Don't miss out on the year-end opportunities

Extra contributions and salary sacrifice are some ways superannuation can help reduce your taxes for the 2007/2008 financial year.

30 June is fast approaching and there are a number of ways you can reduce your tax bill for the 2007/2008 financial year and make sure you are taking full advantage of the fantastic incentives to save in superannuation. Check out these strategies and think about what you need to do before 30 June.

Strategy #1 - Make extra super contributions

Given the tax friendly nature of the superannuation environment, extra contributions to your super fund can make a powerful difference in the long term. Because your investment earnings are only taxed at 15 per cent, instead of your marginal tax rate (up to 45 per cent), then you're likely to save more money investing through super than by investing in the same assets outside super. With lower taxes on your investments, your retirement savings have the potential to grow much faster.

..and the government may boost your balance

Plus, if you qualify for the Government's co-contribution scheme, for every $1 of after tax contributions you make to your super, the Government will contribute up to an extra $1.50 (up to a maximum of $1500).

In this financial year, if you earn $28,980 or less, the maximum contribution you may receive is $1500. If you earn less than $58,980, you may get paid a reduced amount. These limits will be indexed in future years.

Since 1 July this year, this government co-contribution is now also available to you if you are self-employed.

Don't forget to make the most of the 'bring forward' contribution rules

In order to avoid penalty tax rates, you are generally only allowed to contribute up to $150,000 each year in personal after tax contributions. However if you are under 65 years old, you are able to 'bring forward' 2 years' worth of contributions into the year you are currently in - allowing you to contribute up to $450,000, but nothing for the next 2 years.

These bring forward rules allow you to take greater advantage of the tax-friendly treatment of super investment earnings. And remember, when you access your super from age 60, it will all be tax-free.

So if you were thinking of selling or transferring existing assets into super, or if you want to invest an inheritance you have received, the 'bring forward' rules will allow you to contribute up to $450,000 in one go.

It is important that you stay within this limit, because if you exceed this limit you will pay a penalty tax of 46.5% on the excessive contributions.

Strategy #2 - Salary sacrifice some of your pay

Salary sacrificing to boost your superannuation can be an attractive strategy because you will generally pay less tax than if you took your full salary as cash. Salary sacrificing can be particularly useful if you are expecting to receive a bonus at the end of this financial year.

Salary sacrificing is attractive because you only pay 15 per cent contributions tax instead of your marginal tax rate on your income. In addition, your investment earnings are only taxed at 15 per cent, instead of your marginal tax rate (up to 45 per cent).

It involves an arrangement between you and your employer where you agree to forgo part of your salary in exchange for an equal amount in super contributions. The amount you sacrifice is taken out of your gross salary by your employer and paid to your superannuation account. To set up this arrangement, you will need an agreement with your employer.

As salary sacrifice agreements need to be forward looking, now is a good time to think about setting one up for the new financial year or before a bonus payment becomes payable.

..but watch out for the concessional contributions limit

We've explained the limits on personal after tax contributions but what about the limits for before tax (or concessional) contributions?

These before tax contributions to super include Super Guarantee payments and salary sacrifice contributions. If you are eligible to claim a tax deduction for personal super contributions, these tax deductible contributions will also be included. In order to avoid paying a penalty tax, the limit for before tax contributions is $50,000 (indexed) per year. So to make sure you will have enough for your retirement, it pays to start thinking about your super sooner rather than later, as you can no longer make large before tax contributions just before your retirement.

Window of opportunity if you have recently turned or are turning 50

Because these limits were only introduced last year there is a transitional rule: If you are age 50 or over, or you turn 50 at any time between 1 July 2007 and 30 June 2012, you will be eligible for a higher contribution limit of $100,000 (not indexed) for before tax contributions from the financial year you turn 50 until 30 June 2012. So if you fit in this box, make sure you consider taking full advantage of this window of opportunity.

Remember, if you exceed these contribution limits you will be taxed 31.5% on the excess, in addition to the 15% contributions charge already levied. What's more, any excess before tax contributions will be included in your personal after tax annual limit.

