Summary: In any country with tax-advantaged retirement savings accounts, optimising use of them is an essential part of properly managing your finances. In Australia, those in paid employment are forced to contribute 9.5% of their wages to a superannuation fund, so this provides a spur to pick the best fund, ensure they only have one fund open, and, because it's so easy, even make extra pre-tax contributions when their incomes and tax rates are high.

But those who aren't primarily in paid employment at some stage (students, self-employed, those who rely on investment or other income, temporarily not working, early-retired) often neglect superannuation for this period because they aren't forced to do anything. This is a mistake as the tax savings are considerable.

Most advice (and links to the best websites to check the latest rules and tips) on optimising superannuation decisions is maintained here:
> Start organising your superannuation in the most optimal way

In this post, I focus only on some specific tips for those not primarily in paid employment at some stage. In particular, when and how to make voluntary contributions to superannuation.

My Situation: As I'm "self-employed" (or early retired) I BPAY $10,000 most years to AustralianSuper which results in a tax saving of around $2,000 given I'm typically in the 32.5% tax bracket. As I get closer to the age at which I can access super I would be making larger voluntary contributions as the downside of contributing to super reduces.

Related Posts:
> Start organising your superannuation in the most optimal way

Details:

1. Useful websites with guidance for the self-employed and others not making significant compulsory superannuation contributions via paid employment

The key websites kept updated with current information on the rules, limits and processes are:

> ASIC MoneySmart - Super for self-employed people
> AustralianSuper - Super for the self-employed (the process is the same regardless of your super fund)
> SuperGuide - Super Guide for the self-employed
> ATO - Claiming deductions for personal super contributions (often confusing so use other sites)


2. Why make voluntary super contributions?

I don't recommend super as the primary destination for discretionary savings as life doesn't begin at 60 when you get to access it. However, assuming you have sufficient savings outside of super and no major purchases to make coming up (like a house), then it can be worthwhile putting some discretionary savings into super in the below circumstances:

- Only if you really have consolidated all of your superannuation into the balanced option of a large, highly-rated, low-fee industry fund and opted out of insurance if appropriate (See here).

- Assuming you have sufficient non-super, liquid savings you can access and so putting voluntary money into super wouldn't constrain your ability to meet your living costs.

- As you get older the penalty for locking up super money till 60 lessens. Also, the larger the proportion of your savings outside super, the more sense it can make to slowly transition it inside super when most tax effective, and before you hit retirement age and limits on large transfers. Once you reach ~60, there are major benefits to holding retirement savings within superannuation, so as you age above 40, and if you will be transferring a large amount eventually before 60, it makes sense to do some of this yearly and obtain the tax benefit earlier.

- The long-run, after-tax performance of the best low-fee, high-performing funds will be around 4% above the inflation rate. If you are not genuinely able to beat this return after-tax then super is likely a better long-term investment.

- When interest rates will stay very low for extended periods and the other alternative is a return of less than 4% for several years or more in term deposits or similar safe savings options.

- If you would otherwise be chasing yield into riskier investments and don't have a proven understanding of the actual risk vs return tradeoffs.

- If you would just plan putting extra into Australian equities anyway. It makes much more sense to hold these long-term within superannuation.

- If receiving less than $37,000 income in any financial year to take advantage of the government co-contribution and low-income contribution. Make sure you don't submit tax deductions for such contributions as there is negligible benefit and they may make you ineligible for the government co-contributions. (See here)

- If receiving more than $42,000 income in any financial year to reduce the proportion on which you pay marginal tax rates much higher than 15%.

- If you're in the $37,000 to $42,000 range, the strategy to choose depends on how much you are contributing to super and whether claiming a tax deduction for all except ~$1,000 is feasible. If contributing less than $1,000 stick to the government co-contributions only.

- If your taxable income in any financial year is bordering on a major tax threshold like the Medicare Levy Surcharge (currently ~$90,000).

- It is more tax-effective for spouses who plan to be together long-term and trust each other to equalise their super balances over time and also maximise the yearly tax concessions. The higher-earning spouse in each financial year can contribute to the other spouse at a 15% tax rate which is much lower than their marginal tax rate.


3. Let's say you earn $50,000 self-employed or investment income in a financial year. What are the tax benefits of making a voluntary super contribution?

Using the ATO Simple Tax Calculator we can ballpark the benefit. The amount you choose to contribute (up to the yearly total cap which is currently ~$30,000) is taxed at 15% on entry into the super fund instead of the applicable marginal rate when you submit your taxes.

ATO Marginal tax rates for individuals

1. No voluntary super contribution

Starting taxable income (after other deductions): $50,000
Tax: $7,797
Medicare Levy (2%): $1,000

Disposable Income: $41,203
Super balance: +$0
Total wealth change: $41,203

2. Voluntary super contribution of $5,000

Starting taxable income (after other deductions): $50,000
Taxable income after super deduction: $45,000
Tax: $6,172
Medicare Levy (2%): $900

Disposable Income: $37,928
Super balance (after 15% tax): +$4,250
Total wealth change: $42,178

Basically, the $5,000 was taxed at 15% instead of the marginal rate of 32.5% (plus 2% Medicare Levy). This 19.5% tax saving on $5,000 works out to $975.

