Negative gearing can offer tax benefits. With negative gearing, your borrowing costs exceed your investment income. The law allows you to deduct your borrowing costs from your total income provided that your investments are genuine

However, you only get a tax benefit if you earn other taxable income in the first place.

For example, let's suppose Bruce buys an investment (it could be shares, managed funds, a rental property, etc) for $100,000 and pays $6,000 in interest and receives $3,000 income from the investments. He has a loss before tax of $3,000.

Suppose Bruce has a well-paid job (more than $150,000 per year) and pays tax on his salary at the top rate of 47.5%. He can now deduct this loss from his taxable income, and reduce his tax bill by $1425 (47.5% of $3000). The tax saving reduces Bruce's cost of borrowing.

If Bruce earned nothing else apart from his investment, he's just left with a $3,000 loss.

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Superannuation been specifically designed and endorsed by the Federal Government as a preferred way to save for your retirement, and has, therefore, unique tax benefits that make it particularly attractive.

Superannuation can be a tax effective way of building wealth for your retirement. The tax rates imposed will differ depending on what stage of life you are at and in what manner the super funds invested are held.

Accumulation v Income Stream (Pension phase)

There are 2 primary methods of holding your super investments:

• “accumulation” – the most common form prior to your retirement
• “income stream” – also commonly referred to as “pension phase”, this is when your super funds are converted into a tax-effective structure that provides you with an income source. Generally occurs once you have retired.

Accumulation phase

• Contributions Tax is a maximum of 15%.
• Investment income is taxed at a maximum of 15%.
• Capital Gains are taxed at a maximum of 15%. However, if the asset has been owned by the superannuation fund for more than 12 months the maximum rate of capital gains tax is 10%.

Income stream phase

• Contributions tax does not apply as no further contributions are able to be made once established.
• All income and capital returns achieved by the funds invested are tax free.
• Pension payments received from the income stream are also tax free for individuals over age 60. For individuals aged between 55 and 60, pension payments (less any tax free proportion) will be taxable at the individual’s Marginal Tax Rate. However, a 15% tax offset is available that can be used towards minimising potential income tax liability.

These superannuation tax rates are in contrast to personal marginal tax rates, which could be considerably higher.

 

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If you make super contributions under an effective salary sacrifice arrangement, you may be able to increase your superannuation balance by reducing your assessable income for taxation purposes.

Super contributions are not a fringe benefit.

If salary sacrificed super contributions are made to a complying super fund, the sacrificed amount is not considered a fringe benefit for tax purposes.

Your employer will not: 

• be liable to pay fringe benefits tax (FBT) on the super contributions
• need to include the super contributions as a reportable fringe benefit amount on your payment summary.

Salary sacrificed contributions are treated as employer contributions. If salary sacrificed super contributions are made to a non-complying super fund, the contributions will be a fringe benefit.

Your employer will:

• be subject to FBT on the sacrificed amount
• need to record the sacrificed amount on your payment summary as a reportable fringe benefit.

Super contributions are deductible for your employer

If you are under 75 years old, your employer can usually claim a tax deduction on the amount of salary sacrificed contributions they contribute to your super fund on your behalf.

Salary sacrifice reduces your assessable income

The sacrificed component of your total salary package is not your assessable income for taxation purposes. This means that it is not subject to pay as you go (PAYG) withholding tax.

Salary sacrifice is a reportable employer super contribution

As you influence the amount of the extra super contributions your employer makes to your super fund, any salary sacrificed amounts will be reportable employer superannuation contributions. The reportable employer super contribution will be included on your payment summary and will affect the income tests for some tax offsets and deductions, the Medicare levy surcharge, and certain government benefits and obligations.

Super contributions are concessionally taxed in the fund

If you make super contributions through a salary sacrifice agreement, these contributions are taxed in the super fund at a maximum rate of 15%.

Generally, this amount of tax is less than what you would pay if you did not enter into a salary sacrifice agreement and instead were subject to PAYG withholding tax on your earnings.

However, the concessional tax treatment is limited to a set amount of contributions made each income year.

Example

On 1 July 2007, Sally and Zoe started work at Green Thumb Gardening, earning $45,000 a year. Zoe entered into a salary sacrifice arrangement with her employer to sacrifice $10,000 of her earnings into her super fund. Sally did not salary sacrifice any of her salary.  

The following table shows the difference between Sally and Zoe’s assessable income and rates of tax at the end of the 2007–08 income year:

	Sally	Zoe
Remuneration	$45,000	$45,000
Less super salary sacrifice	-	$10,000
Assessable income	$45,000	$35,000
Deductions	-	-
Taxable income	$45,000	$35,000
Income tax (using the 2007–08 tax rate)	$7,950	$4,550
Medicare Levy	$675	$525
Tax on super sacrificed (15% in the fund)	-	$1,500
Total tax and Medicare levy paid	$8,625	$6,575

 

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The following is brief overview of the current key rates and thresholds that apply in relation to superannuation.

