Taking Advantage of Tax Cuts

From 1 July 2024, Australia’s stage 3 tax cuts have taken effect for all 13.6 million Australian taxpayers. Designed as a component of the Australian Government’s cost of living relief package, the tax cuts present a unique opportunity for individuals to bolster their retirement savings without having to adjust their budgets.

What are the stage 3 tax cuts?

The stage 3 tax cuts were first announced in the 2018–19 Budget and, after a redesign in 2024, have been legislated to take effect from 1 July 2024. The tax cuts will see a reduction in tax rates as well as an expansion of select tax brackets to ensure more income is taxed at lower rates. The table below shows the impact of these tax cuts on a range of incomes:

Making additional concessional contributions

Contributing personal tax savings into superannuation presents an opportunity for long-term wealth accumulation. Concessional contributions to superannuation benefit from a lower tax rate of 15%, making it potentially advantageous for couples or individuals aiming to boost retirement savings.

Concessional contributions are before-tax contributions to super for which an individual or their employer claims a tax deduction. The two most common avenues to make these contributions are via:

1. Salary sacrifice: Utilising salary sacrifice arrangements allows an employer to reduce your taxable (take home) pay and instead use these funds to make additional contributions directly to your chosen superannuation fund.
2. Personal contributions: You can also make concessional contributions directly to your superannuation fund from funds held outside of super (i.e., your bank account). If doing so, you will also need to submit a notice to claim a deduction form to your superannuation provider and then claim this as a tax deduction in your individual tax return.

The concessional contribution limit in the current financial year is $30,000 (discussed here). It is important to note that your employer superannuation guarantee payments also count towards this annual limit.

Compounding returns: the key to growth

To illustrate how these tax savings can grow if contributed to superannuation, take the example of Natalia. Natalia is a 30-year-old engineer who is earning $140,000 and has a superannuation balance of $200,000. Each year, Natalia’s employer contributes 11.5% of her salary (or $16,100) to her superannuation fund (note, the minimum employer contribution has increased as of 1 July 2024).

In the 30 years to retirement, if Natalia’s income remains constant and her fund delivers a return of 7% per annum*, her balance will grow meaningfully. However, if she redirects her tax savings of $3,729 per annum from the stage 3 tax cuts as pre-tax contributions, not only will she benefit from a tax deduction immediately but also an extra $320,366 to spend in retirement. Even small additions to superannuation can make a significant difference if compounded over the long-term.

Please note, the above table is for illustrative purposes only and does not constitute advice. The actual outcome will vary based on market movements, tax paid, and your relevant personal circumstances.

 *An investment return of 7% is based on an Evans and Partners Model Portfolio 7 which targets a return of CPI +4.5%.

Maximising your superannuation balance

Personal contributions and salary sacrifice arrangements are not the only avenues to boost your retirement savings and benefit from positive compounding effects. Other common avenues include:

1. Catch-up concessional contributions: Individuals like Natalia with a superannuation balance below $500,000, may also be able to utilise unused concessional contributions from the previous 5 years. This means potentially making a concessional contribution above the annual $30,000 limit and benefiting from a larger tax deduction.
2. Non-concessional contributions: Non-concessional contributions refer to after-tax contributions for which an individual or employer has not claimed a tax deduction. Despite not offering a tax deduction, annual limits are higher ($120,000) which allows for a more significant increase in your retirement savings trajectory (discussed here).

Generally, it is most tax effective to prioritise pre-tax contributions. If the concessional contribution cap is fully maximised or you’re ineligible to make concessional contributions, then the next best thing is usually non-concessional contributions.

Overview

The contribution rules are complex and there is much to consider when deciding how best to use your tax savings this year. It is well known that starting early is key to ensuring funds can benefit from compounding over a longer period so get personalised advice before making changes to your strategy, particularly while it is still early in the financial year.