Your comfort with risk has changed

Super funds offer a range of investment options that generally vary in their levels of risk. Growth-focused options, for example, invest more heavily in shares and other growth assets, and while they have the potential to deliver stronger long-term returns, they can be particularly volatile in the short-term.

Meanwhile, more conservative options typically experience fewer or smaller ups and downs, but in exchange for that peace of mind you’ll generally be looking at lower returns over the long-term.

Your tolerance for those ups and downs can change over time. Market volatility that you shrugged off in your thirties might seem much more worrisome if your super balance has grown significantly or your retirement date is within sight. Asking yourself whether your current investment option still matches your comfort with risk can help ensure your super remains aligned with what you’re trying to achieve.

You’re still invested in the default option

Many Australians remain invested in their fund’s default investment option simply because they never made an active choice. Default options are designed to suit a broad range of members, which makes them a sensible starting point for many people. But because they’re built for the average member, they may not be the best fit for your individual circumstances.

For example, someone hoping to retire early, someone planning to keep working into their seventies, and someone with a particularly low tolerance for investment risk may all have very different needs.

If you’ve never reviewed your investment option, take some time to understand how your super is invested and whether that approach still suits your circumstances. Even if you ultimately decide to stay where you are, you’ll know it’s a conscious decision rather than one that was made for you.

You’re getting closer to retirement

As retirement draws nearer, you’ll naturally start paying closer attention to your super. It’s around this time that many people feel the urge to move everything into a more conservative investment option in an effort to protect everything they’ve built.

But that might not necessarily be the right move. After all, your super may need to support you for another 20 or 30 years, so it will still need to generate returns long after you’ve stopped working and started to draw down an income.

Moving into a lower-risk investment option too early could reduce the opportunity for your savings to continue growing and potentially increase the risk that your money won’t last as long as you need it to. So rather than focusing on your age alone, consider your broader retirement picture. Think about how long your savings may need to last, whether you’ll have other sources of income, and how comfortable you are with market fluctuations.

If you’re unsure whether your current investment option still suits your needs, speaking with a financial adviser can help you understand your choices and make decisions with greater confidence. A regular review every few years, or after a major life event, can help ensure your super continues working towards the retirement you have in mind.

Strange as it may seem, some very important changes take place once that money returns to your account, and this act of financial alchemy can have important tax implications for your children down the track.

The super death tax

To understand how a super recontribution strategy works, we need to remember that super is made up of two parts: a taxable component and a non-taxable component.

The taxable component contains your concessional contributions, such as the money your employer pays to your super on your behalf and any salary sacrifice contributions you make. It also includes the earnings your super has generated over the years.

The non-taxable component consists of non-concessional contributions – that is, the contributions you’ve already paid tax on. If you ever topped up your super directly from your savings without claiming a deduction, this is the basket it goes in.

That distinction might not seem important once you turn 60, which is when super withdrawals generally become tax-free. But the implications for your beneficiaries – specifically, your adult kids – can be enormous.

That’s because adult children who don’t rely on you financially are generally considered non-dependants under tax law. Unlike your spouse or any children under the age of 18 (who are classed as dependents), if you want them to get your super death benefit they typically have to pay tax at the time of inheritance.

This can be at least 15% of the taxable component of your super (plus the Medicare levy, if applicable). And considering this component is usually the larger of the two, that’s a hefty sum of money your kids will never see.

How a recontribution strategy might help

By withdrawing your money and then making a non-concessional contribution, you’re effectively converting the taxable component into a tax-free one.

That means when your kids receive your super death benefit, they’ll be dealing with a much lower – or potentially non-existent – tax bill.

This is possible because there’s a period after you reach preservation age and before you turn 75 when both withdrawals and non-concessional contributions are allowed.

As long as your accumulation account is still open (this is where your super has been sitting during your working years) and you don’t exceed any annual contribution caps and balance limits, you could be able to recontribute your super as many times as you like.

Superannuation and tax can be complex on their own, but combined they can be particularly difficult to get right. If you’re thinking of using a super recontribution strategy to lower your kids’ tax burden, a financial adviser can help you understand all the ins and outs so you don’t make any mistakes or run afoul of any regulations.

Sunscreen and sun hats

Most people know that too much exposure to the sun isn’t good for you, but those who work outside for a living are particularly vulnerable. If your job has you working long hours outdoors (think builders, landscapers and lifeguards), you might be able to claim the cost of things like sunscreen and sun hats.

Briefcases and handbags

Yes, deductions are available for certain bags. But before you rush out to buy that flashy designer item you’ve had your eye on, remember that you’ll have to show that it’s for carrying work items like laptops, tablets and diaries. You’re allowed to use it in your personal life too, but when you claim your deduction you’ll have to apportion it.

Self-education costs

Self-education is admirable on its own, but if the course you’re studying will help you sharpen the skills you use in your current job or give you a chance to boost your salary, then you might be eligible to claim a deduction on certain related costs.

