Case studies: Super strategies
When trying to understand how super strategies can work for you, examples can help. Here are two examples covering spouse contribution tax off-set, government co-contribution and holding insurance cover within your super fund.
Bob and Mary are aged 47 and 45 respectively. Bob is a manager at an IT company and earns $110,000 a year. Mary spends most of her time running the household but is also employed on a casual basis, which sees her earn $10,000 a year.
The end of the financial year is fast approaching and they are looking for ways to minimise Bob’s tax liability and to put some extra money away for their retirement.
After seeing their financial planner, they decide to contribute $4,000 to Mary’s super fund.
In addition to this money being held in Mary’s super fund, where investment earnings are concessionally taxed at a maximum rate of 15%, by carefully structuring the way super contributions are made Bob and Mary will enjoy some short-term savings benefits.
Spouse contribution tax offset
A tax offset is available where contributions are made on behalf of a non-working or low income-earning spouse.
Effectively, a person may be able to claim an 18% tax offset on super contributions of up to $3,000 they make on behalf of their spouse. The maximum offset of $540 is available where the low-income earning spouse’s income* is less than $10,800.
Therefore, if Bob were to make a super contribution on Mary’s behalf, ie a spouse contribution, he would be eligible to receive a tax rebate of 18% for each dollar he contributes. By making a spouse contribution of $3,000, Bob will be eligible for the maximum $540 tax offset, which will reduce his tax payable.
*income for the purposes of the spouse contribution tax offset is defined as assessable income, reportable fringe benefits, and reportable employer superannuation contributions
Government co-contribution
If a person is eligible and makes personal super contributions to a complying super fund, the government will match their personal super contribution with a co-contribution up to a maximum of $1,000 for the 2009/10 financial year.
The maximum government co-contribution is available to eligible people with incomes of less than $31,920 who personally make an after tax super contribution of $1,000.
So, if Mary were to make a $1,000 personal super contribution, in addition to the spouse contributions made on her behalf by Bob, her super fund balance would be credited with an extra $1,000 from the Government.
Outcome
By following their financial planner’s advice, Bob and Mary have effectively been able to turn their $4,000 investment to $5,540 of total benefits. That’s a 38.5% improvement even before tax-friendly investment earnings are factored in!
Insurance within superannuation
This strategy involves clients holding their insurance cover within super.
The most common types of cover held within super are life, total and permanent disability (TPD) and salary continuance.
Benefits
Benefits of this strategy include:
Tax efficient premiums: There are a number of concessions that may be available for super contributions made to fund the insurance premiums. These concessions effectively reduce the net cost of the premium and include:
- The ability to effectively pay premiums using pre-tax income through salary sacrifice or personal deductible (concessional) contributions,
- The ability for the contributions to also attract the government co-contribution, or
- The ability for the contributions to attract a spouse contribution tax offset, and
- No contributions tax is payable on taxable super contributions used to fund the premiums.
Cash flow: Premiums can be paid using Super Guarantee (SG) contributions, super fund investment earnings and/or accumulated benefits. This means that the member does not need to pay insurance premiums from their own pocket.
Cheaper premiums: It may be possible to obtain cheaper insurance premiums in larger funds due to economies of scale.
Automatic underwriting: Some funds may offer group plans with automatic underwriting. This will be attractive for individuals who have pre-existing medical conditions and who would otherwise not be able to obtain the required level of cover.
Flexibility of payment: Life insurance proceeds may be able to be paid in the form of a tax effective pension to certain beneficiaries, rather than a lump sum.
Case Study
Jane (age 35) and Glen (age 39) are married with 2 young children. Jane works part-time as a teacher earning $27,000 a year while Glen is a full-time teacher earning $80,000 a year.
Glen has his life and TPD insurance cover held within his super fund. The gross premium for this cover is $1,000 a year, which is funded by a pre-tax salary sacrifice contribution. A comparison of the tax position between holding his insurance within super versus outside super is below*.
|
Outside super |
Inside super |
Salary |
$80,000 |
$80,000 |
Pre-tax premium |
- |
($1,000) |
|
$80,000 |
$79,000 |
Tax (including Medicare) |
($18,750) |
($18,435) |
After-tax premium |
($1,000) |
- |
Take home pay |
$60,250 |
$60,565 |
Super saving $315 |
||
By holding his insurance within super, Glen has improved his take home pay by $315.
*2010/11 personal income tax rates
For more information on these super strategies and how they may benefit you please contact us.
