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happy couple, financial planning, planning for retirement, concessional contributions

With structure comes freedom

Do you bristle when you hear the words ‘structure’, ‘budgeting’ or ‘cash flow’? Many people do! But the reality is that these things can actually bring you a lot of freedom. It’s about finding the balance of meeting all your living expenses while also funding your future retirement.

One of the things we recommend to our clients is to make the most of their $27,500 concessional contribution cap (the money you are allowed to put into your super each year). This sum includes your super guarantee, which is the money your employer must put in, as well as salary sacrificing and additional payments from you. You can claim this on tax.

We refer to the ‘double tax whammy’ a lot. It’s something that doesn’t exist in many places in the world, but luckily exists here in Australia. It’s a double whammy because money going in is taxed at 15%, and money coming out is not taxed at all. Both of those are incredible, given that you normally pay 34.5% if you earn between $45,000 and $120,000 a year (this is also the biggest tax bracket). We recommend everyone to try and make the most of this $27,500 concessional contribution, which can be carried forward from the last five years.

Here is a simple example to demonstrate how much benefit there is to maxing out your concessional contribution. We have:

  • A couple, both still working
  • They are receiving $14,500 each from their employer as part of the super guarantee
  • This allows the couple to put in an additional $13,000 each a year to take them up to their contribution cap.
  • They are paid fortnightly and, on our recommendation, put $500 into their super each at every paycheck as a personal, post-tax contribution, which brings them up to $13,000 a year (and $27,500 overall).
  • At the end of the financial year, this allows the couple to claim that $13,000 on their tax return. As they are in the 34.5% tax bracket, they will receive $8,970 as additional refund (together).

Throughout the year, you might end up with some kind of large expense that you have forgotten to account for (or that has come up unexpectedly, like a serious injury), and getting a lump sum back on your tax return always comes in handy.

This is also a good example of paying yourself first. For us, the best kind of tax deduction is one that you’re going to get back later on. Putting money into super, then claiming it as an expense, only has benefits for you.

Apart from making the most of your concessional cap, you can also structure your bank accounts to make things easier for yourself. You can name your accounts, too – for example bills account, holiday account, or home loan offset account. Always allow a leeway for unforeseen expenses – we recommend allowing 10% extra for unexpected spending. It’s not foolproof, but it’s better than nothing! And never ‘rob’ yourself; that is, don’t take money from the wrong accounts to cover other expenses.