Strategy #3 - make a super contribution on behalf of your spouse

If your spouse earns less income than you or is not working, then it can be beneficial to make super contributions on their behalf.

If your partner's income for tax purposes is $10,800 or less, you could get a $540 tax offset on the first $3,000 you contribute to superannuation for them from your after-tax income. This tax offset decreases as your partner's income increases. And you can't claim it if your partner's income exceeds $13,800. This tax offset will help to reduce your personal income tax bill.

Strategy #4 - Make pre-paid deductions

There are a number of areas where you can use pre-paid deductions to reduce your assessable income. These must be implemented before 30 June and include:

• Deductible prepaid expenses of less than $1,000
• Investment in schemes that have Australian Taxation Office product rulings, such as forestry or agricultural projects
• Interest, which may be prepaid for a period of 12 months, and must relate to borrowing used to buy income-producing property, company shares or units in unit trusts.

  This strategy may be even more pertinent this financial year because of the reduction in personal tax rates from 1 July (see box below).

  Strategy #5 - Bring forward capital losses

  If you have any non-performing investment assets, you may want to consider selling them in order to realise the capital loss. This money can then be freed up to go into investments with greater potential. Note that capital losses can not be claimed against ordinary income and can only be offset against capital gains.

  Strategy #6 for the self-employed - Contributions to super now 100% tax deductible

  If you are self employed, or otherwise eligible to claim a tax deduction for personal super contributions, these personal concessional super contributions are now 100% tax deductible.

  Up until 30 June 2007, you could only claim the first $5000 of personal contributions to super as a 100% tax deduction. For any contributions over this amount only 75% was deductible.

  But make sure you keep an eye on your concessional contribution limit (see strategy 2).

  Example

  Michael is 51 years of age and a self-employed carpenter.

  Over the last few years he has regularly made an annual superannuation contribution of $60,000 in order to claim a tax deduction to reduce his tax bill, while building his superannuation assets in the lead up to his retirement.

  	Previous financial year 2006/07	Current financial year 2007/08
  Super contribution	$60,000	$60,000
  	$5,000 + (75% of $55,000)	100%
  Deduction allowed	$46,250	$60,000

  New tax rates

  For many us, 1 July this year will see us with a bit more cash in the hip pocket as further tax cuts come into play.

  Following the 2008 Federal Budget announcement on 13 May 2008, the 30 per cent tax threshold will increase from $30,000 to $34,000, the 40 per cent threshold will increase from $75,000 to $80,000, while the 45 per cent threshold will increase from $150,000 to $180,000.

  Rather than fritter the extra cash away, consider how you might invest this extra money. For example, depending on your own circumstances, you could consider:

  • A salary sacrifice arrangement - taxed at the 15% super contributions tax rate rather than your marginal tax rate (see strategy 2), or
  • An after tax contribution that may entitle you to a co-contribution from the government (see strategy 1).

  While tax can have a significant impact on how soon you reach your financial goals, it's important to remember that the different strategies available to minimise your tax should be considered all year round, not just in the lead up to the end of financial year. Each strategy or investment should also be able to stand on its own merits and should not be used solely as a tax-effective instrument.

  Your financial adviser will be able to work with you to choose the most effective tax and superannuation strategies for your personal situation.

  Want to know more?

  • Try our interactive simulators. If you are under 50 try My super simulator and if you are over 50 try My retirement simulator
  • If you're already an AMP customer, use My portfolio to manage your super account online.
  • If you've still got questions about your super, browse our FAQs . Or call AMP today on 133 888
  • Click here for more information on key opportunities to consider before 30 June 2008.

  Important note

  The information in this article does not take into account your objectives, financial situation or needs. Therefore, before acting on the information, you should consider its appropriateness to your personal circumstances. Although this information was obtained from sources considered to be reliable, it is not guaranteed to be accurate or complete. This publication was prepared by AMP Financial Planning Pty Limited ABN 89 051208327. The information is current as at 15 May 2008 and may change over time.