Building a bigger superannuation fund could reduce your tax bill in FY24

Did you know that giving extra cash to your super can save you tax?

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Given June is upon us, so too is tax time… along with the moons and Ferris wheels. It's natural for Australians to be thinking about any dollars they can save when they lodge their next tax return at this time of year. To indulge this admirable pursuit today, let's talk about how building a bigger superannuation fund can help you save on your taxes.

As we discussed earlier, the superannuation retirement system in Australia is a grand bargain of sorts. In exchange for giving up control of the portion of our pay packets that end up in our super funds, the Federal Government gives us many lucrative tax breaks to encourage us to pad out our retirement funds.

Most of us would be aware that most contributions to superannuation are taxed at a 15% flat rate. Any earnings generated from super investments are also taxed at 15%. And once we enter the pension phase of our retirements, in many cases earnings can be enjoyed tax-free.

Of course, you'll need to check with a tax professional to see what your personal circumstances might allow. You also might want to talk to a financial adviser about whether making extra super contributions might be the wisest course of action compared to paying down your mortgage or investing outside of super, for instance.

But those are the general rules for superannuation.

This means that for most Australians, contributing any extra funds above the mandatory 11% superannuation guarantee can automatically result in paying less in taxes.

Reduce your taxes using superannuation this tax time

According to the Australian Taxation Office (ATO), there are two kinds of contributions you can make to your super fund. Those are concessional contributions and… (you guessed it) non-concessional contributions.

Put simply, a concessional contribution is one that you can claim as a tax deduction. A non-concessional contribution is not eligible for that claim.

However, the good old days are no longer with us. Australians are no longer entitled to put as much cash as they want into super. At least without paying full taxes.

According to the ATO, the current cap on conventional contributions into one's super fund is $27,500 per annum (including the 11% super guarantee). From 1 July this year, it will rise to $30,000. This means most Australians can only claim deductions of up to $27,500 in super contributions this tax time. That includes what your employer is required to pay you, of course.

However, you may be able to contribute more if you didn't hit the cap in previous years.

The cap for non-concessional contributions is $110,000, but it will rise to $120,000 on 1 July. If you contribute more than this, you might have to pay extra taxes.

So, how much would someone be able to save in taxes from an extra contribution to their super fund?

As an example, let's say someone who earns $100,000 per year before tax wants to make an extra superannuation contribution to save money at tax time.

This person would have already seen $11,000 taken out of their pay packets for their super fund.

But according to the MoneySmart website, our worker could save up to $5,692 in taxes if they were prepared to contribute an extra $10,000 to their super fund.

Foolish takeaway

Of course, all of this is just general advice. Everyone's personal circumstances will be different. As such, it's vital to check with a tax professional or financial adviser before making any big decisions when it comes to your super fund.

But super is a legitimate and potentially lucrative way to save some extra dollars this tax time. So make sure to check if you can do just that before 1 July.

Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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