Every Australian Rules follower knows that getting a free kick can be vital in coming out a winner.
The same applies when it comes to getting a free kick from the Federal Government – particularly when you add the benefit of capital gains and compounding interest over many years.
Superannuation itself is already a substantial free kick, given that it can lead to a substantial tax-free income in retirement and tax savings along the way as well compared to normal income tax rates.
However, the best free kick of all are the various co-contribution schemes, which can yield up to an instant return of 50% tax free – a return that continues to cascade upwards through compound returns over the years.
It is a bit of a mystery why these schemes are not more popular given that with a bit of advance organisation, you can eventually be enjoying a beer a day for the rest of your retired life paid for by the Government and perhaps a lot more.
It is often in the last week of the financial year that the con-contribution strategies get mentioned as a good idea for a last-minute bit of tax planning but I think that the start of the new financial year is actually a better time to jump on the co-contribution band wagon because it gives you more time to plan your cash flow around it rather than scratching around for a quick lump sum.
Lower or no income a tough time to part with money
One of the issues is that the co-contributions are mainly available to those on lower incomes or not working and naturally money is already fairly tight in this situation.
However, even if some households find it impossible to find a lump sum of up to $3,000, it can be more approachable if it is paid for over time.
So now that we are at the start of a new financial year, it is a great time to set up an automatic monthly payment that may not be missed as much and eventually over time you will be able to reverse the payments so that your super is paying you $250 a month or possibly much more for the rest of your life, just by showing some extra financial discipline and taking advantage of a rare financial free kick.
Two main schemes
So, what are the two main co-contribution schemes and how do they work.
There are a range of conditions that must be met before they are payable which you should check carefully on the ATO website before you start but in basic terms, the two schemes work like this:
Spouse co-contribution
This scheme is particularly generous and is ideal for when one spouse is not working for a period of time or is earning less than $40,000 a year but wants to keep their super ticking upwards to ensure they can meet their retirement goals.
In this situation, as long as the working or higher income spouse is able to withstand depositing $250 a month into the partner’s superannuation, then the Federal Government will pay the higher income spouse a $540 tax credit which they claim when filling out their tax return.
There are some other conditions around eligibility which you need to check carefully (Australian residency, living together and not claiming a tax deduction for your super deposits are just some of the conditions) but this can be a very powerful tool over the years to boost super in a very tax effective way if you qualify.
Co-contribution
This scheme is even more generous although it doesn’t get as much money into superannuation so it is a bit of a slower burn.
Indeed, the initial return can be as high as an ultra-impressive 50% of your investment, which is the sort of number that should attract attention from any investor.
It works for people earning less than $57,016 a year who can deposit up to $1000 as an after-tax contribution into their own superannuation account to quality for up to a $500 co-contribution directly into their super account.
Again, it is important to check that you fulfill all of the requirements first but by starting this strategy at the beginning of a financial year you can make much more approachable monthly contributions that will really add up over the years.
Some of the requirements include meeting an income test, being under 71 years of age and lodging a tax return for the year you’re claiming the co-contribution but if you qualify and maintain contributions over many years, the returns are truly impressive.
Discipline pays off
Just like any other area of planning your finances, having the discipline to check if you can use either of the main co-contribution schemes is well and truly worth the effort in the long term.
Even relatively small amounts accrued within superannuation when young can turn into really large and life changing amounts over time and your future self will really thank you for showing a bit of foresight and investing some government money with your own.
The only downside of these schemes is that once invested, the money won’t be available for withdrawal until you retire but that is really a small price to pay for a much better financial future.
