A new superannuation contribution rule allows taxpayers to claim a deduction for any personal superannuation contributions. The gives people greater flexibility in the way they manage their super accounts, and a tax planning tool.
Under the old rule an individual could claim a deduction for a personal contribution if they met certain conditions. The main condition was that less than 10 per cent of their income had to come from salary and wages, making it an opportunity for the self-employed.
On July 1 last year, the 10 per cent rule as removed, opening up the option of deductible personal contributions to anyone under age 75. People aged 65 to 74 have to meet a work test, which involves being gainfully employed for at least 40 hours over 30 consecutive days during the financial year.
Jonathan Philpot, wealth management partner at HLB Mann Judd, says that for those with income of more than $87,000 and in the 39 per cent tax bracket (including the Medicare levy), the tax benefit of the contribution is 24 per cent but the individual personally receives the 39 per cent benefit.
What this means is that the personal super contribution is tax deductible, so it reduces taxable income by the amount of the contribution – a 39 per cent benefit.
The net benefit is 24 per cent because the super fund has to pay contribution tax of 15 per cent.
Philpot says personal contributions can be used as an alternative or a complement to salary sacrifice.
He says a large number of people use salary sacrifice in the years approaching retirement but it is not a common strategy for younger people. The new personal contribution rule gives people an opportunity to assess their situation as they approach the end of the financial year and make a one-off contribution.
He says the people who have money in a mortgage offset account may be better off putting some of it in super.
The impact of an offset account is that is reduces the balance of the loan by the amount in the offset, providing a saving that is equal to the mortgage interest rate and is tax-free (if it is a home mortgage).
Philpot says the personal super contribution benefit is more significant, and the money is going into super where earnings will be taxed concessionally.
The limit on how much can be contributed to super personally is $25,000 less employer SG contributions, which are 9.5 per cent of salary.
The ATO says that anyone intending to make use of this facility must lodge a notice with their super fund and have this notice acknowledged in writing.
Something to note is that a person cannot create a tax loss by making a personal contribution. This means that deduction that can be claimed is limited to the assessable income for the year.
Also, a person with a total superannuation balance of $1.6 million or more is not restricted from making a personal deductible contribution. But if the deduction is denied by the ATO, the contribution will be classified as non-concessional.
People with a total superannuation balance of $1.6 million or more cannot make non-concessional contributions, so any contributions deemed non-concessional by the ATO would be excessive.
