As 30 June approaches, more taxpayers and SMSF members are taking advantage of the new tax deduction rules for personal superannuation contributions.
Wage and salary earners can now contribute personally to their fund and claim their contribution as a tax deduction. In previous years, the deduction was limited to substantially self-employed taxpayers who passed the “10% rule”. The new measures can assist eligible Australians under 75 who may be partly self-employed and partly employed, or individuals who work for employers who don’t accommodate salary sacrificing.
Now that concessional contribution limits have been reduced to $25,000, maximising superannuation contributions earlier may be important to meet retirement saving goals. Also, as there is no longer any need to salary sacrifice into super, existing arrangements may need to be reviewed if the employer does not pay super guarantee on the salary sacrificed amount.
When calculating your tax saving, bear in mind that tax-deductible super contributions and other concessional contributions are subject to 15% tax within a super fund (and 30% tax for Australians earnings more than $250,000).
For those earning above $87,000 and in the 39 per cent tax bracket, including Medicare levy, the tax benefit of the contribution is 24 per cent after taking into account that 15% tax is paid by the super fund. However, the individual personally receives the 39 per cent tax benefit with their return.
Claiming a tax deduction for super contributions may not be tax effective if you pay less than 15 cents in the dollar tax on your income. Note that some individuals may be eligible for a refund of the 15% contributions tax paid on super contributions, with the Low-Income Superannuation Tax Offset (LISTO) that applies from 2 July 2017. Eligible taxpayers with adjusted taxable income up to $37,000 have their LISTO calculated on 15% of the concessional (before tax) super contributions paid by themselves or their employers to their super fund. Capped at $500 per financial year, this tax offset is paid by the ATO into the super fund. That is, it’s not paid as a personal tax refund.
Contribution payment deadlines
It is important to make sure contributions are sent to the superannuation fund well before the end of financial year, as the contribution is dated from when the fund receives it, not when it is sent. Most funds will recommend paying no later than Wednesday 27 June to ensure your contributions are received by 30 June.
Aside from claiming a personal tax deduction, why is it tax effective to contribute to super?
The earnings derived by a super fund from those contributions are generally taxed at a lower rate than earnings on investments or savings outside the super fund, depending on your level of taxable personal income. Super fund earnings are taxed up to 15 per cent compared to marginal tax rates of up to 45 per cent plus 2% Medicare levy (for 2017/2018 year) on individual earnings. If you pay less than 15% tax then super is not a tax effective investment.
Concessional (before-tax) and Non-Concessional (after-tax) Contributions
If you claim a tax deduction for your super contributions, this means these super contributions are treated as concessional contributions.
Concessional contributions include:
- Superannuation Guarantee contributions (made by an employer),
- salary sacrifice contributions,
- tax-deductible super contributions (that is, where an individual claims a deduction for making the super contribution).
For the 2017/2018 year, that is, from 1 July 2017 to 30 June 2018, an eligible individual can make concessional contributions of up to $25,000.
Non-concessional contributions include:
- Contributions paid by you or your employer from after-tax or untaxed income,
- contributions your spouse makes to your super fund, and
- Personal contributions which haven’t been claimed as a tax deduction.
When these contributions reach your super fund, they are not taxed within the fund because you haven’t claimed a tax deduction, or received any other type of tax concession, before making these contributions.
There is an annual limit on the amount of non-concessional (after-tax) contributions that you can make, known as a contributions cap. Since 1 July 2017, the annual non-concessional contributions cap is $100,000, and the 3-year bring-forward cap is $300,000 (reduced from $180,000 and $540,000.) The annual $100,000 non-concessional contributions cap will be indexed annually in $10,000 increments, as will the concessional contributions cap.
- High super fund balance: If you have a Total Superannuation Balance equal to, or more than $1.6 million, you will not be able to make non-concessional contributions.
- If you’re a high-income earner: If your ‘income for surcharge purposes’ is more than $250,000 a year, then your concessional contributions will be subject to an additional 15% tax, known as Division 293 tax. Since 1 July 2017, if your ‘income for surcharge purposes’ is more than $250,000, your super account will also be hit with extra tax. It may be possible to avoid this outcome with some planning.
Complete paperwork when making tax-deductible contributions
If you plan to claim a tax deduction for a super contribution, you must notify your super fund in writing before you lodge your tax return for the financial year, or by the end of the financial year following the year the contribution was made, whichever is earlier.
· Step 1: Send your Notice of Intention form to your Super Fund.
· Step 2: Wait until they send you a Letter of Acknowledgement.
· Step 3: Check the deductible amount on the Letter and complete your tax return.
For more information:
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Please contact us for clarification, or further advice, regarding any of the topics covered in this newsletter.