Written by Hudson Adviser Ivan Fletcher
No longer is getting a tax deduction for making personal super contributions for the chosen few (historically self employed or unemployed under age 65), it is now for everyone either working or under age 65. So this year when you are looking for ways to legitimately reduce your tax before 30 June consider making a personal Concessional Super Contributions.
To take advantage of this you must be aware of your annual Limit and the necessary process required to ensure you get a tax deduction.
How It Use to Be – Salary Sacrifice
The rule used to be that if you earned more than 10 per cent of your income from employment (ie wages/salary), you were not able to make extra tax deductible contributions for yourself.
The only way you could make extra Concessional contributions was via your employer as salary sacrifice. This of course requires planning ahead and communicating with HR to make sure your calculation is on track.
However there are several circumstances where Salary Sacrifice failed us
- If your employer didn’t offer it, tough luck.
- If you had a big capital gain or Bonus late in a financial year and wanted to get extra money into super, but didn’t have enough income left in the year to do so, also tough luck.
The New and More Flexible Alternative
Under New Legislation as of 1 July 2017 personal contributions (funded from personal accounts) may also be classified as concessional allowing for a tax deduction in your personal tax return.
The ‘substantially self employed’ rule (otherwise known as the ‘10% rule’) effectively no longer applies as of 1 July 2017, which opens up the opportunity to claim a tax deduction for anyone (self employed, a wage earner or retired ) who :
- is under the age of 75, and
- is eligible to contribute to superannuation, and
- has room left in their concessional contributions cap and
- has enough assessable income to be able to use the tax deduction.
Personal contributions can be done as one lump sum towards the end of the financial year (or via several deposits as funds are available). The Contribution(s) must however be received by your super fund by 30 June 2018 (if it arrives on1 July it becomes part of next years figures).
- make a personal contribution to a complying superannuation fund (before 30 June).
- submit a valid Notice of intent to claim a deduction for personal super contributions, in the approved form, to the superannuation fund trustee within required timeframes. Please see the tips and traps below on what makes a notice invalid and the required timeframes.
- Receive Confirmation from the Super Fund trustee that the valid notice of intent has been received.
- Use the above confirmation back from your Super fund as evidence to claim a 'personal' tax deduction in your tax return.
Other ways this strategy can be utilised to your advantage:
- fund insurance within super
- contribute to super where salary sacrifice is not available
- save for a first home deposit
- make in-specie contributions of direct shares into SMSFs.
Salary Sacrifice still lives on
Many people may want to continue their salary sacrifice contributions, adding a consistent amount each week/month. But they will also have the choice to put in large sums towards the start, or end, of the financial year, if it is more suitable to them. You can effectively use both methods of contribution to super (provided the total is within the $25,000 CAP).
A deduction cannot be claimed for a personal contribution that is:
- a downsizer contribution
- a CGT exempt amount contributed to super as required under the small business retirement exemption
- made to a Commonwealth public sector superannuation scheme in which the you have a defined benefit interest
- made to an untaxed fund
- made by a minor unless the minor derives income from employment or carrying on a business.
INVALID - notice of intent
A notice of intent to claim a deduction for personal super contributions will not be valid in any of the scenarios below:
- the notice is not in respect of the actual contribution amount made
- the trustee no longer held the contribution (example since rolled into another fund or split the contribution to a spouse)
- the trustee had begun to pay an income stream (pension) based in whole or part on the contribution
tips and traps
1. TRAP - EXCEEDING $25,000 CAP
The amount of personal deductible contributions must be considered in total with all other concessional contributions for the income year to ensure the contributions do not exceed the CAP.
Remember to consider all concessional contributions made or scheduled to be made in a financial year including the following
- superannuation guarantee,
- salary sacrifice,
- employers paying for insurance premiums
- If you are a member of a Defined Benefit account you will need to consult with that super fund for amounts classified as ‘concessional’
- In some cases insurance polices are framed in super such that the premiums are classified as Super Contributions.
A member who incorrectly classifies a personal contribution as an employer contribution and also claims a tax deduction for the contribution risks receiving an excess concessional contributions tax determination, as the ATO will count the contribution twice.
Super funds need to know what type of contribution you are making so that it can be reported correctly to the ATO and so the fund knows whether to deduct 15% tax. The ATO then uses the information reported from the fund and your income tax return to classify employer and personal contributions into concessional and non-concessional contributions.
3. TRAP– ClLAIMING CO-CONTRIBUTION OR SPOUSE TAX OFFSET
Where you make a personal contribution to superannuation and claims a tax deduction, they will not be able to claim a co-contribution on that contribution.
A personal contribution to superannuation cannot be used as an eligible spouse contribution to claim a spouse contribution tax offset.
4. TIP - PLAN ALL TYPES OF CONTRIBUTIONS BEFORE MAKING THEM
To avoid missing out on co-contributions or a spouse contribution tax offset, carry out more general contribution planning first. If you plan to claim a co-contribution, ensure a notice of intent is not submitted for that contribution.
If a spouse tax offset will be sought, ensure the contribution is made by the spouse and not as a personal super contribution.
5. TRAP – SUBMITTING A NOTICE OF INTENT TOO LATE
A Notice of intent to claim a deduction for personal super contributions will not be valid unless it is submitted in writing to the fund trustee by the earlier of:
- the end of the day the taxpayer lodges their income tax return for the income year in which the contribution was made or
- the end of the next income year following the year of contribution.