Bruce Brammall, 21 March, 2018, Eureka Report
SUMMARY: This year, Australians will be able to make tax-deductible contributions to their super funds. Here’s what you need to know.
Last-minute super tax planning is now, at long last, available to (almost) all.
But, as we approach the end of the financial year, it’s about to get really exciting.
For the first time, millions of Australians now have a choice about when to plonk money into their retirement savings.
They no longer have to make a “salary sacrifice deal” with their employer. They won’t have to take a gamble on when their employer will pass on those contributions in a timely fashion (or at all). They won’t have to wonder whether an unscrupulous employer will reduce their other superannuation benefits when they enter salary sacrifice arrangements.
Australians will simply be able to make a super contribution when it suits them, directly to their personal fund.
This might be throughout the year. It might be when a bonus is received. It might be because they’ve got a bit of money lying around in June and want to both get a tax deduction and to do something positive for their retirement. Or when a capital gain has been made, in the hope of reducing the CGT they will have to pay.
It seems ridiculous that we’re celebrating this. But it was only because of the removal of an archaic superannuation law that most Australians now have a choice about when they contribute extra to super.
The now-dead superannuation rule restricted EMPLOYEES from making extra tax-deductible contributions to super.
The law was known as the “10% rule”. And it meant that anyone who earned more than 10% of their income as an employee could not make personal deductible contributions to super. They could make these sort of contributions only via salary sacrifice arrangements with that employer.
This rule was particularly unfair for those employees whose bosses didn’t offer salary sacrifice (it’s never been compulsory for employers to do so), or for those who were part employee, part self-employed.
For example, if someone was a part-time teacher/office worker earning $30,000 a year, but was a consultant or ran a business on the side earning $70,000 a year, they might be restricted in how they could make contributions, outside of the teaching income.
With that rule now assigned to the dust-bin, Australians can make contributions when they want to. And this financial year is the first time they will be able to do so.
How does it work?
Let’s take Sally, 54, an employee earning $100,000 a year. She will receive $9500 in superannuation guarantee (SG) over the course of the year.
This leaves her $15,500 ($25,000 less $9500) still available under their concessional contributions cap for the year.
Come May, Sally has savings lying around that she wants to put towards her superannuation. She calls her fund, gets the right details and electronically deposits into her super fund, direct from her personal bank account.
After the end of the financial year, her super fund sends her a notice telling her that they received $10,000 in personal contributions and asking if she will be claiming a tax deduction for these. Sally fills in the paperwork indicating yes and sends it back to the super fund.
A couple of months later, Sally sees her accountant to do her tax return. The accountant claims a tax deduction for the $10,000 contribution at Sally’s marginal tax rate of 39%. She receives $3900 extra in her tax return, meaning her net contribution to super was just $6100.
Meanwhile, inside the super fund … once the fund receives the declaration from Sally about claiming the contribution as a tax deduction, it will deduct 15% tax, leaving $8500 in the fund.
So, for a net $6100 contribution from Sally, she will get $8500 working for her in her super fund.
Here’s what you need to know
You can now make contributions directly to your super fund. At any time of year.
Anyone under the age of 65 can make these personal concessional contributions. And if you’re between 65 and 74, you can also make them if you meet the work test (which means working 40 hours in a 30-day period during the financial year).
For most, making contributions will be a case of calling your fund and getting the Bpay details to pay directly into your super fund’s account.
You can leave it to the last week in June if you want. But beware that it must hit your super fund account before 30 June in order for it to count for the current financial year. This can be an issue for some transfers, such as Bpay, which can often take 48 hours to arrive in your account.
If it arrives on 1 July or later, it will count towards the following financial year’s contributions caps.
After the end of the financial year, you will need to inform your super fund that you are going to claim a tax deduction for the contributions BEFORE you do your personal tax return.
With most APRA-regulated funds, you will be sent a notice that will outline how much you have made in regards to these types of contributions and you will be asked how much you are going to claim. (You can claim less than the entire amount, if you want some of them go in as non-concessional contributions.) Don’t ignore this correspondence. Your super fund needs to know and tell the ATO, before you submit your own tax return (where you’ll be officially claiming the deduction).
Don’t leave it to the last minute. Get the declaration to the super fund when you know your intention, so that it can be included in your own personal tax return to the ATO.
Be really careful about these things
Understand that any personal tax deductible contributions that you make will count towards your concessional contributions limit.
For everyone now, that is $25,000 a year. It takes in your superannuation guarantee (SG) contributions, your salary sacrifice contributions and any other deductible contributions that you make, from all sources.
Make sure you are completely up to speed with how much has, or will, be contributed to your super fund for the year.
You will also need to understand when your employer is making their SG contributions. Some employers will make all SG payments before 30 June – they don’t have to, but many want the tax deductions for the business – so if they pay extra one year, you might find yourself with an excess contributions tax. Best to find out what they have done in the past, or call the pay office and find out when they will be paying the super contributions for the period to 30 June.
Salary sacrifice still has a place
But don’t discount the old-school method of salary sacrifice. It’s not dead. Salary sacrifice still has its place.
For a start, salary sacrifice arrangements take the organisation away for you. It will give you the discipline of doing it regularly.
The main downside with salary sacrifice is that you can only sacrifice money to super that you have not yet earned. That is, you can only do it with money you will earn in the future, not money that you earned in the past.
Some unscrupulous employers may use salary sacrifice to decrease the amount of SG they pay on your behalf. Legislation is going through parliament now to fix this, but it’s not yet law.
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 and is both a licensed financial adviser and mortgage broker. E: firstname.lastname@example.org . Bruce’s sixth book, Mortgages Made Easy, is available now.