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SUMMARY: Finish off the super year with care – getting your contributions right is critical.
Contributions to super funds are rarely made by accident. But many accidents can happen when making contributions to super funds.
There are only about 2.5 months to go to the end of the financial year. In that time, there’s a lot on, including an early Federal Budget, which could throw super rules into disarray (see column of 4/4/16).
Today we’ll ignore those political issues to focus on two unusual rules that could impact on your super contribution plans for this year.
Particularly those who are looking to push up against their concessional contribution limits – $35,000 for the those aged 49 and over on 1 July 2015 and $30,000 for the rest of us.
It’s true that some of us are in complete control of when and where we make our contributions. The truly self-employed can make their entire contributions in late June each year, if they wish. And for them it is reasonably simple.
But for the rest, it is not. Be aware of the following two rules.
Employers choose timing of contributions
If you are an employee trying to maximise your concessional contributions, you are somewhat at the mercy of your employer.
Employers must pay the superannuation guarantee (SG) for their employees. But they don’t have to pay it until 28 days after the end of the month, or the quarter, that it relates to.
So, if you’re trying to maximise your super contributions for the current financial year, but your employer only pays your super quarterly, then you might find that he/she puts your super in, for April-May-June 2016 (or June 2016 alone), half way through July.
If it hits your super fund account in July 2016, then it counts towards your FY17 contributions limits, not FY16, even though the payment relates to your employment for FY16.
For the employer, the tax deduction comes in the year that it was paid. If the employer wants the deduction for the FY16 year, then they might pay it before 30 June. If it would suit the business more to have it in the FY17 year, then they could delay it until then.
If it’s important to you when it is paid – which it will be to anyone who is trying to hit their limits for FY16 and FY17 – then ask your employer, or HR department, when the timing of the final super payment will be made.
Hopefully they’ll be honest and tell you whether they’ll pay before or after.
They might even go out of their way to pay it early, if it’s important to you and not a huge deal for them. (And it won’t be hugely important for every employee, so they might make an exception for you.)
Some employers that I have spoken to on behalf of clients have been very forthright. They either want the tax deduction for the business before 30 June, or their standard practice is to pay near the due date.
If they will pay before 30 June, it gives you the maximum flexibility, which is great.
If they won’t be making that final payment until after 30 June … get cracking. If they make monthly payments, then you might need to make extra salary sacrifice contributions for April and May, if not too late.
It might make hitting CC targets this financial year difficult. But you should find out, so that you can adjust your plans accordingly for your contributions for your employer’s behaviour for FY17.
Earning more than 10% as an employee
There’s a very cruel rule when it comes to those who are part self-employed and part-employee.
If you earn more than 10% of your income as an employee in a given year, then you are not eligible to make personal concessional contributions.
For example, they might work part-time in a business, but spend other parts of the working year as a consultant. If they earn $150,000 a year as a consultant and $50,000 a year as a part-time employee, then they can’t contribute to their super via personal deductible contributions.
If this is ongoing, it’s not necessarily a disaster. In the situation above, if you knew those sorts of earnings were likely to come from each income stream, then you would simply make salary sacrifice arrangements through your employer, potentially up to your $30k or $35k maximum.
A bigger problem often arises for those who switch from one to the other during the financial year. And either way, it’s simply cruel.
For both of the following examples, we’ll assume that you will earn more than 10% of your income for the year from being an employee.
Scenario 1: If you switch from being an employee to self-employed, then you won’t be able to contribute CCs to super for the part of the year that you’re self employed. But at least you can make the decision not to make contributions.
Scenario 2: A bigger issue to be wary of is, potentially, if you switch from being self-employed during the year to being an employee.
If you made, say, $20,000 worth of personal contributions (on which you intend to claim a deduction) up to Christmas, but in January became an employee, receiving SG, then you wouldn’t be able to claim that $20,000 as a tax deduction or concessional contribution.
The way around this is tougher and will usually involve some planning. Let me give you an example.
A woman was moving from being a partner in an accounting firm (essentially self-employed, where she made her own super contributions) to becoming an employee of another accounting firm in the January, where part of her super is SG.
She realised in about the September that the move was likely. Where she had been contributing about $2000 a month for the first three months of the year (total $6000), she made his final payment in the September.
She had made $6000 in contributions to her super fund for July, August and September. But, as she will earn more than 10% of her income for the year as an employee, she will not get a tax deduction for that $6000.
That $6000 will now become a non-concessional contribution. But it certainly beat, for her circumstances, continuing to contribute a further $6000 in total for October, November and December, that also would not have qualified as a deduction.
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The information contained in this column should be treated as general advice only. It has not taken anyone’s specific circumstances into account. If you are considering a strategy such as those mentioned here, you are strongly advised to consult your adviser/s, as some of the strategies used in these columns are extremely complex and require high-level technical compliance.
Bruce Brammall is managing director of Bruce Brammall Financial. E: bruce@brucebrammallfinancial.com.au . Bruce’s new book, Mortgages Made Easy, is available now.