Question 1: Salary sacrifice versus voluntary contributions – is there any difference to the end result?
The term ‘voluntary contribution’ can mean many things. Salary sacrifice contributions themselves can be classified as voluntary, as you are not forced to make them.
The difference to the ‘end result’ comes about in whether you have made the contribution pre- or post-tax.
Pre-tax contributions, known as ‘concessional’ contributions, include salary sacrifice or personal contributions for which you then claim a tax deduction for.
With these contributions the super fund then deducts 15 per cent in contributions tax to give to the Australian Taxation Office.
Whereas after tax, or ‘non-concessional’ contributions have zero tax deducted from them by the super fund as typically income tax has already been paid on them.
Let’s look at an example.
Say you have $100 per pay to contribute to super and you earn between $45,000 and $120,000, so you are on a marginal income tax rate of 34.5 per cent (including Medicare Levy).
- Option 1: You could simply put that into super as an after-tax non-concessional contribution. No tax would be deducted by the fund so $100 would be invested
- Option 2: You could salary sacrifice $100 into super which would mean paying less income tax but 15 per cent contributions tax be deducted by your super fund, meaning only $85 is invested
- Option 3: You could salary sacrifice $153 but as this saves you $53 in income tax ($153 x 34.5 per cent), and you are still left with the same net income as option 1, i.e. after tax you have $100 less in pay.
This is one of the big advantages of salary sacrifice, because the more you do it, the more income tax is saved, so you can then afford to do more.
The super fund would then deduct contributions tax of $23 ($153 x 15 per cent) leaving you with $130 invested.
The end result is that you are saving $30 more every pay day than in option 1 but you still have the take-home pay as option 1.
Hopefully this example not only shows you the advantage of making pre-tax salary sacrifice contributions but the importance of grossing up those contributions to get the biggest impact for your contributions after tax is taken into account.
Question 2: As a disabled pensioner, I don’t have what is a ‘regular’ business, but a business that makes money every now and again, and I don’t know if I need to pay tax and how does it affect my pension? Say I made $3000 in one month and then not again for another six months, then do I pay tax? How is pension then affected?
Your disability support pension is not taxable while you are under age-pension age. (Once you are age-pension age it becomes taxable, or you could move to the age pension at that time, which is also taxable).
Therefore from a tax perspective you don’t need to worry about this – any employment or business income would be taxable. How much tax is payable depends on your income for the full financial year.
In relation to your rate of disability pension payment, you should be regularly updating your income with Centrelink (or the DVA).
In your example of you receive a large payment over say one or two fortnights, then yes, it will affect your payment over that period. But if you are receiving nil or small amounts every other fortnight then your payment will be restored to the maximum.
Fortunately, you are also entitled to ‘working credits’ which are aimed at encouraging you to keep earning employment income.
Working Credit is an income-test concession that helps keep more of your payment when you work.
You accrue working credits for each dollar of income below $48 per fortnight.
When you work, your credit increases the amount of employment income you can earn before your payment is reduced. Credits accrue up to a maximum of $1000.
Centrelink will calculate this automatically, but they can provide you with more information if required.
Question 3: Hi, if I buy in a retirement village today and live there while my wife lives in our house and we sell our house in three to four years and she moves with me in the retirement village, can we make contributions to our super funds by considering it as downsizing?
Yes, so long as all the other conditions are met, including holding the home for at least 10 years.
Also note there may be other tax implications as well which need to be considered. And remember you can only have one principal place of residence exempted for CGT purposes at a time. There could also be Centrelink implications if you are receiving any benefits currently.
Question 4: My 94-year-old mum owns her own home but is thinking of moving into an aged-care facility. She has $100k in the bank and her house is expected to sell for $800k. She needs to pay $500k as a RAD up front, which leaves her $400k in the bank. The aged-care facility will be her primary place of residence. Will the $500k still count as capital and deemed income when assessing her pension and DVA supplement.
The good news is that a RAD (Refundable Accommodation Deposit) for social security and DVA purposes is an exempt asset under the asset test and is also not subject to deeming under the income test.
A RAD is like an interest-free loan to the aged-care facility and is government guaranteed. The aged-care facility is limited as to how they utilise the RAD, as the balance of the bond must be refunded to the individual (or their estate) when they leave.
