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Australia
Melbourne,
19 October 2009
High income earners who have not yet acted on changes to superannuation this financial year risk exceeding concessional contribution limits with their employer contributions alone and may need to change the way they contribute to get the most out of their superannuation dollars, warns, Sue-Ann Charlton, Mercer’s Financial Advice Region Leader.
If people reach the maximum concessional amount, $25,000 for those under 50 years and $50,000 for those over 50 years as of July 1, they should consider directing the surplus either into super, as a non-concessional contribution, or into other investments. Either way, they should be wary of the tax implications and of giving it over to discretionary spending.
“Super tends to take a back seat after the frenzy of the end of the financial year, but given the reductions to concessional contribution caps announced in the federal budget, it should be front and centre, and high income earners should be looking closely at the superannuation contributions their employer makes on their behalf,” said Ms Charlton.
The compulsory nine per cent superannuation contributed by employers is considered part of the concessional cap. However, in 2009/10 employers only have to pay nine per cent superannuation on the first $40,170 of an employees ordinary time earnings per quarter. This is known as the maximum earnings base and equates to $160,680 per year. This means, for example, if an employee is under 50 and earning more than $277,000 a year, and if their employer is paying super above the maximum earnings base, they are going to reach the concessional contribution cap in employer contributions alone.
“The maximum super contributions with a concessional tax rate could be reached by high income earners through their employer contributions alone, so these people should perhaps consider talking to their employer about the possibility of re-directing the surplus into their salary for use in other investment strategies,” Ms Charlton said.
Irrespective of how people reach the concessional cap they should consider issues of access and responsibility as they consider where to direct the surplus.
“In deciding how to invest any surplus cash above the concessional super contribution limits, people should consider whether or not they need access to it in the short to medium term. If they don’t, long term returns highlight the attractiveness of super as an investment vehicle, so they should consider building their retirement nest egg by making non-concessional contributions,” Ms Charlton adds.
“If they do need shorter-term access, they should talk to their financial adviser about complementing their super with another investment strategy.
“People also need to consider whether they are prepared to take on the responsibility of managing any surplus cash. If they are, they can consider the full suite of investment options. If they aren’t, a managed fund may be an attractive option. Managed funds are similar to superannuation in that the investor entrusts the day to day management of their money to someone else. For those wanting to take a more passive interest in their investment, as they may have done when they’d funnelled it into superannuation, this could be a good choice,” she said.
Top 5 ways to invest surplus income if you’ve exceeded your concessional cap:
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1. Repay debt.
One of the simplest strategies that you can employ for surplus income is to use it to retire non-deductible debt, such as your credit cards, personal loans and your home loan. Especially in this lower interest rate environment, it is a golden opportunity to knock years off your home loan by directing all your surplus income in this direction.
2. Contribute the money into super as a non-concessional contribution (i.e. after tax).
Yes, you will still pay tax at your marginal rate, but no contributions tax will be deducted from these contributions. The money will be invested for your retirement in a concessionally-taxed environment and will be returned to you entirely tax free upon retirement (after your preservation age). Plus, no matter how much your super grows to over time, you don’t personally declare the growth of this investment for capital gains tax purposes.
3. Invest into a managed fund.
Managed funds can be started with as little as $500 to $1,000 and can be set up to receive regular contributions of anything from $100 per month. Your money can be invested in a variety of short, medium or long term investment strategies within the fund and you can access the money for any expenses you need along the way (such as children’s education, holiday, car, boat, etc).
4. Borrow to invest.
Depending on your circumstances, it may suit you to consider ‘gearing’ or borrowing to invest. Your surplus income can be utilised to meet loan repayments. You don’t have to be restricted to borrowing large amounts to invest in property – you can start small and borrow to invest in shares or managed funds.
5. Insurance bonds.
Insurance bonds have enjoyed resurgence in popularity in recent years. Insurance bonds can be classified as ‘tax-paid’ investments, as the provider pays the tax on investment earnings. The rate of tax paid is generally the current company tax rate of 30 per cent, although this can be reduced through the use of imputation credits. For clients on high incomes, this can be a tax-effective way to invest. |
With each of these strategies, it’s important to seek the advice of a qualified financial adviser, to ensure that the direction you want to take is appropriate given your personal circumstances.
“The biggest trap for people who make the decision to reduce their superannuation contributions because of the reduced concessional caps is that the excess money gets eaten up by discretionary spending. Resisting this temptation by investing it may take some discipline in the short term but certainly pays off in the long term,” said Ms Charlton.
Table – Who should consider discussing 2009/10 super contributions with their employer
| If you are: | Your employer has to pay 9% super on a yearly salary of¹: | Talk to your employer if your salary is more than: | Because 9% of this figure is: | So a salary higher than this means you’ll be paying top tax for every $ of super contribution over your concessional cap of²: |
| Under 50 | $160,680 | $277,000 | $24,930 | $25,000 |
| Over 50 | $160,680 | $553,000 | $49,770 | $50,000 |
About Mercer:
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¹ Based on multiplying the quarterly maximum earnings base for 2009/10 ($40,170) by four.
² Proposed superannuation concessional contribution limits for 2009/10.
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