Increase super and reduce tax
There are a number of strategies that allow you to boost your super and save tax as you head towards retirement including:
- Making additional super contributions
- Implementing Transition to Retirement Pensions
- Using franking credits to reduce the tax in your super fund
Salary Sacrifice Contributions
Salary Sacrificing is an arrangement in which an employee agrees to have their wages cut, in exchange for additional employer superannuation contributions. The main advantage of choosing this method is that it’s a tax effective way to increase superannuation assets, as they are made from your pre-tax salary. This therefore allows a greater proportion of every dollar sacrificed to make its way into your superannuation fund, preparing you for a more comfortable retirement.
Converting superannuation to a Transition to Retirement pension
A Transition to Retirement or TtR pension is a type of income stream which allows people who have reached their preservation age (55 years of age for most of us) to access their superannuation while still working. Converting your superannuation to a TtR pension allows you to transfer a significant portion of your assets to a tax-free pension environment.
Using franking credits to reduce tax
Generally when a company generates a profit, they will distribute part of the profit to their shareholders in the form of a dividend. Just like you, a company is required to pay tax on the money it earns and the current company corporate tax rate is a flat 30%.
Given the tax rate of a super fund in accumulation is 15% and assuming the dividend is fully franked, the super fund would effectively receive a 15% tax credit which can then be used to offset taxable income within the super fund
To give you an indication of the tax benefits associated with franking credits, we compared two scenarios which are summarised below:
- Scenario 1 – The super fund received employer contributions of $15,000 and the entire balance of $200,000 was invested in term deposits which earned 4% for the year.
- Scenario 2 – The super fund received employer contributions of $15,000 and the entire balance of $200,000 was invested in shares which paid a fully franked dividend of 4% for the year.
The following chart illustrates the tax benefits of investing in Australian shares which pay fully franked dividends.
Investment Incomes vs. Tax Payable
In the above comparison*, ‘Scenario 2’ super fund pays no tax on the investment income, and no excess franking credits to assist in reducing the tax on the employer contribution. Therefore in this case, you would be approximately $3,000 better off under ‘Scenario 2’ investing in Australian shares providing fully franked dividends.
* Please note that the above comparison is purely for illustrative purposes and further diversification would be required in both scenarios.