Nick Bruining: The superannuation contributions sting lurking in the tail of stage three tax cuts

Those not paying close attention to their voluntary contributions to superannuation could be wasting almost $3400 a year when stage 3 tax cuts kick in on July 1.

For many seniors, the unnecessary tax paid could be more than $5300 a year.

The revelation comes on the back of an increase to tax-deductible concessional contributions to super, which are set to rise from the current level of $27,500 to $30,000 a year on July 1.

Concessional contributions include the employer compulsory contribution of 11 per cent of ordinary time earnings, plus voluntary concessional contributions. Voluntary contributions include salary-sacrificed amounts and personal contributions where a tax deduction has been claimed.

Compulsory super will rise to 11.5 per cent on July 1.

Concessional contributions are taxed at a minimum of 15 per cent of the gross amount. In some cases, the total tax payable can be as much as 30 per cent if your adjusted taxable income for the year exceeds $250,000. That might occur through one-off events like a capital gain made through the sale of an asset.

Adjusted taxable income includes gross wages, voluntary concessional contributions to super, reportable fringe benefits provided by your employer and an add-back of investment losses, typically losses generated through strategies such as negative gearing.

The wasted tax issue arises because of the various tax offsets or credits that apply to low-income earners.

The Low Income Tax Offset is a $700 offset that applies to individuals with a taxable income of less than $37,000. It shades out at different rates so that beyond $66,667, no offset is available.

LITO is a use-it-or-lose-it offset. It can only be used to reduce your tax liability and unused LITO amounts aren’t refunded.

When combined with the low-income Medicare cut-off limit, those with a taxable income of up to $22,575 after July 1 won’t be paying tax. The current level is $21,884 so if your income after deductions is less that this figure, you won’t be paying any income tax.

If you use concessional super contributions to reduce your taxable income below these figures, the 15 per cent contributions tax would still apply.

The superannuation fund must still deduct the contributions tax whether or not you are liable for personal income tax. Once the tax is deducted, it can’t normally be reclaimed.

Many couples employ a retirement savings strategy where one person’s income is fully redirected to super, leaving that person with no taxable income and living off the other partner’s income.

While you might receive a generous tax refund of all the income tax paid during the year, 15 per cent contributions tax on the current tax-free amount of $21,884 — or $3282.60 — has been unnecessarily deducted from the contributions. On July 1 when the stage 3 tax cuts kick-in, that wasted tax could increase to $3386.25.

The problem is worse for seniors.

Those aged 67 or older are also eligible for the Senior and Pensioners Tax Offset, which is in addition to the LITO.

At present, a single senior can earn up to $33,088 and pay no tax.

Under some circumstances, a senior could effectively waste up to $4963.20 in unnecessary contributions tax if concessional super contributions were used to reduce their taxable income to zero. From July 1, the tax-free threshold for a senior effectively rises to $35,813, lifting the wasted tax up to $5371.95

The SAPTO changes if you are a member of a couple, partly because of the way it is calculated. In this case, the current threshold where a member of a couple pays income tax is $29,783 each. On July 1, that will rise to $31,888.

The key is to only claim as much as you need to lower your taxable income to the lower threshold amount.

You can still put the money in, but the extra amount will need to be contributed as a non-concessional contribution. The up-side of that is that no contributions tax comes out and the full contribution amount is invested.