How To Make The Most Of Super Co-contribution

Newcastle Herald

Thursday February 1, 2007

Noel Whittaker

MY recent column extolling the benefits of the superannuation co-contribution attracted a flood of inquiries asking for more information about the way the scheme works.

Consequently, I am covering it in detail today, but be aware it's important to take advice as it is a little complex, and getting it wrong could result in your losing eligibility.

For the current tax year, the co-contribution remains at $1.50 for every $1 of personal superannuation contributions with a maximum co-contribution of $1500 for contributors whose total taxable income for the financial year is $28,000 or less. As income rises the co-contribution reduces by $50 for each $1000 of additional income until it cuts out at $58,000 a year.

For example, if your income is $42,000 for the income year and you made personal superannuation contributions of $1000 or more, you would be entitled to a superannuation co-contribution of $800.

There is a calculator at www.ato.gov.au/super/ just click on Calculators, which sits under Resources and Services.

For co-contribution purposes your income is your assessable income plus your reportable fringe benefits.

You can use salary sacrifice to reduce your salary to be eligible for a larger co-contribution but salary sacrificed superannuation contributions are not eligible for co-contributions.

You will need to make an additional undeducted contribution if you are seeking the co-contribution. For example, a person earning $33,000 a year could salary sacrifice $5000 into super to bring their income down to $28,000 and then make an extra contribution of $1000 from after-tax dollars and so become eligible for the extra $1500 from the Government.

To be eligible for the co-contribution, you must have received at least 10 per cent of your income from what is called eligible employment, usually income from salary or wages. Eligible employment generally means anything resulting in you being treated as an employee, and self-employed people are eligible as long as they work for a company or a trust that is making superannuation contributions for them.

This means that retired people under 65, the unemployed, and self-employed who operate as sole traders or through partnerships, cannot claim the co-contribution. However, until June 30 they can claim a tax deduction of up to $5000 plus 75 per cent of the balance of their contribution, which still makes contributing to superannuation a very worthwhile exercise. From July 1 they can claim 100 per cent of their contribution which can be up to $50,000 for the under-50s and $100,000 for those 50 and over. Also at that time, the rules will be relaxed for self-employed people who don't work through a company or trust so that they will become eligible for the co-contribution if they meet normal eligibility requirements.

Borrowing for the contribution is a superb strategy. Think about a lower-income couple in their early 40s who always manage to pay their bills, but don't have much left over. Well, assume they're both on $28,000 a year. Their only superannuation is the 9 per cent of salary the boss is paying for them, but this amounts to just $2142 a year after the government contributions tax of $378 has been deducted.

Suppose they take out a one-year personal loan of $2000 at 10 per cent with monthly repayments of $176 to make a $1000 superannuation contribution each to qualify for the government co-contribution of $1500. The interest will not be tax deductible because you cannot claim a tax deduction for money borrowed to invest in superannuation but, in any event, because the term is short, it's only going to be $110. The combination of their own contributions of $1000 each and the Government's co-contribution of $1500 each means they will have an extra $5000 in superannuation for an outlay of just $110 in interest.

Now $5000 might not seem like a huge amount of money, but if they keep up the strategy for 20 years they'll have an extra $278,000 in super if their fund earns 9 per cent a year. This will be in addition to their employers' superannuation and will enable them to have a vastly better retirement. Under the new rules all their superannuation can be withdrawn tax-free when they retire.

Noel Whittaker is joint managing director of Whittaker Macnaught Pty Ltd, AFSL number 246519. Email noelwhit@gil.com.au. This advice is general in nature and readers should take their own expert advice before making financial decisions.

© 2007 Newcastle Herald

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