It makes absolute sense for a doctor or dentist to consider making concessional superannuation contributions given the tax savings provides a better after-tax return instead of paying tax to the tax office. Something is better than nothing. Whether you choose to maximise your concessional superannuation contributions or whether you choose to contribute slightly less still provides you with significant after-tax returns.
Almost all working Australians can make a concessional superannuation contribution for which they claim a tax deduction. For most people, this provides an immediate positive return on their investment. You can contribute any amount provided that your total concessional contributions are not more than $25,000 in a given year. Remember if you’re employed, then the compulsory 9.5% superannuation guarantee contributions that your employer must make is included within this $25,000 limit. So, if your employer has contributed $10,000 on your behalf, you can make a further contribution of $15,000.
If you are aged between 65 and 74, then you also need to meet a ‘work test’ to qualify for the tax deduction. But if you are below 65, there is basically no restriction.
Your super contributions will be taxed at 15% if your adjusted taxable income is below $250,000 and 30% for those above $250,000. So, provided your personal marginal tax rate is more than 15% or 30%, then the amount that you save in tax will be more than the amount that the super fund pays in tax.
For example, if your tax rate is 47% (including medicare levy), and you contribute $12,000 per year, you will save $5,640 in tax. So, the contribution only costs you $6,360 – being the $12,000 you contribute minus the $5,640 tax rebate you receive. Within the super fund, only $1,800 will be paid as tax. If your adjusted taxable income is above $250,000 then you will need to pay an additional $1,800 tax.
You have given up $6,360 of spending power and acquired an asset worth $10,200. That’s an immediate, guaranteed return of $3,840 – 37.6% of the $10,200 that the contribution actually cost you.
A guaranteed return of 37.6% is absolutely outstanding. You simply can’t beat it.
The only ‘catch’ is that money contributed into super must stay there until you meet a condition of release. The most common condition of release is reaching retirement age. So, by making a contribution into your super fund, you are agreeing to keep the money there until you retire. That is why the government offers the tax incentive: to encourage us to save for our retirement.
Obviously personal cash flow needs to be taken into consideration as once that money enters super it is a long time before you can get it back. To discuss your superannuation goals further please contact us to arrange a financial advisory meeting with either myself or Sean Dwyer.
Berivan Dubier, Director
General Advice Warning
This advice may not be suitable to you because it contains general advice which does not take into consideration any of your personal circumstances. All strategies and information provided in this article are general advice only. Please arrange an appointment to seek personal financial and taxation advice prior to acting on this information.