Finance Your Budget Tipping money into your children’s superannuation? Use this method to minimise tax

Tipping money into your children’s superannuation? Use this method to minimise tax

superannuation age pension piggy bank
Indirect contributions are the most tax-effective way of boosting your children's super. Photo: Getty
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Question: First, Craig: Thank you for your detailed and informative articles. They make sense of a complex subject.  Now the question: I want to ‘donate’, but in her name, $5000 to my daughter’s industry super fund. What is the most effective method, in terms of her income tax deductions: Donate the $5000 in one hit, or pay it into her bank account, then let her increase her weekly salary deductions to $100 a week?

If you were to contribute directly to your daughter’s super fund, you would be using after-tax money and you would be unable to claim a tax deduction for the contribution.

But as you have indicated, you could contribute the money into her superannuation account in an indirect way. This would be more tax-effective and could be done in two ways:

  1. Give her a lump sum so she can immediately contribute the funds to super, notify the fund she will be claiming a tax deduction down the track, and then claim the tax deduction in her income tax return at the end of the financial year. In a previous article, I have gone over the steps involved in claiming a tax deduction
  2. Deposit funds into your daughter’s bank account weekly, or however often she is paid, and get your daughter to enter into a salary sacrifice arrangement with her employer. She would salary sacrifice some of her wages into super, whilst the money you paid into her bank account would cover the shortfall.

From a tax perspective, both of these options provide the same result. Your daughter would pay less income tax, but 15 per cent contributions tax would be deducted from the super contributions, for either a salary-sacrifice or tax-deductible contribution.

Let’s look at an example, and assume your daughter is in the ‘middle’ marginal income tax bracket of 34.5 per cent (for people earning between $45,001 and $120,000 in 2021-22).

With option one, assuming all else is equal, she would receive a tax deduction refund after completing her tax return of $5000 x 34.5 per cent = $1725.

Additionally, her super fund would have invested the $5000, less 15 per cent contributions tax of $750. So the net amount invested in her super would be $4250.

With option two, if she entered into a salary sacrifice agreement, her employer would then deduct less tax each pay cycle.

As an example, if she were to salary sacrifice $100 a week for 50 weeks, then her employer should deduct $34.50 less in tax each week, totalling $1725 over the 50 weeks. (Note that the employer might not do this exactly, but after her tax return is submitted and calculated, it would work out to be $1725 less in income tax for the financial year).

And as per option one, the $100 salary sacrificed would be invested, less $15 in contributions tax (15 per cent). Over 50 weeks, this would equate to $4285 invested in super (50 x $85).

The advantage of option one is the money is invested upfront and in one go, but your daughter would not receive any tax benefit until after her tax return.

The opposite is true for option two – she would get an immediate reduction in tax, but the funds would not be fully invested immediately.

You and your daughter should do whichever is easier for you both.

Finally, I do not have your daughter’s income details, so the above is provided as an example only.

A tax adviser or financial planner would be able to calculate and recommend specific amounts.

Question 2: Is there an online calculator to ascertain if one is eligible for the Commonwealth Seniors Health Care Card, without spending time at Centrelink only to find out one is not eligible?  Regards.

The easiest way to find out is to use Services Australia’s (Centrelink) online ‘how to claim’ form.

You need to be over age pension age and meet residency rules to be eligible for the Commonwealth Seniors Health Care Card, and to not be receiving the age pension.

Those in receipt of the age pension are automatically provided the Pensioner Concession Card.

There is no asset test, but there is an income test that you have to be under in order to be eligible for the card.

The income test will look at your:

  • Adjusted taxable income
  • A deemed amount from account-based income streams (note that some income streams purchased prior to 2015 are exempt from deeming).

To meet the income test, from September 20, 2021, you must earn no more than the following:

  • $57,761 a year for singles
  • $92,416 a year for couples.

If you think you may be eligible, it is a good idea to go through the claims process as the Commonwealth Seniors Health Card gives you:

  • Access to cheaper medicine under the Pharmaceutical Benefits Scheme
  • The chance to be bulk billed by a GP (at their discretion)
  • A bigger refund on medical costs when you reach the Medicare Safety Net
  • Access to some state and territory concessions.

Craig Sankey is a licensed financial adviser and head of Technical Services & Advice Enablement at Industry Fund Services

Disclaimer: The responses provided are general in nature, and while they are prompted by the questions asked, they have been prepared without taking into consideration all your objectives, financial situation or needs.

Before relying on any of the information, please ensure that you consider the appropriateness of the information for your objectives, financial situation or needs. To the extent that it is permitted by law, no responsibility for errors or omissions is accepted by IFS and its representatives. 

The New Daily is owned by Industry Super Holdings