Preservation age

• Generally, you must reach preservation age before you can access your super. Use the following table to work out your preservation age.

Date of birth	Preservation age
Before 1 July 1960	55
1 July 1960 – 30 June 1961	56
1 July 1961 – 30 June 1962	57
1 July 1962 – 30 June 1963	58
1 July 1963 – 30 June 1964	59
From 1 July 1964	60

Super co-contribution

• The super co-contribution is a Federal Government initiative to assist eligible individuals to save for their retirement.
• If you are eligible and make personal non-concessional contributions, the government will match your contribution with a super co-contribution up to certain limits.

Co-contribution income thresholds

Year	Maximum entitlement	Lower income threshold	Higher income threshold
2010-11	$1,000	$31,920	$61,920
2009-10	$1,000	$31,920	$61,920

The lower income threshold is indexed in line with AWOTE each income year. However, government proposals have led to the lower limit threshold being frozen for the 2010-11 and 2011-12 years.

Example benefit for contributions made in the 2009-10 to 2011-12 years

	If your personal super contribution is:
	$1,000	$800	$500	$200
And your income is:	Your super co-contribution will be:
$31,920 or less	$1,000	$800	$500	$200
$34,921	$900	$800	$500	$200
$37,921	$800	$800	$500	$200
$40,921	$700	$700	$500	$200
$43,922	$600	$600	$500	$200
$46,922	$500	$500	$500	$200
$49,922	$400	$400	$400	$200
$52,922	$300	$300	$300	$200
$55,923	$200	$200	$200	$200
$58,923	$100	$100	$100	$100
$61,920	$0	$0	$0	$0

Superannuation guarantee (SG)

The superannuation guarantee requires employers to contribute a minimum of 9% of an eligible employee’s earnings (ordinary time earnings) to a complying super fund or retirement savings account (RSA). Your contributions need to be made at least every quarter.

Maximum super contribution base

• The maximum super contribution base is used to determine the maximum limit on any individual employee's earnings base for each quarter of any financial year.
• Employers do not have to make SG contributions for earnings above this limit.

Income year	Per quarter
2010-11	$42,220

* Indexed in line with AWOTE each income year.

Contributions caps

Concessional contributions cap (CCC)

Concessional contributions include:

• employer contributions (including contributions made under a salary sacrifice arrangement)
• personal contributions claimed as a tax deduction by a self-employed person (that is, pre-tax income used).

Income year	Amount of cap
2010-11	$25,000
2009-10	$25,000

Concessional contributions cap for people 50 years old or over

• An increased annual cap of $50,000 applies, until 30 June 2012, for people 50 years old or over. The government proposed during the 2010 Federal Budget, a continuation of this increased cap post 30 June 2012 for individuals with total superannuation investments under $500,000.
• If you have more than one super account, all concessional contributions made are added together and count towards the cap.

Non-concessional contributions cap (NCCC)

Non-concessional contributions include:

• personal contributions for which you do not claim an income tax deduction (that is, after-tax income used).

Income year	Amount of cap
	< 65 (years *)	> 65 & < 75	75 +
2010-11	$150,000 (3 year limit of $450,000 can be brought forward)	$150,000	No NCC can be accepted
2009-10	$150,000 (3 year limit of $450,000 can be brought forward)	$150,000	No NCC can be accepted

* age on July 01.

Small business exclusion (CGT cap)

• Under the CGT cap, non-concessional super contributions from the sale of a small business will be excluded from the NCCC up to a lifetime limit amount. Small business sale proceeds above this lifetime limit will be included in the NCCC.

Income year	Lifetime limit
2010-11	$1,155,000

Untaxed plan cap amount

• The untaxed plan cap amount limits the concessional tax treatment of benefits that have not been subject to contributions tax in a super fund (such as some government funds).
• The untaxed plan cap amount applies to each super plan from which a person receives super lump sum member benefits.

Income year	Amount of cap *
2010-11	$1,155,000

* The untaxed plan cap amount is indexed in line with AWOTE, in increments of $5,000 (rounded).

Super lump sum tax table

Type of Benefit	Age upon receipt	Amount subject to tax	Maximum rate of tax (including Medicare levy)
Member benefit (taxable component – taxed element)	< preservation age	Whole amount	21.5%
	Preservation age but < 60	Below low rate cap amount*	Nil
		Above low rate cap amount*	16.5%
	60 +	Nil (non–assessable non–exempt income)	N/A
Member benefit (taxable component – untaxed element)	< preservation age	Up to untaxed plan cap amount^	31.5%
		Above untaxed plan cap amount^	46.5%
	Preservation age but < 60	Below low rate cap amount*	16.5%
		Above low rate cap amount* and below untaxed plan cap amount^	31.5%
		Above the untaxed plan cap amount^	46.5%
	60 +	Below the untaxed plan cap amount^	16.5%
		Above the untaxed plan cap amount^	46.5%
Death benefit lump sum paid to non-dependants (taxable component – taxed element)	Any	Whole amount	16.5%
Death benefit lump sum paid to non-dependants (taxable component – untaxed element)	Any	Whole amount	31.5%
Death benefit lump sum paid to dependants (taxable component – taxed and untaxed elements)	Any	Nil	N/A
Rollover (taxable component – taxed element)	Any	Nil (non–assessable non–exempt income)	N/A
Rollover (taxable component –untaxed element)	Any	Below untaxed plan cap amount^ is non–assessable non–exempt income	N/A
		Above the untaxed plan cap amount^	46.5%
Super lump sum (less than $200)	Any	Nil	N/A
Super lump sum (terminally ill recipient)	Any	Nil	N/A

