Smart Strategies for the New Financial Year

As we embrace the new financial year, now is a good time to review your strategies and determine what adjustments may be required to optimise your financial position and take advantage of the opportunities that lie ahead.

Making the most of tax cuts

The Stage 3 tax cuts came into effect from 1 July 2024. This will see changes to tax rates and income thresholds such that all tax payers will get some relief. Those earning under $150,000, including retirees with taxable pensions and investment income, will benefit the most, but on average, taxpayers will receive a tax cut of $1,888 or $36 per week, in FY25.

Do the calculations to see how much you will save and importantly, how these savings can be best utilised – whether that’s to reduce debt, build personal wealth or top up super.

Super is still super

Tax rates within superannuation remain as generous as they ever were. Investment earnings and capital gains within a superannuation accumulation account are taxed at a maximum rate of 15%. Within a pension account, earnings on balances up to $1.9 million are tax free. This makes superannuation still one of the most tax effective investment vehicles in Australia.

If you have built up savings and have been holding off contributing to super, FY25 could be an opportunity to top up contributions under the increased caps.

Concessional contributions

The concessional contributions cap will increase from $27,500 to $30,000.

If you’re under 67, you don’t have to be working to making concessional contributions. So, if you’re retired but still have taxable investment income or defined benefit pension income, you could benefit from making larger personal concessional contributions in FY25 to boost super while saving tax personally. For those over 67 who can meet the ‘work test’, concessional contributions can be made up until age 75 even if your total super balance is over $1.9 million.

On the other hand, if you are still working and have set up a salary sacrifice arrangement through your employer, you may need to adjust your payments to ensure you maximise your cap or plan to make a top up personal concessional contribution by the end of FY25.

Individuals with a total super balance (measured on 30 June 2024) of under $500,000, will be able to carry forward any unused concessional contribution cap from 1 July 2019 onwards to potentially make sizeable and very tax effective contributions to boost super during FY25. This may be a good opportunity for retiree-parents to use surplus pension income to help fund tax effective contributions for their children – essentially an early inheritance.

Non-concessional contributions

Unlike the concessional contribution rules, you can make non-concessional contributions until 75 without working but provided your total super balance is under the thresholds (discussed below).

The non-concessional contributions cap is 4 times the concessional cap, and as a result will increase from $110,000 to $120,000. The maximum non-concessional contribution cap using the three-year bring-forward rule will increase from $330,000 to $360,000.

Your ability to use bring-forward amounts is subject to your Total Superannuation Balance (TSB) as follows:

Source: Australian Taxation Office

Importantly, if you have triggered the bring-forward arrangement in 2022-23 or 2023-24, these increases won’t apply to you. You can only contribute up to the current contribution caps. If, however, you triggered the bring-forward arrangement in 2021-22, your three-year period will reset on 1 July 2024 and you will have access to the new caps. If you have sold some personal assets, received an inheritance or accumulated savings over the past few years, consider your eligibility and the benefits of topping up your super in FY25.

Check your total super balance (TSB)

Your TSB, which is the sum of the value of all your superannuation accounts including defined benefits, is assessed on 30 June each year. If your TSB is creeping close to $500,000, FY25 could be the last year for you to utilise any unused carry-forward concessional contribution amounts. Similarly, if your balance is nearing $1.9 million, FY25 may present a final chance to make a non-concessional contribution to super or implement tax-effective estate planning or rebalancing strategies.

Rebalancing super accounts

Couples managing their finances collectively can implement strategies to equalise their super accounts which can help strengthen their overall financial position in retirement.

If you’re a working couple, you can plan ahead and implement balancing strategies each year to help equalise super accounts by the time you retire. Higher income earners are offered a tax offset of up to $540 if they top up their spouse’s super by $3,000 – this provides a double benefit via a tax saving for the higher income earner and a boost to the smaller super account. If you don’t have the extra cash flow to commit to super, concessional (pre-tax) contributions, such as employer contributions or salary sacrifice, can also be transferred between spouses’ super accounts after the end of each financial year. For 2023-24 concessional contributions, you have until June 2025 to implement this strategy with your spouse.

Couples at the end of their career or fully retired still have time to rebalance using non-concessional contribution caps. Provided the age and total balance requirements are met, an individual could withdraw up to $360,000 from their super account and recontribute into their spouse’s smaller super account. The larger non-concessional contribution caps mean couples may be able to equalise their super balances in just a few years after retirement.

Minimum pension rates

Retirees who have had a significant birthday during the past year may see an increase in the amount they are required to withdraw from their super pension. The legislated minimum rate is based on your age at 1 July and increases with age as shown below:

The increase in pension rates do not necessarily match increases in expenses so you may find your personal cash balance grows over time. As voluntary super contributions are cut off from age 75, you can’t contribute this excess income back into super. While it is important to keep a cash reserve for unexpected expenses, if you have excess savings that you don’t anticipate spending, consider investing in your personal name. Alternatively, consider helping your children start to build their superannuation balance as they may not have capacity within their own cash flow due to competing priorities such as mortgage repayments or school fees.

Key milestones and action items for the year ahead

The year ahead provides a range of opportunities to build wealth tax effectively. If you are approaching any of the key milestones: turning 67 or 75 or your super balance is approaching $500,000 or $1.9 million, consider how you can take advantage of the rules to maximise your benefit. To work through the intricacies of these opportunities, talk to an expert.