(03) 9020 2905PORTFOLIO POINT: Heard about “reportable super contributions”? They’re another Rudd Government attack on the wealthy. Here’s how they work.
Means testing was launched back onto the political agenda with the incoming Rudd Government, who decided to make a feature of whacking the wealthy to save a few bucks for the Budget’s bottom line.
It was the means testing of private health cover, the baby bonus and the child care rebate that grabbed headlines earlier this year when those rugs were pulled out.
While not a direct means test, the reduction in the concessional contribution limits from $50,000 to $25,000 and from $100,000 to $50,000 (for the over 50s) worked like a means test, in that it was directly aimed to impact on wealthier Australians.
But there’s another shadow means test that has got far less publicity. It’s a nasty little one. And it has the potential to silently hit far more people. It could impact on anyone who, in the past, has used super to reduce themselves down to a lower taxable income and received extra dollars in Federal Government benefits or lower taxes.
The new rules state that you will no longer be able to use super contribution strategies (salary sacrifice, personal contributions or over-award employer contributions) to reduce your salary to the point where you can pick up government benefits including government super co-contributions, dependent tax offsets, pensioner tax offsets, the senior Australian tax offset, or to reduce the amount you owe in Medicare Levy surcharge.
The system is known as “reportable super contributions”. Essentially, if you have control over the amount of concessional contributions made into your super, or your employer contributes more than is required by law to your super, then that amount must be reported to the Tax Office.
The ATO will then add that back to your income to assess your eligibility for a range of government benefits and tax breaks.
The ATO splits reportable employer super contributions into two parts
- Personal deductible contributions
- Reportable employer super contributions your employer makes for you.
Personal deductible contributions
This is largely for the self-employed. If you are able to claim a tax deduction for a personal contribution you make, then the amount you claim is considered to be a personal deductible contribution.
Reportable employer super contribution
These are not your Superannuation Guarantee contributions, but are other contributions in excess of that.
The ATO defines reportable employer super contributions as contributions where:
- You influenced the amount or rate of super your employer contributes
- The contributions are additional to the compulsory contributions from the employer under SG law, industrial agreements, a trust deed or government rules of the fund, or a federal, state or territory law
- The amount is a salary sacrifice arrangement.
So, if your employer makes contributions in excess of the 9%, they must be included on your “payment summary” (once known as group certificates).
For example, if you earn $90,000, your employer will contribute approximately $8100 to your super fund. This payment is not a “reportable employer super contribution”. Many Australians might, however, then salary sacrifice $20,000 of their salary to reduce their net taxable income to $70,000. This will reduce the overall tax paid by the employee.
It is a good strategy for those who have other assessable income, such as dividends or income from positively geared properties.
However, that $20,000 that has been salary sacrificed is a “reportable employer super contribution”, which will be added back for the purpose of some income tested benefits.
Adding it back for government benefits
There are many benefits that are affected by the new “reportable super” rules. But probably the most annoying for Eureka Report readers is how it impacts on super co-contributions.
The government super co-contribution is designed to help low-income workers save for their retirement by providing a capped government contribution to their super when they make a non-concessional contribution to their own super.
If a low-income worker (earning less than $31,920) puts $1000 into their super, the government will add a further $1000 as a co-contribution. (This was $1500 last financial year, but has been cut back from the Rudd Government for the next few years.) The $1000 co-contribution tapers out between $31,920 and $61,920.
Let’s take an employee who has an assessable income of, say, $50,000, who makes a $1000 non-concessional contribution to super. However, this does not include $20,000 that was salary sacrificed.
Prior to June 30, this employee would have qualified for a co-contribution. However, under the new reportable super rules, this employee would have a reportable salary of $70,000, which would make the person ineligible.
Another super related offset to be hit is the spouse super offset. This is where a higher earning spouse could receive an offset of up to $540 for making a contribution of up to $3000 for a spouse earning less than $13,800 and where you could not claim a deduction for the contributions.
In the past, the lower earning spouse could, for example, have sacrificed her salary down from $20,000 to $6000, putting him/her below the $13,800 limit. The higher earning spouse could then claim the rebate. However, under the new rules, the spouse would have earnings for the purpose of this test of $20,000.
The ATO lists the following as being affected by the decision in their “Guide for employees and self employed – reportable super contributions”.
- Dependent tax offsets. This includes dependent spouse, housekeeper, child housekeeper, parent/parent-in-law and invalid relative tax offsets.
- Medicare levy surcharge (for singles earning more than $70,000 and couples/families earning more than $140,000)
- The mature age worker tax offset
- The senior Australian tax offset
- HELP and financial supplement repayments
- Child support assessments, and
- Centrelink benefits.
The ATO’s guide can be downloaded here.
Bruce Brammall is the author of Debt Man Walking and director of Castellan Financial Consulting.