If you’re lucky enough to have received a windfall, perhaps an inheritance or a retrenchment payout, your first decision will be what to do with it.
Finding the best place to invest a lump sum can depend on a number of things, including the effect on your tax bill and how soon you will need access to the funds.
For those interested in investing their lump sum for a longer term, superannuation is one approach because of its long-term tax benefits.
But be aware that, while super can be a tax-effective investment, there are limits on how much you can pay into your super without having to pay extra tax. These are known as contribution caps.
Different types of contributions
There are two types of super contributions you can make – concessional and non-concessional – and contribution caps apply to both.
Concessional contributions are paid into super with pre-tax money, such as the compulsory contributions made by your employer. They are taxed at a rate of 15 per cent.
Non-concessional or after-tax contributions are paid into super with income that has already been taxed. These contributions are not taxed.
So, the tax your super fund pays on your contribution depends on whether:
- The contribution was made before or after you paid tax on it.
- You exceed the contribution caps.
- You are a high income earner. If your income and concessional contributions total more than $250,000 in a financial year, you may have to pay an extra 15 per cent tax on some, or all, of your super contributions.
Investing after-tax income
There are many different types of after-tax contributions that can be made to your super including contributions your spouse may make to your fund, contributions from your after-tax income, an inheritance, a redundancy payout or the proceeds of a property sale.
Based on current rules, the annual limit for non-concessional or after-tax contributions is $110,000. You can also bring-forward two financial years’ worth of non-concessional contributions and contribute $330,000 at once but then you can’t make any further non-concessional contributions for two financial years.
It is also useful to note that, under certain conditions, there are some types of contributions that do not count towards your cap. These include personal injury payments, downsizer contributions from the proceeds of selling your home and the re-contribution of COVID-19 early release super amounts.
The Downsizer scheme is available to Australian homeowners over the age of 55 and allows for the contribution of up to $300,000 from the sale of your property to your superannuation balance. However, there are some eligibility rules to consider, so it’s best to seek advice.
Giving your super a boost
A review of your super balance and some quick calculations about your projected retirement income might inspire you to give your super a boost but not everyone has access to a lump sum to invest.
A strategy that uses smaller amounts could include any amount from your take-home pay. These contributions will count towards your non-concessional or after-tax cap.
Alternatively, you add to your super from your pre-tax income through salary sacrificing. These types of concessional or pre-tax contributions attract a different contribution cap: $27,500 per year, which includes all contributions made by your employer.
If your super fund balance is less than $500,000, your limit may be higher if you did not use the full amount of your cap in earlier years. You can check your cap at ATO online services in your myGov account.
The rules for super contributions can be complex, so reach out to discuss how best to maximise your benefits while avoiding any mistakes. Speak with our team here.
Andrew Sherlock is the Owner and Head of Advice at Sherlock Wealth.
A Sydney-based financial planning firm, Sherlock Wealth has been helping successful families, business owners and individuals with their wealth creation and wealth protection needs for over two generations.
A Chartered Accountant with a background in funds management, Andrew’s career spans more than 30 years. Andrew was one of the first people in Australia to obtain the Self-Managed Superannuation Specialist accreditation and is one of only a few advisers in Australia to be a Certified Investment Management Analyst. He is a lifetime member of the international MDRT Top of the Table and holds a BA in Economics degree from Macquarie University with majors in accounting and finance.
Helping clients achieve their lifestyle goals through smart investing and asset management, wealth structures, and strategic planning are the cornerstones of what Andrew and the team at Sherlock Wealth provide.
Andrew can also be contacted at firstname.lastname@example.org.