Tax Hacks for the Young: Superannuation Secrets

Hope you enjoyed your morning matcha; I ate kitkat matcha chocolate 😋

Today, I'm excited to reveal one of the miliions of ways rich people pay less tax.

—and how you can apply it too.

• Tax rates for an australian residents 2023-2024

Taxable Income	Tax on this income
$0-$18,200	Nil
$18,201-$45,000	16c for each $1 over 18,200
$45,001-$120,000	$4,288 plus 30c for each $1 over $45,000
$120,001-$180,000	$31,255 plus 37c for each $1 over $120,000
$180,001 annd over	$51,638 plus 45c for each $1 over $180,000

• `Amended rates for an australian residents 2024-25

Taxable Income	Tax on this income
$0-$18,200	Nil
$18,201-$45,000	16c for each $1 over 18,200
$45,001-$135,000	$4,288 plus 30c for each $1 over $45,000
$135,001-$190,000	$31,255 plus 37c for each $1 over $135,000
$190,001 annd over	$51,638 plus 45c for each $1 over $190,000

Ok so... what is going on here?

The above means that taxpayers who earn less than $150,000 a year will receive a larger tax cut than they would have last year, while those earning more than $150,000 will receive a lower tax cut than previously estimated.

For example, a person earning the average Australian salary of around $80,000 a year will now receive a tax cut of $1,679 instead of $875.

A person earning $200,000 a year will now receive a tax cut of $4,529, instead of $9,075.

 

However, if you put your income in superannuation pension mode, the money will get a compounding effect as time passes and it will be tax-free, including your potential capital gains.

Solution 1 

Make more than $150,000 annually. According to statistics, you get fewer tax cuts, allowing you to keep more of the income you earn.

Solution 2 

Use superannuation and contribute more to get a smaller pay cut.

In Australia, a superannuation fund pays NO TAX on the income earned or capital gains when in pension mode. 

However, because it is in pension mode, you can only access it after you retire or under certain conditions such as medical treatment, severe financial hardship, or permanent incapacity. You can find more details on superannuation websites.

One simple way to maximize this is through 'salary sacrifice' (also known as pension mode) at 11.5% (which some say will potentially increase to 12% from 2025).

When you salary sacrifice, your annual salary goes down, and therefore you get different tax cuts. However, in the long term, you're bringing more money to the table.

Solution 3 

If you don't want to wait until you retire because you feel too young for that, consider putting your superannuation into accumulation mode.

In accumulation mode, the tax is limited to 15% on income and 10% on capital gains (subject to various rules). This is better than facing a 30% to 37% tax cut.

Since it's in accumulation mode, your money will snowball and benefit from the 'compounding' effect.

Why we have Supperannuation? 

We all understand that after COVID-19, countries faced a massive amount of debt.

Each year, the interest on the debt increases, and so do our tax rates. 

This increase can reduce the budget for supporting the nation’s education, healthcare, and other essential services.

Because of this, the government alone can't support everyone's pensions. (They are busy with paying their debt and the interest on that debt.) That's why we have many options for superannuation companies to choose from.

In conclusion,

• Earn more than $150,000 to benefit from a lower tax bracket.
• Salary sacrifice into superannuation pension mode to achieve a 0% tax rate.
• Use accumulation mode in your superannuation to get a 15% tax rate and let your savings enjoy the compounding effect.