Parents, take a breath. The cherubs are (becoming) less dependent on your daily care. Blink and they’ll be in high school. Daycare fees are a distant memory, the finish line of your mortgage is in sight and, while you may still be hands on at home, perhaps you’re thinking about switching your weekday focus from child rearing towards paid employment.
If your spouse has the higher earning career and you are or have recently been the primary carer then this post is for you.
You’ve juggled time and money for years now. You’ve stretched the family finances to make it work on one income, and/or used your part-time earnings to keep up with mortgage payments and maybe even made some room for some small ‘luxuries’. Whether you’re re-commencing work, increasing your work hours, or looking for a higher paid role, you’ll have extra cash for the family budget.
Practically speaking, your first $18,200 is tax free, and you’ll pay only 19% tax on income up to $37k. If you have a spouse, it’s better tax-wise if you earn this, rather than a higher earning spouse receiving a pay rise.
What to do with the extra cash?
If you have credit card or other high-interest debt, pay that down first. Do you have a high balance on your mortgage? Consider making additional repayments. If, however, you feel those areas of your finances are under control, then read on.
You most likely have a decade or two until retirement, which is a good amount of time to optimise your personal finances, to consider how you might financially help your children in the future if that’s something you want to do.
Did you know that income in superannuation is taxed at a lower rate than income on your personal investments? Ideally in retirement, most of your savings would be in super to take advantage of low or no tax. While on a career break, you’ve effectively missed out on the opportunity to build your low or no tax savings for retirement.
While there are some limits to how much you can put into your super each year, we’ve outlined several strategies which may help you to catch up:
- Each year you are normally allowed to make $25k of tax-deductible contributions to your super (this cap includes any contributions made by your employer). However, generally speaking, the more you earn the more beneficial these deductions will be to your tax situation. If you pursue this strategy you will need to complete an ‘intent to claim tax-deduction’ form once the contributions have been made. N.B. If you’re earning less than $18k p.a. tax deductions won’t give you a refund (because income tax is not paid on earnings under this amount), so a better strategy would be to still make your super contribution but not claim a tax-deduction for this contribution. This way you will avoid paying the 15% contributions tax applied to deductible contributions within your super account.
- Furthermore, if you have under $500k in super, the ‘5 year carry-forward rule’ allows you to make extra tax deductible contributions if you didn’t reach your $25k limit in earlier years (including employer contributions). This rule applies to cap limits not reached commencing from the 2018/2019 financial year (meaning the first year you can take advantage of this rule by making extra contributions is in the current 2019/20 financial year).
- If you have a higher-earning spouse, they can make additional contributions to their super and claim a deduction in their tax return. If your goal is to boost your super balance, they can even lodge a ‘contribution splitting application’ with their superfund at the end of the year to send these contributions (less contributions tax) to your super account. You’ll get more tax back for the family this way. They still can’t go over the annual limit of $25k (including super from their employer) before splitting, but they could be eligible to put in extra under the 5 year carry-forward rule outlined above.
- If your income is below $40k your higher-earning spouse can also contribute $3,000 directly into your super account and claim an 18% tax offset in their tax return up to $540. This is called a Spouse contribution tax offset. This may suit if your spouse has already reached their $25k limit, otherwise they’d be better off claiming a tax deduction and splitting the contribution to you as they’ll get more than 18% back.
- If your income is below $38k, you could also make a super contribution of $1,000 (which you don’t claim as a tax deduction), and the government will make a ‘co-contribution’ of $500 into your super account. If your income is higher than $38k but below $53k you may receive a smaller co-contribution.
- Finally, if you have used all of the above strategies, and you still have extra money you want to invest for the future, you can always put the extra money directly into your super as a non-concessional contribution (meaning no tax deduction or offset claimed). This allows your investments and more importantly your investment earnings to be in the low-tax superannuation system instead of earnings being taxed at your personal tax rate.
Unlike deductible contributions, this is as simple as transferring money directly to your super account (usually B-pay works best). The amount of non-concessional contributions you can make each year is limited to $100k p.a. Like the carry-forward rule above, you are also able to ‘carry forward’ prior year caps for 3 years (provided your under 65 and your account balance is less than $1.6 million). This is a great option for when you sell a property, or receive an inheritance, and have a large sum to invest.
Remember, some of these strategies require forms to be completed and lodged with your super fund at specific times, so don’t leave planning until the end of June!
Taking time away from full-time employment can be wonderful for family life, but it can take a toll on the family budget. Consider the impact to your superannuation balance, and whether you should take advantage of some of the above incentives to catch up.
Disclaimer: The content of this article includes advice that is general in nature and does not consider your personal situation. Christian Super encourages all people considering their options in retirement planning to seek out qualified professionals who can provide specific personal advice.