Salary sacrificing into super is a popular strategy for clients looking to maximise their retirement savings tax effectively. Since 1 July 2017, many individuals now have the additional option of making personal deductible super contributions.
While deductible contributions are not new, they were generally not available to the majority of employees before 1 July 2017 due to the operation of the 10% rule (which required less than 10% of income to be attributed to employment activities). The removal of this rule on 1 July 2017 means employees now have greater flexibility around how they make tax effective contributions for retirement.
Some clients may decide to take advantage of this flexibility while others will simply cease their existing salary sacrifice arrangement in favour of deductible contributions to overcome some of its drawbacks (e.g. potential reduction in Superannuation Guarantee (SG) or other employer benefits).
For these clients, it is important they meet the other rules associated with deducting personal contributions to ensure a deduction is not denied.
In this article we recap on these rules as well as other important tips and traps when helping clients implement personal deductible superannuation contributions, particularly as part of their retirement income strategy.
Cash flow differential and the need for a ‘top-up’ contribution
The ability to replace an existing salary sacrifice arrangement with personal deductible contributions can provide a number of benefits to clients.
For example, clients who are currently salary sacrificing into super and are also repaying a mortgage could consider making a single deductible contribution close to the end of the year. This provides higher regular cash flow that can be used during the year to make additional repayments to an offset account that can be withdrawn near the end of the year to make the contribution.
Also, making a contribution closer to year end can help with managing contribution caps especially with a lower $25,000 concessional contributions cap from 1 July 2017. For example, Super Guarantee is payable on employee bonuses which is usually not known in advance. This means it is often difficult to ascertain the maximum amount that can be salary sacrificed in the beginning of the year, leading to the need to adjust or cease salary sacrifice contributions near the end of the year.
However, it is important to weigh these benefits with the benefits of regular salary sacrifice contributions – dollar cost averaging, positive market returns and encouraging disciplined savings – before deciding to switch.
Contributions in excess of the concessional contributions cap from 2013-14 are no longer subject to excess concessional contributions tax. Instead, excess contributions are included in assessable income and taxed at marginal tax rates (with tax reduced by a non-refundable 15% tax offset).
An excess concessional contributions charge is also payable to recognise that the tax on excess concessional contributions is collected later than normal income tax. Excess concessional contributions (up to 85%) can be withdrawn to pay the tax liability. Excess amounts not withdrawn will count towards a person’s non-concessional contributions cap. Those who decide to switch strategies will need to be mindful of the need to contribute additional capital to equalise total contributions with their salary sacrifice arrangement.
Consider the following client:
- An employee with a gross salary of $80,000
- who decides to cease their regular salary sacrifice arrangement totalling $10,000 a year, and
- saves the extra net income to make a single contribution at the end of the financial year.
This client will need to contribute an additional $3,436 of their own capital to achieve a tax deduction of $10,000 (see Table 1).
Once the deduction is claimed, the additional amount contributed will be returned to the client as a tax refund.
Table 1: Cash flow differential when switching to end of year deductible contributions
|Annual salary of $80,000||Without salary sacrifice||Salary sacrifice
|Gross monthly salary
|Monthly salary sacrifice
|Net monthly income
|Total gross contribution (excl. SG)
|Additional monthly cash flow
|Total additional annual cash flow
|Additional contribution to equalise with the salary sacrifice arrangement
A valid notice of intent is still required
Before clients can claim a tax deduction, they need to provide the trustees of their superannuation fund with a valid notice of intent to claim a deduction, in the approved form and within the required timeframes. They must also have received acknowledgement of the notice from the trustees.
Importantly, clients retiring in the same year that they’re making the contribution, will need to provide their notice to their superannuation fund trustees before they commence a retirement income stream, to be eligible for a deduction.
This is because a notice (even if provided within the required timeframes) will not be valid if the individual:
- has commenced paying a superannuation income stream, or
- is no longer a member of the fund, or
- if the fund provider no longer holds the contribution.
- The required timeframe to provide the notice of intent is the earlier of:
- the day the client lodges their tax return for the year in which the contributions were made
- the end of the income year following the one in which the client made the contributions.
- A valid notice can only be varied down (including to nil). To increase the amount claimed as a deduction, another valid notice would need to be provided for the additional amount.
- Where a valid notice has already been provided, clients will not be able to vary their notice if they are no longer a member of the fund or if the fund provider no longer holds the contribution or has commenced paying a superannuation income stream.
- For clients who are planning to split contributions to their spouse and also want to claim a deduction for contributions, the notice must be lodged before lodging the contribution splitting claim.
Be mindful of contribution rules (work test)
Clients who are planning on retiring in the beginning of the financial year (and after 65), will need to ensure they have satisfied the work test before retirement to ensure they are able to contribute to super.
To satisfy the work test, the person will need to be gainfully employed (employed or self-employed for gain or reward) for at least 40 hours, over 30 consecutive days, in the financial year in which the contribution is made.
Additionally, those delaying retirement will need to ensure they make their personal contributions before the 28th day after the end of the month they turn 75, to be able to deduct their contribution.
Before 1 July 2017, there were rules on how much a superannuation fund trustee could accept as a single contribution, known as fund-capped contributions. This usually meant clients were required to make two separate contributions – one for an amount up to the non-concessional contributions bring forward limit, and an additional amount to claim as a deduction.
Going forward, these limits no longer apply and clients are now able to contribute more than the bring forward non-concessional contributions cap as a single contribution. For example, a single contribution of $325,000 would be accepted from 1 July 2017. Clients are then able to provide a notice of intent to claim $25,000 as a deduction.
Ensure there is sufficient taxable income
Clients should ensure there is sufficient taxable income before deciding to claim a deduction for their personal contributions, especially those retiring early in the financial year.
This is because the ATO will deny the deduction if the person’s taxable income is below the amount in their notice of intent.
Importantly, the amount denied by the ATO is added to the person’s other non-concessional contributions which may cause the client to unintentionally trigger the bring-forward rules or even exceed their non-concessional contributions cap.
Also, extra care should be taken where a client’s average tax rate is nil, as it is usually not worthwhile to deduct the contribution given the 15% contribution tax that applies.
- Personal contributions can only be claimed as a deduction for the income year in which the contribution was made. This usually occurs on the day the funds are credited to the superannuation fund provider’s account, or the day they receive the cheque (unless the cheque was dishonoured).
- Clients will be eligible for the Low Income Superannuation Tax Offset (LISTO) of up to $500 if their adjusted taxable income is $37,000 or below for the income year.