Updated Dec 19, 2022
This information has been reviewed by our SMSF Mates before it was published as part of our review process.
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Tim: Welcome back to SMSF Mates podcast. Today we’re talking about tax saving and superannuation opportunities for the end of the financial year.
Gareth: Sounds like a really boring topic.
Ashwin: Gareth’s all over this.
Sonny: He said disclaimer here.
Ashwin: I’ll run through what I do and I do have a tax head as well but take notes everyone. I take the view. Probably the biggest advantage people have got regardless of what type of super fund whether it’s self-managed, retail, industry. You can put extra money into super and a lot of people have got excess amounts they can put in there because you got this provision for catch-up. If you haven’t used up your full threshold in the last two years which might have been 25 and now 27 and a half thousand you can actually do an extra amount in the super per person to top up your super.
It’s tax deductible so obviously whatever your tax rate is in your own rate it’s going to probably be higher than the 15% you’re paying super and you’ll get a bigger tax refund as a result of it. You’re not spending money on a car or a computer or something to reduce your tax bill. That’s going to go down in value. You’re putting money into super which hopefully should go up.
The biggest thing I do is me and my wife would typically sit down and go through what money we’ve got available potentially to do that but we go through it in in a pragmatic way of going well is there stuff around the house that needs to be done. Is there a holiday once Covid is done?
Gareth: What are those?
Ashwin: Is there something we need to have money aside for medically or something like that. Then we go what’s left let’s put that in super.
Gareth: Because the difficult thing is getting it back. It’s not like you’ve loaned it. You use that 25 grand it’s gone till you retire and I’ve got longer than you guys.
Ashwin: That’s the thought process because it makes financial sense to probably put in a super because of the tax saving and the advantage of the money being earned in super is going to be and let’s say you make 5% whatever you choose to invest in. It’s only taxed at 15% in super versus whatever your tax rate is in your own name. It makes sense to do your investing in super. It is also likely if the laws still provide it could be tax free in retirement. That’s what the current rules allow you to do. If you sell the asset and you got less than 1.6 million dollars which most people do. That’s the advantage but very good point Gareth, once it’s in it ain’t coming back out. I would always go through that process so you think about how much money you need. Your offset for peace of mind. How much money do you need for renovations, holidays, other costs and whatever is left over probably should go into super.
Sonny: It’s a juggling out between cash flow and tax saving. If you look at it simply at 47 cents in the dollar you’re putting some money into super and you’re paying 15 cents on that contribution in. It’s 32 cents in the dollar saving.
Gareth: Living which is 32%.
Ashwin: But if you’re one of those people at 47% or 49% because you earn more than 250 then you’re going to pay 30% in super. You’re only going to save 17.
Gareth: What relatively low risk stock is doing 17% per annum?
Ashwin: Then that’s what you’re going to take.
Gareth: Which is a no-brainer right?
Sonny: Correct. Well, it is from a return and a tax saving perspective but it’s also cash flow management to Ashwin’s point. Once that money’s in there you won’t get it so if you can afford to forego the cash flow and sink your concessional contribution limits are the deductible amount of which that’s applicable to is still only 27,500.
Ashwin: Use the catch-up amount from the previous years right? What we sort of, where it’s typically used is let’s say someone’s had a capital gain in their own personal name. Let’s say you made an extra $50,000 in an investment. You want to reduce that down. You get the 50% discount if you had it for a year. You got tax on $25,000. You put $25,000 in a super. If you’ve got the cap available to you and you don’t pay any extra tax but you physically got the extra cash. You made $50,000 so you should have that profit in your cash. You only have to put half of it away and pay no extra tax bill.
Sonny: It’s important to remember though that total contribution limit though is in its entirety whether you are contributing or whether your employer is contributing it. It’s a combination of both. It’s the self-employed people that don’t have any contributions being made. Your limit is what you put in. If you’re not self-employed…
Ashwin: You’re 10% of your…
Gareth: Just for like in real life example you get someone with a $200,000 salary plus super so you’re paying $20,000 super and then the limit is $25,000 or was now 27.
Ashwin: They get the five from the previous years they haven’t used. It might be $10,000 plus the seven and a half they haven’t used this year.
Gareth: It’s not another 25.
