Written by Hudson Adviser Ivan Fletcher
Historically, salary sacrifice (via your employer) was the only way to tax effectively boost your super whilst reducing your own taxable income at the same time.
Under Legislation enacted as of 1 July 2017, personal contributions (funded from personal accounts) may now also be classified as 'Concessional' allowing for a tax deduction in your personal tax return and thus achieve the same outcome as Salary Sacrifice.
This is an extremely flexible way to manage your super contributions and means you do not have to deal with the HR of your employer and can make the contributions when it suits you (including leaving it till late in the year when you have more information about how your finances and taxes are tracking).
This opportunity to claim a tax deduction is available to 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 benefit from the tax deduction.
Note - that if you are between age 67 and 75, you will need to satisfy the Work Test.
Timing of Contribution
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 (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, on 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.
A Notice of intent to claim a deduction for personal super contributions will not be valid unless it is submitted in writing to the Super 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 (30 June) following the year of contribution.
Circumstances Where Personal Contributions – may be suitable (as opposed to Salary Sacrifice)
- If your employer doesn’t offer salary sacrifice.
- If you have a one off event such as a big Capital Gain or Bonus.
- If you are self employed (sold Trader or via company or Family Trust structure)
Other ways this strategy can be utilised to your advantage:
- fund insurance within super.
- 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 annual $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
- Tip – TWO RECORD OF the CLAIM ARE REQUIRED
For the concessional Contribution to be recorded accurately – it must be consistently reflected in two locations:
- 'Notice of Intent' to you Super fund that you will be claiming the deduction
- Inclusion in your tax return as a Deduction.
- 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.
Concessional contributions that exceed the your concessional contributions cap are effectively taxed at a your marginal tax rate and you will also be subject to an excess concessional contributions charge.
Note - In certain circumstances (specific criteria applies) you may be able to carry forward unused Concessional Contributions from the previous two years 2018/19 and 2019/20 which may increase your maximum capacity above $25,000 for a given year. It is recommended you seek specific advice to see if this applies to your personal situation.
- TRAP - incorrectly categorising 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.
- Trap – Claiming co-contribution or spouse tax offset
If you intend to qualify for either the government co-contribution or a tax offset for a “spouse contribution” then you CANNOT claim a deduction for the contribution (i.e. you cant receive two benefits).
Co-Contribution – if you contribute up to $1,000 in an attempt to qualify for the maximum co-contribution of $500 - DO NOT claim the $1,000 contribution as a deduction.
Spouse Contribution Offset - If a spouse tax offset (maximum $540) will be sought, ensure the contribution (up to $3,000) is classified as a ‘Spouse Contribution’ and not as a personal super contribution (in which case you CANNOT claim this as a deduction).
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 or Spouse Contribution offset, ensure a notice of intent is NOT submitted for that contribution.