution, it becomes a tax-free part of the super accumulation account that can reduce proportionally as taxable investment earnings and tax concessional contributions are added, and asset values increase.
That said, applying proportioning to a super account between tax-free and taxable amounts does not become relevant until super is withdrawn, either as a pension or a lump sum.
When a pension is started, for instance, says Hallinan, the proportion of tax-free and taxable super is struck at this time and the percentage then remains unchanged.
What proportioning does is prevent you from choosing which components – tax-free or taxable - to withdraw when a super benefit is paid.
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