There is a significant opportunity for Australians to take advantage of a $25,000 tax deduction that is set to expire soon. This is an important time to consider your options to reduce your tax bill, as this deduction will no longer be available once the new financial year begins on July 1.
Recently, the government introduced new superannuation rules that allow individuals to ‘catch up’ on super contributions from prior financial years.
However, this catch-up provision is limited to a maximum of five years. Therefore, it is critical to act promptly if you wish to benefit from this tax deduction.
Understanding Tax-Deductible Super Contributions
Under the current regulations, individuals can make tax-deductible contributions to their superannuation up to a specified annual limit. This limit has recently been increased to $30,000, which includes mandatory contributions made by employers under the superannuation guarantee.
For example, if you earn $100,000 per year and your employer contributes 11.5% (amounting to $11,500) to your super, you will have $18,500 remaining that you can contribute tax-deductibly. This means you can make a contribution of $18,500 and claim a tax deduction for it.
For those with an income exceeding $45,000, the tax rate is at least 32%, which translates to a tax benefit of approximately $5,920 for a deductible super contribution of $18,500. Higher income earners would see even greater tax benefits.
Catch-Up Super Contributions Explained
To qualify for catch-up super contributions, your super fund balance must be below $500,000 as of June 30 of the financial year prior to making your contributions. The government recognizes that not all individuals can utilize their full allowance of super contributions each year.
With the catch-up provisions, individuals can make up for unused deductible contributions from the preceding five financial years.
However, there is a time constraint. Starting on July 1, any unused catch-up contributions from five years prior become void and the associated tax deduction is permanently lost.
Why Immediate Action Is Necessary
For those who were earning the average Australian income five years ago, the mandatory super contributions would have been around $9,000, with a total contribution limit of $25,000. As a result, many Australians could potentially have approximately $16,000 in catch-up contributions available.
Although this tax deduction does not officially expire until July 1, 2025, it is wise not to wait until the last moment to consider your contributions. Instead of trying to contribute a lump sum at the end, planning ahead and spreading the contribution over the course of 26 weeks could be more manageable. By starting now, one would only need to contribute about $615 each week.
Employers can also assist with this process through salary sacrifice arrangements, where they deduct contributions directly from an employee’s salary before tax is calculated. This means that for an employee contributing $615 weekly to their super fund, the impact on take-home pay would be approximately $418.
Conclusion
Taking advantage of the available deductions requires strategic planning and proactive steps. By utilizing the rules to your benefit, you can significantly enhance your financial situation.
The initial actions may require effort, but establishing this groundwork will create momentum for future financial decisions. Remember, taking action is essential for achieving desired results.