Ashwin: No but what a lot of people don’t know is you can access, now that we’ve all got mygov accounts because we need it for our certificates to get around. You can access your mygov account and actually give you a running total of what your carry forward balance is or you can ask your accountant or you could ask your super fund to run the report on your TFN.
Gareth: Tax File Number.
Ashwin: Tax file number and it will shoot out what that number is. I’ve done it for a few clients where they’ve asked how much can I put in a super. We go to the Australian tax portal. We can print off the amount and they go and put $50,000 extra super. It’s giving you a running balance so do that before you put the extra money in there. If you do go over your limit the penalty now is not the highest tax rate. It’s what your tax would have been in your own personal name. You also potentially have the ability to get it back depending from your fund but most likely just pay the top up tax.
Sonny: I think where we started some of the conversations around can be useful for tax planning in what you’re doing with clients before that 30 June because it’s done on a financial year. On July to 30 June each year that you’ve got that limit to make.
Gareth: You have to make it by, the cash has to depart your bank account before 30 June.
Ashwin: Has to be received.
Gareth: Received so this is an important little catch all.
Ashwin: Some people try and do it 30 June and now it’s a contribution for next year. The good thing now with that rollover provision and we’ve had it, I was looking at one that happened last week. The client accidentally transferred the money on the 30th of June. Only hit his fund on the first of July or the second July because it was on the weekend. We can claim the deduction next year.
Gareth: I think it’s a really important point because I’ve been caught in this little situation before. Typical self-employed, company has a BAS, a business activity statement that goes quarters. You go July, august, September. Your accountant then does their bit usually in the month after and then the super payment gets usually made for that quarter a month later. What typically happens is if you’re not on top of the time frame the last financial quarter of the year April, May, June the super actually gets paid in July. What Ashwin’s saying is that well that’s actually technically next year. You need to make sure that you’ve had $25,000 of cash received by your super fund in the financial year.
Ashwin: But going back to Sonny’s point if you’re going through those quarters you’ve probably used a fair chunk of your 25 potentially over the year. It’s always important to probably see your account in May that’s when we normally would do our tax planning because it’s a good idea. You can guess what left in May and what’s June going to be income and you can estimate it, self-employed but if you’re employed and you’re just a pay-as-you-go person, run the mygov report. Sit down with your partner and maybe have them in with their tax accountant if you’re not sure but otherwise run through the numbers. You can talk to your super fund and get the advice from them as well.
Sonny: Without opening a can of worms it’s not just limited to the concessional contributions.
Ashwin: You put extra money.
Sonny: There’s additional non-concessional contributions. That’s after tax money that you’re putting into super for which you don’t get a tax deduction. There’s certain limits and availability to do that each year. For some taxpayers there’s the option to bring forward some of those amounts. We won’t go into the detail now but if it’s applicable I’d always encourage people to go and take advice from their accountant or financial advisor but there’s other considerations as well prior year, there’s changeovers of birthday, hitting retirement ages, switching accounts to pension to the tax-free status that Ashwin talked about up to the 1.6 limited balance. There’s particular considerations around timing of contributions, restructuring of accounts based on age particularly around self-managed super funds that you need to consider each financial year.
If we go through a checklist it’s concessional contributions, it’s non-concessional contributions. It’s change in accumulation or pension account structures due to age. There’s options for rollover relief, for business sales pre 30th of June for particular transactions.
Gareth: It’s definitely worth asking the question.
Sonny: Definitely worth asking the question with some pre-planning so don’t lob up and ask a question on the 29th of June…
Ashwin: Because no accountant, we don’t reply one day anyway but you want to have a structure around it. Some people do that extra salary sacrifice throughout the year so they meet their 25 or their extra amount. You can do it at any point but it all depends on your situations. I would encourage you like Sonny said talk to your advisor whether it’s accountant or financial planner to have a plan around it but effectively it’s good to take a holistic view. My personal experience is I’ll go through our family first then whatever’s extra we go in there but there has been times when I put too much into super and it’s affected personal decisions when it comes to buying a house or other stuff because we put too much in there. We’ve learned from that.
Gareth: Because you’re effectively lowering your income.