If your taxable income was over $87,000 then your marginal rate would be 37% (plus 2%) so the difference would be 24%. It's easy to calculate the benefit on $5,000 as $1,200.

The tax benefit can then be easily ballparked for any taxable income, marginal tax rate and potential super contribution amount.

For this tax-minimisation strategy (reducing your marginal rate to 15%), there's no tax benefit in reducing taxable income below $37,000 so don't try to contribute such a large amount it takes your taxable income below $37,000.

For the self-employed this strategy relies on claiming a tax deduction which those with starting incomes below $37,000 should not do as it makes them ineligible for a government co-contribution.

Those with starting taxable incomes below $37,000 should instead make super contributions to maximise receipt of the low-income super contribution and government co-contribution. (See here).


4. How do the self-employed or others making voluntary super contributions obtain the 15% tax rate? When is the best time to make it and what are the key tips?

Basically, they make an after-tax super contribution to their existing super fund. But also submit a form advising their super fund they will be claiming this contribution as a tax deduction in that financial year.

The super fund will tax the contribution at 15%. The tax-payer can then validly claim the amount as a deduction when submitting their taxes.

To keep things simple and low-overhead, I recommend making your after-tax voluntary contribution in June of the financial year (just before it ends) as it is taxed 15% on entry. Then make sure you submit your super notification form soon after and in time to submit your taxes when most tax-effective (late July if getting tax back, late October if owing).

For an example of the steps for a super fund see here:
> AustralianSuper - Super for the self-employed

Below I will detail all specific steps using my account at AustralianSuper.

4a. Check your current financial year concessional pre-tax contributions won't be bumped over the yearly limit (currently $30,000) by your intended voluntary contribution

- The best super funds will provide a year-to-date figure advising of your current contributions and how to check what concessional caps apply. Below is the AustralianSuper summary screen at: Manage my account > Add to your super



- If your super fund doesn't have a year-to-date total you can do this check manually from your transaction history. If near the limit check with your employer there are none pending. E.g. AustralianSuper - Manage my account - Transactions


4b. Figure out what amount you wish to contribute given your circumstances in section #2 and marginal tax rates in section #3 above

- For my example of a taxable income (after other deductions) of $50,000, I will choose $10,000 as I can afford to and most of my savings sit outside super but much should be transferred in (for tax reasons) before age 60.

4c. Make an after-tax contribution to your super fund. This involves completing an online (or PDF) form and transferring the money (BPAY is best for a once-off contribution).

- For AustralianSuper see:
> Make after-tax contributions (the PDF form is linked from this page)
> Manage my account - Make a contribution


The BPAY details are at the top right of this screen: Manage my account > Add to your super
Note that when submitting a form, you don't actually need to wait for further confirmation to go ahead and transfer funds. You may receive a confirmation email immediately advising you to go ahead and transfer whenever ready or a letter will arrive if you submitted your form by post.

4d. Submit a second form to your super fund called something like: Notice of intent to claim a tax deduction for personal super contributions

Unfortunately, this is likely to be a PDF at any super fund. I recommend making the contribution as a single sum in June and finalising your total voluntary after-tax contributions before you submit your form. This saves having to vary it with further forms later.

AustralianSuper's PDF form is on its Forms page called: Claiming a tax deduction for personal contributions

Complete a tax deduction claim form (PDF, 270kb) and send it to us at:
AustralianSuper, GPO Box 1901, Melbourne, Victoria 3001

When this form is processed, you will receive a letter in the mail that is formal acknowledgement from your super fund of your notice of intent to claim form. If you don't receive the letter make sure you follow up and obtain it or resubmit your form as you need to have received the letter to make your tax deduction claim.

4e. How to complete your tax return

See:
> ATO -  Claiming deductions for personal super contributions
> ATO - D12 Personal superannuation contributions 2016

How to complete your tax return
When you complete your tax return, you can claim a deduction for the amount of the contribution stated in your notice. If you want to claim an amount that is different (more or less) than what the notice says, you can vary your notice (see How to vary your notice).
Make sure that you claim your deduction at the correct label in your tax return. Deductions for personal super contributions must be claimed at Personal superannuation contributions in the Individual tax return supplement.

When completing your tax return (preferably using MyTax) make sure you answer Yes to all the eligibility questions. This one is confusing as its wording suggests possible ineligibility depending on income source but other detailed ATO information indicates a wide range of income sources are permitted.


Once you get through the preliminary steps the actual entry of the deduction is straightforward. You should be able to get data for all fields required from the acknowledgement letter your super fund sent you. The key fields can be seen in the example for AustralianSuper below:

Fund Name: AustralianSuper
Fund ABN: 65714394898
Fund Member Account Number: 702xxxxxx
Claim Amount: $10,000


The completed 2016-17 MyTax section is below. You can see that typically only four simple fields need to be completed:



Further Info:

ATO
> Self-employed
> Government super contributions
> D12 Personal superannuation contributions 2017