Get ahead of yourself this financial year - Part 1

The end of another financial year is already on the horizon. If you're like many people, you probably won't start reviewing your finances until after 30 June 2010, potentially missing opportunities to reduce your tax while building your wealth. However, the best time to prepare for the end of the financial year is now.

Despite recent market conditions, super is still the most tax-effective way to save for your retirement.

Below I present 4 tax-effective super strategies that are suitable for a wide range of people and incomes.

For next weeks 3 tax-effective super strategies, click on Get ahead of yourself this financial year - Part 2.

Strategy 1 - Government co-contributions

What's the strategy?

You make a personal contribution to super and the government matches your contribution on a dollar-for-dollar basis, up to $1,000.

Who can use it?

To be eligible for the co-contribution you must make a personal contribution into a complying super fund by 30 June 2010. Your total income must be less than $61,920 and 10% or more of your total income must be from eligible employment, running a business or a combination of both. You must be under age 71 and have lodged your tax return. 

Why you should use this?

The co-contribution scheme is an effective way for eligible investors to boost their super balance. Earnings are taxed at 15% rather than a marginal tax rate of up to 46.5%.

Strategy 2 - Non-concessional contributions

What's the strategy?

There is a cap on non-concessional contributions of $150,000 per year. If you were under 65 on 1 July 2009, you can contribute up to $450,000 in the current year, although this limits how much you can contribute in the next two years. Any contribution you make over your relevant cap is taxed at 46.5%. 

If you turned 65 after 1 July 2009, you can still take advantage of these provisions this financial year, but if you make the contribution after your 65th birthday, you must satisfy the work test before making the contribution. If this applies to you, this will be the last chance you will have to make a large, non-concessional contribution to boost your retirement savings. If you are in this position, you may consider short term borrowing to fund a contribution if you're waiting for an asset to sell or to receive proceeds.

Who can use it?

You can use this strategy if you were 64 or under on 1 July 2009 or you turned 65 in the 2009/10 financial year and met the work criteria.

Strategy 3 - Concessional contributions

There are limits on the level of concessional contributions that can be made each year. The current limit is $25,000 unless you are 50 or older, in which case your limit is $50,000. Amounts contributed above these limits will be taxed at an additional 31.5% and will count towards your non-concessional contribution limits.

Salary sacrificing

What's the strategy?

Salary sacrificing involves diverting pre-tax dollars from your employment salary into a range of benefits. One of the most common forms of salary sacrificing is making pre-tax contributions into your super account. The benefits of this strategy are twofold.

Firstly, you'll be bumping up your super balance. Secondly, you reduce your tax liability. Instead of paying tax at your marginal rate, the amount you salary sacrifice becomes a taxable contribution received by the fund. The contribution (plus any income earned on the investment) is generally taxed at a maximum rate of 15%. And, once you turn 60, payments from your super fund are tax-free.

Who can use it?

Salary sacrificing can be used by most employees. You will need to check that your employer allows you to salary sacrifice. In addition to this, you must have an effective salary sacrifice agreement in place.

Personal deductible contributions

What's the strategy?

By making a personal deductible contribution to super, you can reduce your taxable income and therefore decrease your personal tax liability. If you have sold an asset during the financial year and realised a significant capital gain, you may also be able to offset any personal income tax that would have been payable on the capital gain.

Who can use it?

If you are self-employed, substantially self-employed, or under 65 and recently retired, you may be eligible to make a personal deductible super contribution. You should confirm your eligibility to make a personal deductible contribution with me before making the contribution.

Strategy 4 - Spouse super contributions

What's the strategy?

If your spouse's assessable income (including reportable fringe benefits) is less than $13,800 and you make a contribution to your spouse's super fund, you may be entitled to receive a tax offset. As this benefit is a tax offset, by implementing this strategy you can make a direct saving against your income tax liability.

Who can use it?

You may benefit from this strategy if you have a spouse on a low income and want to boost your partner's super savings whilst reducing your tax liability.

Next steps

The end of the 2009/10 financial year will be here before you know it. Don't wait until 30 June 2010 to get the financial ball rolling. Get ahead of yourself this financial year by calling me on 9372 7955 to discuss end-of-year strategies.

Important Information

The above information provides an overview or summary only and it shouldn’t be considered a comprehensive statement on any matter or relied upon as such. The above information doesn’t take into account your personal objectives, financial situation or needs. It’s important for you to consider these matters before making any financial decision and I recommend you seek help from a financial adviser.