Ashwin: You’re lowering your income so the tax savings is really great from a tax head but then…
Gareth: Maybe you want to borrow some money to buy a house effectively you’ve reduced your borrowing capacity so that’s the importance.
Ashwin: Having a good discussion about your future goals. So once you’ve got the wherever house or you’ve got the equity and everything else then maybe it makes sense to start doing it but also be mindful and I find that catch up with me and my wife when we actually sit down and do it focuses us to look at it as a family so we own the decision that we make from it.
Gareth: And then it’s not your fault.
Ashwin: That’s also part of it.
Gareth: Remember on the 13th of June in 1952 I asked you.
Ashwin: My experience as an accountant you do see a lot of potential relationships break down because they’re not open about money. By having that conversation you defuse the issue or how can we got so much in super. I need the money for this holiday. Well you were there in May right when we talked about this and we put it away.
Gareth: The minutes of the meeting.
Ashwin: It’s a lot easier to have that accountability whether it’s your wife or an employee or whatever it is you have that discussion. Talking about it helps.
Gareth: You married yet Tim?
Ashwin: Smart man.
Tim: One day.
Gareth: This is what they don’t tell you. You’re required to have an agenda.
Tim: You’re venturing into life coaching territory.
Gareth: We are.
Ashwin: Gareth is so great at that.
Sonny: I’ll bring it back to some numbers for a second. I’ll see if I can get this right. If you contribute $27,500 then if your tax amount was high enough and you’re at the top marginal rate it would be a tax saving and then for a cash flow saving of $12,925.
Ashwin: Is that assuming the 15% or 30%?
Sonny: That’s assuming 15%. You’ve saved 12,925 so you’re left with 14,575 in super. You’ve saved the 12. You still have the 14 but you’ve parted with the money now.
Gareth: If you’ve had to sacrifice a holiday that you desperately needed and you’re not happy about that decision then that’s a consideration but if you were then investing 25,000 in your individual name for the long term then you really probably should have considered putting it in your super fund.
Ashwin: That’s where I think, it’s just a talk right. If you’ve put the extra 25 grand consciously because you’re going to buy a new house or that’s for peace of mind or so you can sleep better at night that makes sense but soon as it’s starting to go that you’ve almost paid off your house but you got next nothing in super you probably got the balance wrong. The catch-up period’s gone. The real key thing with super is the earlier you get the money in the more time it’s got to work before you retire. When people have that discussion of trying to catch up when the kids move out of home and you’re in your mid-50s you’ve got a 10-year window maybe for that money to work for you but if you made that hard yards when you were in your 30s until you’re 45 you know what you can do from 45 onwards? You can enjoy the money. You could spend it and because it your super has grown with you. I think everyone forgets the length of time the money can sit in super in a lower tax period or tax environment and it can grow. That’s a real kicker.
Gareth: Assuming the global financial crisis version two doesn’t happen.
Ashwin: It will happen but it’s in a super and it should grow. If that crash happens and it’s in your personal name you’re more likely I think psychologically to react in a way instead of taking the long-term view of what that investment is. Super forces you to go or it forces me personally when I see it and go okay that’s tanked. I can’t do anything about it because I’ve got to wait till 65 and magically in five years it might come back.
Gareth: The summary point that you’re making is plan to not need that money because you really can’t get it back once it goes in.
Ashwin: But have the conversation around what the opportunities you have with that money is because I think that’s the key part. If there’s a plan around the money it doesn’t matter ultimately in my head what you do with it because you’ve talked about it. You’ve made the conscious decision I’m saving extra money because I want to have a hundred thousand dollars in my offset account so I can sleep at night. If that’s a goal within the family well that makes sense to try and achieve that within reason but if you’re trying to pay off your house and the whole time your super’s only got 50 grand in it. Maybe you should have aimed to do it but maybe your goal is so focused on paying off your house that’s what’s going to give you freedom but then if you sat down with an advisor, statement of advice will likely take a whole view and go well, you might pay off your house and you might be saving two and a half percent of interest or three percent in interest or four percent but you gave up 15% cash return on putting the extra money into super. It would have potentially grown to a higher value. When you see that in a statement of advice piece. Here you go oh, I’ve actually left half a million dollars on the table by focusing solely on tunnel vision.
