For many people, super remains a highly tax-effective structure to hold investments for the accumulation of retirement savings, as well as maintaining their risk/insurance protection.
However, due to the current contribution caps and rules, this also means that planning ahead over the longer term is the most effective way to maximise the potential benefits of super. Particularly worth noting, are the recent changes which allow for the ability to claim tax deductions on personal super contributions.
The concessional contribution cap of $25,000 applies to everyone, regardless of their age or superannuation balance. The ‘less than 10 per cent employment income’ rule no longer applies when looking to claim a tax deduction for personal superannuation contributions. Broadly, anyone who is eligible to contribute to super can claim a tax deduction for their personal contribution (other conditions apply, talk to your adviser). Keep in mind the 9.5% SG contribution from your employer is counted in this amount.
How this might benefit you in practice
Clients who already make salary sacrifice contributions may be asking, “what’s the big fuss around personal tax-deductible contributions”? In the end it creates the same tax effective outcome whether you choose to do this regularly via employer salary sacrifice or “ad hoc” via personal lump sum contributions. While this is true, there can be some advantages for people in the following circumstances:
- Flexibility to calculate capacity and “top up” towards end of financial year: It has been challenging for employees with “lumpy” incomes to salary sacrifice in the past – it’s hard to determine how much your employer will contribute for the year (as it’s hard to project the amount of income for the year). The new super arrangements simplify this situation – you now have the flexibility to top-up concessional super contributions (up to the $25,000 cap) towards the end of the financial year. This offers more certainty around income and super contributions for the year to date.
- Won’t reduce your SGC: The salary sacrifice contribution is classified as an employer contribution, and some employers simply include your salary sacrifice contributions to reduce or eliminate their SG obligation (proposed legislation is currently being drafted to eliminate this practice).
- Employer doesn’t offer salary sacrifice: Some employees are not offered salary sacrifice arrangements all together. You can now effectively “salary sacrifice” by making voluntary personal contributions and then claiming these personal super contributions as a tax deduction in your tax return.
- You now control the timing: The control, including the timing of when salary sacrifice contributions are made, is effectively in the hands of the employer. Unlike compulsory SG contributions (which must be remitted to the employee’s super fund no later than 28 days after the end of the relevant quarter), no such time frame exists for salary sacrifice contributions. This makes the employee reliant on the employer to do this in a timely fashion. In contrast, making regular personal contributions or one-off contributions towards the end of the financial year (you can choose whether or not to claim a tax deduction at that time), may allow people to take greater control of their super contribution strategy.
- Easier to sacrifice bonuses: The need for an effective agreement to be in place with your employer prior to the salary/income being earned which reduces flexibility and can make it difficult to sacrifice bonuses or extra income.
- Save interest in the meantime: Tax deductible contributions could also be combined with other strategies like keeping these “provisioned” contributions aside in your offset account in the meantime, which can reduce the cost of your loan.
- Accrue any unused amounts from 2018/19: Beginning in 2018–19, a person can start to accrue unused amounts of concessional contributions cap and carry-forward these unused amounts. Provided your total superannuation balance prior 30 June is under $500,000, the first year a person can make additional concessional contributions from their accrued unused amounts is in the 2019–20 financial year.
Important reminder around admin and claiming a tax deduction.
The ‘paperwork’ requirements to qualify for a deduction for a personal superannuation contribution have not changed. The member must complete a valid Notice of Intention (NOI) to claim a tax deduction and lodge this with their super fund.
To be eligible to claim a tax deduction for a personal contribution, clients must notify the super fund of their intention to claim a tax deduction using the NOI and receive an acknowledgement from the fund by whichever of the following dates occurs first:
- before they lodge their income tax return for the income year in which the contribution was made
- by the end of the income year following the income year in which the contribution was made
Personal super contributions that the ATO allows as a tax deduction in the individual’s tax return will count towards their concessional contribution cap.
If employer super contributions are also received, clients will need to make sure these are taken into account when determining how much to claim as a personal tax deduction.
Also requiring consideration is the individual’s tax-free threshold: effectively $21,594 in 2018–19. Clients who bring their taxable income below these thresholds by making salary sacrifice and/or personal deductible contributions will find that they are paying contributions tax (15%) in the super fund when they could be paying zero tax personally. The amount of personal contributions that can be claimed as a tax deduction is also limited to the member’s taxable income, i.e. taxable income cannot be reduced below zero.
We encourage you not to leave things to the last minute. Super contributions are generally allocated and count towards a client’s contribution cap in the year in which they are received by the fund. Clients need to accordingly allow several business days for contributions made by BPAY® or similar methods to reach the fund.
Business owners should also consult their accountant or business advisor to consider other taxation and reporting matters, such as finalising trust distributions, claiming asset write-offs and the amount of personal super contribution to claim a tax deduction for.
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Article by Illawarra Financial Planning
General Disclaimer: This article contains information that is general in nature. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information. Please seek personal financial advice prior to acting on this information.