* The application of the low rate threshold for super lump sum payments is capped at $160,000 (2010/11).
^ The untaxed plan cap is $1,155,000 (2010/11).

Payment levels from income streams (super)

• If you have commenced an allocated pension or annuity on or after 1 July 2007, a minimum amount is required to be paid to you each year.
• There is no maximum amount (excluding “Transition to Retirement” pensions), other than the prevailing balance of your account.

The following table shows the minimum percentage factor for each age group:

Age	Minimum % withdrawal (pa)	Temporary reduction to minimum limits (2010/11)*
Under 65	4%	2%
65-74	5%	2.5%
75-79	6%	3%
80-84	7%	3.5%
85-89	9%	4.5%
90-94	11%	5.5%
95 or more	14%	7%

* The reduction in the minimum payment amounts applies only to account-based annuities and pensions, allocated annuities and pensions, and market-linked annuities and pensions.

Super income stream tax tables

Taxed Fund

Tax-free component

The tax-free component of any income drawn is not assessable and not exempt income in all cases.

Taxable component

Age	Income stream
Age 60 +	Not assessable, not exempt income
Preservation age and < 60	Taxed at marginal tax rates (Tax offset of 15% is available)
< Preservation age	Taxed at marginal tax rates (no tax offset except 15% where a disability super benefit)

Medicare levy (1.5%) will apply if amounts are assessable.

Untaxed Fund

Tax-free component

The tax-free component of any income drawn is not assessable and not exempt income in all cases.

Taxable component

Age	Income stream
Age 60 +	Taxed at marginal rates (10% tax offset)
Preservation age and < 60	Taxed at marginal rates (no tax offset)
< Preservation age	Taxed at marginal rates (no tax offset)

Medicare levy (1.5%) will apply if amounts are assessable.

Employment termination payments

An employment termination payment (ETP) is a payment made in consequence of the termination of employment. It can include:

• amounts for unused rostered days off
• amounts in lieu of notice
• a gratuity or ‘golden handshake’
• an employee’s invalidity payment (for permanent disability, other than compensation for personal injury)
• certain payments after the death of an employee.

ETPs do not include:

• a payment for unused annual leave or unused long service leave
• the tax-free part of a genuine redundancy payment or an early retirement scheme payment.

ETP cap amount

• The amount up to the ETP cap amount will be taxed at a concessional rate.
• The amount in excess of the ETP cap amount will be taxed at the top marginal rate.

ETP cap amount for termination payments:

Income year	Amount of cap
	Life Benefit	Death Benefit
2010-11	$160,000	$160,000

* The ETP cap amount is indexed in line with AWOTE, in increments of $5,000 (rounded).

Transitional ETP cap amounts up to 30 June 2012

Transitional arrangements apply if you were entitled, as at 9 May 2006, to a payment made on the termination of employment under:

• a written contract
• an Australian or foreign law (or an instrument under such a law)
• a workplace agreement under the Workplace Relations Act 1996.

Employment termination payments made after 1 July 2007 (other than those made under the transitional arrangements) won’t be able to be contributed to or rolled over into super.

The taxable component of a transitional termination payment will be taxed at:

• no more than 15% up to the lower cap amount
• no more than 30% on the amount which exceeds the lower cap amount but does not exceed the upper cap amount
• the top marginal rate for amounts in excess of the upper cap amount.

Income year	Lower cap amount	Upper cap amount (not indexed)
2010-11	$160,000	$1 million

ETP tax table

Type of Benefit	Age upon receipt	Amount subject to tax	Maximum rate of tax (including Medicare levy)
Life benefit ETP (taxable component)	< Preservation age	< ETP cap amount	31.5%
	Preservation age +	< ETP cap amount	16.5%
	All ages	> ETP cap amount	46.5%
Transitional ETP (taxable component)	< Preservation age	< Upper cap amount	31.5%
	Preservation age +	< Lower cap amount	16.5%
		> Lower cap amount & < Upper cap amount	31.5%
	All ages	> Upper cap amount	46.5%
Death benefit ETP - non-dependants (taxable component)	All ages	< ETP cap amount	31.5%
		> ETP cap amount	46.5%
Death benefit ETP – dependants (taxable component)	All ages	< ETP cap amount	Nil (non–assessable non–exempt income)
		> ETP cap amount	46.5%