Nick Bruining: New tax rates make voluntary superannuation contributions a waste when you earn this much

New income tax rates that take effect in six weeks mean it’s time for many superannuation members to revisit their voluntary contribution levels, or risk wasting up to $3400 in unnecessary tax.

July 1 is when stage two of a series of small reductions in personal income tax rates take effect.

From that date, the first band of personal income tax drops from 16 per cent to 15 per cent on income within a range of $18,200 to $45,000.

July 1, 2027 will see that base rate drop to 14 per cent and the introduction of the Working Australians Tax Offset of $250.

A 15 per cent marginal tax rate is a significant number because it is the same rate as the contributions tax that is charged on concessional contributions made to super. Concessional contributions include contributions made through salary sacrifice arrangements as well as personal contributions to super where a tax deduction is claimed.

Under Australian tax law, special credits or tax offsets are available to some taxpayers.

Offsets tend to favour those on modest incomes because they shade out as incomes rise. Tax deductions, on the other hand, favour high-income earners because they reduce the amount of income that is subject to income tax.

Significantly, Australian residents are entitled to a special Low Income Tax Offset, or credit. In effect, that increases the amount of money you can earn before you actually need to pay tax.

In addition to income tax, most Australians are liable for a Medicare levy of at least 2 per cent, but for low-income earners special credits mean that the impost is waived.

When all of these credits and offsets are added together, an Australian under the pension age of 67 can currently earn $22,575 before income tax or a Medicare levy is payable. From July 1 this year — and when the lower marginal tax rate kicks in — that figure will increase to $22,826.

The link to superannuation is that irrespective of your personal income tax rate, a super fund deducts at least the 15 per cent contributions tax when the payment is a concessional contribution.

Bring your income below $22,826 after July 1 this year by making concessional payments to super, and every dollar under that figure is copping the 15 per cent contributions tax. That 15 per cent hit versus paying no tax whatsoever if you’d received the money in your hand.

For someone who is salary sacrificing all of their wage into super, that wasted contributions tax will be a whopping $3423.90

For someone who’s aged over 67, another offset kicks in — the Senior and Pensioners Tax Offset. Unlike the LITO, this offset also recognises couples.

The bottom line is that a single senior eligible for both LITO and SAPTO will be able to earn $36,960 of taxable income before they pay income tax. It’s why many retirees on a full age pension, supplemented with tax-free payments from superannuation, don’t need to pay tax or even lodge an income tax return.

For couples with both members eligible for LITO and SAPTO next financial year, each person can earn $32,773 — or a combined $64,546 — before they need to pay any tax or Medicare levy.

Nick Bruining is an independent financial adviser and a member of the Certified Independent Financial Advisers Association