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Monthly tax tip:
A superannuation fund pays a set rate of 15% income tax on taxable income earned. Making personal super contributions (before-tax) can save money and make a great tax deduction if you personally pay more than 15% tax on your income. The contribution caps for this financial year are $27,500 per member for before-tax contributions (tax-deductible) and $110,000 per member for after-tax contributions. If you operate an SMSF then you have greater control of what you invest in. You can choose to invest in assets using your SMSF instead of investing in your personal name to save even more tax on the income earned. An example of a great tax strategy for a small business owner paying more than 15% tax is listed below. If you are interested in learning more about SMSF’s or investing in super, then please contact our office. We also recommend discussing your investments and strategy with a financial adviser before investing in anything new.
Example – Kevin Smith runs a successful business in a company entity and pays an annual salary to himself. The commercial offices that the company leases have just come up for sale and he would like to purchase them but is considering which entity will own the property. Table below shows three different scenarios.
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Scenario 1 – Kevin purchases the offices |
Scenario 2 – the company purchases the offices |
Scenario 3 – the superfund purchases the offices |
| Individual – Kevin Smith |
Annual salary = $100,000.
Purchases commercial property, leases to company, and earns net rent of $26,000.
Taxable income is $126,000.
Income tax = $31,687.
Tax rate is 25.15%. |
Annual salary = $100,000.
Income tax = $22,967.
Tax rate is 22.97%. |
Annual salary = $100,000.
Income tax = $22,967.
Tax rate is 22.97%. |
| Company – Smith & Co. Pty Ltd |
Annual profits = $200,000.
Lease deductions = $36,000
Taxable income is $164,000
Company tax = $42,640
Tax rate is 26%. |
Annual profits = $200,000.
Property deductions = $10,000
Taxable income is $190,000
Company tax = $49,400
Tax rate is 26%. |
Annual profits = $200,000.
Lease deductions = $36,000
Taxable income is $164,000
Company tax = $42,640
Tax rate is 26%. |
| SMSF – Smith Superfund |
N/A – not established under this scenario. |
N/A – not established under this scenario. |
Net rental income = $26,000
Income tax = $3,900
Tax rate is 15%. |
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| Total tax liability |
$74,327 |
$72,367 |
$69,507 |
The clear winner is scenario three which shows a total tax savings of $4,820 annually. This comes up to a total saving of $96,400 over a twenty-year period. Kevin can also choose to make extra before-tax contributions to save even more tax as he personally pays 7-8% more of tax on income than the superfund entity.
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