This can include course fees, textbooks, meal and accommodation expenses (if travel is involved), and even the depreciation on the computer you use for study.

Mobile phone bills

If you use your mobile phone for work, you might be able to claim a deduction for the work-related portion of your phone bill. Just make sure to keep detailed records so you can show how much of your mobile usage (both calls and internet) is work-related versus personal.

Subscriptions and memberships

Do you subscribe to any industry magazines or journals to help stay current in your field? If you’re not already being reimbursed by your employer, you might be able to claim the cost of those subscriptions come tax time. The same goes for the cost of membership in a union or a professional association.

Income protection insurance

The premiums you pay for income protection insurance — which is designed to replace your income if you’re unable to work due to illness or injury — are generally tax deductible. Just keep in mind that deductions won’t be available if your policy is through your super fund, or if the premiums are related to other forms of life insurance, like life cover or trauma insurance.

Investment property expenses

If you own a rental property, you probably already know you can claim the interest on your mortgage and expenses like land tax and council rates. But the list of available tax deductions doesn’t stop there. It might also include:

• Real estate agent fees
• Strata fees
• Water charges
• Maintenance and repairs
• Pest control
• Advertising for tenants
• End of lease cleaning services
• Insurance

Personal contributions to your super

Your super exists to provide you with an income in retirement, and the good news is it’s one of the most tax-friendly ways to save. If you top up your super from your take-home pay, you might be able to claim a deduction by submitting a Notice of Intent form to your super fund.

Provided you submit this in time (either before lodging your tax return or 30 June of the following financial year, whichever comes first), this will reclassify your after-tax contributions as concessional contributions, meaning they’ll be taxed at 15% rather than your personal tax rate.

Capital losses on investments

Losses on investments — be it shares, property, or other assets — can take a lot of the wind out of your sails, but you might be able to use those losses to offset any capital gains you’ve made. The good thing is capital losses can be carried forward indefinitely, so if you incur one now you can save it until you sell a profitable investment down the track.

Depending on how large a cut you receive, you might decide to spend the money, either on essentials or other items. But it might be worth considering a few alternatives. For example, younger Australians might be able to make their money go further by topping up their super, whereas others might feel that their debt obligations are more pressing.

Below, we explore some of the benefits associated with these and other options.

Put the money in a high interest savings account

It’s no secret that the Reserve Bank’s ratcheting up of interest rates is intended to discourage people from spending. It does this partly by increasing how much household income is required to service debt, but also by making saving more appealing. With rates on savings accounts having risen from their early pandemic lows, you might consider finding a high interest savings account to deposit your tax cut.

Of course, the prospect of more attractive returns isn’t the only reason to save. Contractionary monetary policy tends to put the country on shaky economic footing (as RBA Governor Michelle Bullock’s talk of walking a “narrow path” serves to remind us), and many people are concerned about job loss or reductions in income. Putting the extra money directly in your savings can serve as a useful buffer if you find yourself out of work or facing some surprise expense.

Top up your super

If you want to think more long-term and are happy to lock the money away, you might consider topping up your super. One of the main benefits worth highlighting here is the preferential tax treatment super receives. Assuming your contribution is treated as coming from your pre-tax income — meaning you can claim it as a deduction on your tax return — it will generally be taxed at 15% instead of your marginal tax rate, which is typically much higher. Any investment earnings within the fund will also be taxed at 15%.

For this lower tax rate to apply to your personal contributions, you’ll need to submit a Notice of Intent form to your super fund at the earliest of the following: before you complete your next tax return, before 30 June of the following financial year, or before you move money out of the super fund.

Just keep in mind that any contributions which you claim a tax deduction for will count towards your concessional contributions cap, which is currently set to $30,000. What’s more, the money you contribute won’t be accessible until you meet a condition of release (such as reaching age 60 and retiring). So before you make any decisions, think carefully about any other financial obligations you might have and whether you’d rather have the money on hand.

Pay down your home loan

If you’re one of the many borrowers who has been struggling to adjust to the higher interest rate environment, directing any extra money you have towards your mortgage might help ease some of that stress, while also saving you interest over the long run. And the good news is that money saved doesn’t attract any tax, unlike earnings from investments or savings accounts.

If your loan comes with an offset account, you might choose to deposit the money there instead of making extra repayments on your mortgage. The two options are functionally similar — in that both lower the balance on which your lender charges interest — but with an offset account, you’ll be able to access that money whenever you wish.

Pay down other debt

Even if you don’t have a mortgage, there might be other debts you can chip away at. Your credit card debt, for example, might not seem urgent but it has the potential to snowball over time depending on how high the interest rate is. Easing your debt burden now might help to free up money in the future to spend in other ways. Just be mindful that not all loans allow free extra repayments, and some go so far as to apply an early repayment fee if you manage to pay down your loan ahead of schedule.

In the end, what you decide to do with your tax cut will depend on your personal circumstances and goals. If you’re unsure how to make the most of your tax cut, consider speaking to a qualified financial adviser.

Sources

1 NAB