Sonny: My comment before was an important one for self-managed super fund trustees. We’ll do a podcast on it specifically but there’s particular rules and regulations and requirements that trustees must adhere to when managing their own self-owned super fund. Where this relevance for this conversation is example where you might make those contributions to super. Because that money is in a bank account that you might control as a self-managed superfund trustee. It’s important to remember that they’re your funds but you can’t access them until you meet certain conditions.
Gareth: You can’t transfer them willy-nilly right?
Sonny: Conditions of release. There’s special requirements under hardship if you need to but once they’re in that self-made super fund that’s where they are until you made a condition of release to get access to them.
Gareth: Even though in my online banking I have my SMSF cash account that in theory I can transfer cash from any account that I feel like, pay off my credit card with. The law says I’m not allowed to do that.
Ashwin: Yes. You’ve got to meet a conditional release just like a normal super fund.
Gareth: It’s an important point.
Ashwin: We always advise clients if you’re going to take money out good to have a meeting because you need to create pension documents if it’s a pension or if it’s hardship, you need to go through all the processes to be approved. Just like if you were part of an industry or managed fund you have to call your advisor and go can I access my money?
Gareth: My internet banking is just hit the button go done.
Ashwin: Correct and chances are if you do breach the rules in a significant way the advice would probably be from the ATO and other places might be to close the fund down, wind it up and there might be penalties and fees as a result.
Gareth: Potentially very dangerous.
Ashwin: You can’t fix it up.
Gareth: Is it as simple as transfer out transfer back in?
Gareth: Oops, I’ll just put it back.
Ashwin: Accidents do happen and there is provisions for the auditors and the compliance of the fund to talk about but I’m sure we’ll have a separate podcast to discuss it but it’s really important when a mistake is made to engage all the advisors properly and how to rectify it because likely you’d have to work out what would that money have made in super for that period of time that you’ve taken it out or recognized the breach. You’ve recognized the breach, the penalty tax might be at 47% because you’ve made a real big mistake there. The interest charge or the earnings that should have been charged will be taxed and you need to meet that back into your super. It’s a proper process to make sure the super fund is rectified to where it should be but if the breach is so severe that it’s occurred regularly or it’s significant then you’re going to have to engage a lot higher process to try and rectify it.
Gareth: Be careful.
Ashwin: You’re the trustee so you’ve got to take those responsibilities seriously when you’re managing your accounts.
Sonny: Not to use it as a scare tactic but it’s really important to get that right. If you break rules, laws, regulations, worst case scenario you could lose the complying status of your self-managed super fund which means now you are no longer taxed at 15% but taxed at marginal rates. If you had like a million dollars in super and you lost the complying status of that fund that now may be taxed at higher rates than what it was being taxed at previously.
Ashwin: Really important. We always stress the self-managed fund is those first two words self-managed. It’s not advisor managed. It’s not accountant advisors. It’s self-managed.
Sonny: I think that’s really important like in my personal relationship I do most of the banking but it doesn’t stop anyone logging into our bank account and seeing money in certain accounts. I think that’s the important thing is to make sure anyone who has access to your banking knows that that money is a totally different entity, can’t be touched, don’t be transferring money out of it.
Ashwin: I’ve personally taken the view that a self-managed super fund transaction account is in a separate bank to my normal banking.
Gareth: That seems a smart, logistical thing to do.
Ashwin: The accidental payment that can happen which clients can rectify but you pay a bill out of the account.
Gareth: By simple accident.
Ashwin: It’s easy to do and that’s the most common sort of mistake that happens but if it’s in a separate bank account I’m less likely to make a transfer.
Gareth: Because you’ve got to log in and think. Good advice.
Sonny: Ashwin, based on one of your earlier comments I think you’ve long known my view and tongue-in-cheek comment that although from a regulation point of view I completely agree with the owners falling on the self-managed superfund trustee to manage the fund. I’ve had a long-held view that no self-managed super fund should be self-managed. You should or trustee should get advice whether that’s from an accountant or a financial advisor or counterparts and peers. Again expertise and objectivity are two different things sometimes.
Gareth: Even that in itself like a lot of people I think who have self-managed super funds kind of think that they don’t need an advisor as well whereas you can have absolutely have an advisor help you manage your self-managed super fund.
