How would you feel if you were having a Zoom meeting with your accountant and they asked “how would you like to save more than $5,000 in income tax over the next six months?”
While probably a bit sceptical (did I hear right? Maybe this technology is faulty? What’s the catch? Surely this is too good to be true?) you might be intrigued. You might even turn up the volume to make sure you hear the next bit.
What about if they followed up with, “It’s completely legal. The Australian government will be picking up the tab as part of the stimulus packages! Plus, you can do it mostly risk-free. But you do have to rearrange your financial affairs a bit, and deal with some bureaucratic hurdles.”
What the accountant would be referring to is a generous incentive that is on offer now over the next six months.
It is linked to the decision to temporarily allow the early release of A$10,000 in super this financial year and $10,000 the next.
When parliament approved the Coronavirus Economic Response Package Omnibus Bill 2020 last week, they put no new restrictions on how people could contribute into super.
This means that it’s possible to voluntarily contribute $10,000 of your pre-tax income into super over the next three months, and also apply to withdraw a $10,000 lump sum from super tax-free at some point before June 30.
You still end up with $10,000 in your pocket. But if you contribute through a salary sacrifice arrangement with your employer and stay within the concessional contributions limits, your voluntary contributions will be taxed at 15% rather than your marginal personal tax rate.
When you pull out the funds from super, the withdrawal is tax free. And, you will be able to do the same thing again between July 1 and late September.
In a working paper released by the ANU’s Tax and Transfer Policy Institute, we described these kinds of situations – where people assume a different legal form in order to receive a lower marginal tax rate – as “tax arbitrage”. They are completely legal, and widespread.
Like other tax arbitrage opportunities, there are sizeable tax savings available from the pursuing of the super equivalent of the Hokey Pokey.
This chart illustrates the sums involved.
Potential tax saving in one specific scenario associated with salary sacrificing up to $10,000 into super and withdrawing it in the same financial year
It applies to a very specific scenario: a working age individual who is on 9.5% compulsory super contributions, has an annual salary below $158,000, has made no previous voluntary contributions to super in 2019-20, and who elects to make a “simultaneous” (within 2019-20) pre-tax contribution to and withdrawal of the maximum possible $10,000 from super over the next three months.
It suggests that, as long as an individual in this situation has an annual income of approximately $30,000 or more, there is a prospective tax saving from rearranging his or her financial affairs over the next three months.
The tax savings can be risk-free, if that’s what you want. If you were worried about the stock market falling further and taking away your contributions to super with it, you can direct your super fund to hold all new contributions purely as cash.
In all, its not a bad return for three (or six) month’s efforts – especially as it results purely from a change in legal fiction rather than any change in underlying economic activity.
Who can do it?
As always with these kinds of arrangements, the devil is in the detail, but there is a lot we already know.
First, the arrangements are targeted at those who have been adversely impacted by the coronavirus. On or after January 1, 2020 working hours (or turnover for sole traders) have to have been fallen by at least 20%.
And it benefits those willing to embrace the bureaucratic hurdles (or outsource the embracing to their accountant). Consistent with Australia’s self-assessment tax system, the onus is on the applicant to certify that they qualify. The Tax Office will then make a determination that the funds be released by the super fund.
There appears to a fair bit of discretion left to the ATO as to what impacts from coronavirus will be considered sufficient.
One thing is that isn’t clear is what the base period for comparison is, although some examples provided by treasury compare outcomes over a month in 2020 against the average over the six months at the end of 2019.
Authors: Robert Breunig, Professor of Economics and Director, Tax and Transfer Policy Institute, Crawford School of Public Policy, Australian National University