Ashwin: I would strongly advise you do because you still have those life events that we’ve talked in the previous podcast. There could be inheritance. There could be passing. There could be divorce. It could be change of circumstances or change of an investment strategy. Are you really equipped to make those decisions and if you’re not comfortable doing it or you don’t feel like you have the knowledge that’s when you do need to see an advisor to get that.
Sonny: There’s also a misconception out there. I’ve heard people say that they didn’t think they could engage an advisor because they have a self-managed super fund. They felt like they had to go at it all alone even without having maybe the expertise or experience. Certainly not the case.
Thank you for joining us. Once again, if you’re interested in our waffle about self-managed super funds feel free to join us on smsfmate.com.au or search SMSF Mate in Spotify.General Advice Warning
Gareth Lane is a successful entrepreneur, businessman, and owner of the digital marketing and web agency Concise Digital, based out of Perth, Western Australia. Concise Digital have solved over 60,000 digital / web problems for clients since 2005. Gareth is one of the founders of SMSF Mate.
Gareth is passionate about helping small businesses be more successful online by avoiding the pitfalls of digital marketing. He regularly runs live talks, workshops and meetups discussing Google, social media and all things digital marketing.
Gareth studied Business and Commerce at Curtin University, and has held board positions for a number of organisations, including serving as the President of the Western Suburbs Business Association and as a non-executive member of WA Business Assist. A true entrepreneur at heart, he started his first business at 13 and has created and run multiple successful businesses since.
Gareth enjoys good food, great wine and time in the sun when he’s not at his computer helping other businesses get ahead!
You can find out more about Gareth or connect with him on Linkedin here: https://www.linkedin.com/in/garethconcise/
Ashwin is an accountant and educator based in Perth, Western Australia. He is passionate about helping family owned businesses and startups. He is one of the founders of SMSF Mate and you’ll regularly see him on our podcast!
Ashwin is a managing owner and director of Eventum Consulting, a multidisciplinary firm helping clients with finance, succession planning and their tax needs. He also served as a lecturer in taxation and small business at the Central Institute of Technology, and has worked as an accountant at a number of well-known tax specialists.
Ashwin studied a Diploma of Business Education and a Bachelor of Commerce in Financial Accounting, Managerial Accounting and Corporate Finance, both at Curtin University, WA.
Ashwin is passionate about technology, and sees it as an enabler for his clients to grow truly sustainable and profitable businesses.
You can find out more about Ashwin or connect with him on Linkedin here: https://www.linkedin.com/in/ashwin-ramdas-72442919/
Or visit his website here: https://eventum.com.au
Sonny Rahim is a finance professional based out of the Greater Perth Area. He is the director and founder of Premia Private, a multi-faceted finance business with advisory divisions and expertise in the areas of Strategic Planning, Wealth Management, Investment Management, Debt and Personal Insurances. Sonny is one of the founders of SMSF Mate.
Sonny studied in the Private Markets Investment Programme at Saïd Business School, University of Oxford and also participated in the Oxford Entrepreneurship Venture Finance. He also completed a Bachelor’s Degree, Commerce (Accounting and Finance) at Curtin University in Western Australia.
As well as being a founder and managing director of the Premia Financial Group, Sonny has worked as an investment fund manager and a chartered accountant. He sits on the board of Ronald McDonald House Charities Western Australia.
You can find out more about Sonny or connect with him on Linkedin here: https://www.linkedin.com/in/sonny-r-rahim-28959333/
Or visit his website here: http://www.premiaprivate.com.au/
SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!
SMSF Mate provides a unique insight into superannuation and financial topics in a way that is easier to understand than conventional websites. The colloquial nature of the site makes it easy to understand and they often speak about complicated topics in lamens terms so I can wrap my head around them. The investment product information is a great way to research funds that I am interested in investing in with my SMSF and there is a lot of helpful information on the site for better structuring my investment portfolio. In comparison to other websites which offer similar information, SMSF Mate excels as the information is free to access whereas many other sites charge a subscription fee for the same thing. Overall, I think SMSF Mate is a great resource for SMSF trustees and is worth looking at for a variety of super-related topics. Thanks.