Making a personal contribution to your super is an effective way to grow your retirement funds. Some individuals may also be eligible to claim a tax deduction for 100% of these types of contributions in the year in which they are made, if the following conditions are met:
1) Complying super fund
Personal contributions must be made to a complying super fund in order to obtain super benefits for yourself or, in the event of your death, your dependants.
There is no limit to how much you can contribute and claim as a deduction. However, the contribution will count towards the contributions cap, and therefore any amount above the cap may be subject to excess contribution tax.
2) Age related conditions
If an individual is under 18 years old at the end of the income year in which the contribution is made, the deduction can only be claimed if the income was earned as an employee or a business operator during that year. So if the individual earned purely passive income, such as share dividends, they would not be entitled to the deduction for their personal contribution.
For ages 75 years or older, a deduction can only be claimed for the personal contribution that was made before the 28th day of the month following the month in which the individual turned 75.
Additionally, for individuals aged 65 and up to 75, the work test must be met prior to the contribution being made, whereby they are gainfully employed for at least 40 hours in a period of not more than 30 consecutive days in the financial year.
3) Employees to meet the 10% rule
If you are an employee at any time during the income year, you must meet the 10% rule to be eligible to claim a deduction for a contribution. This means that less than 10% of the total assessable income, reportable fringe benefits and reportable employer superannuation contributions must be in respect of activities as an employee.
For example, in 2011/2012 a self-employed doctor earns $100,000 from his medical practice. During the year, he also worked as an employee in a hospital where his total earnings were $10,000. Since his earnings as an employee were less than 10% of his total earnings of $110,000, he may still be eligible to claim a deduction for personal contributions to his super fund.
4) Notice of intent to claim a deduction
A written notice must be submitted to the super fund in the approved form ‘Deduction for personal super contributions’ advising the super fund of the amount you intend to claim as a deduction. The notice must be lodged at the earlier of either the day the income tax return was lodged for the year the contributions were made, or the end of the income year after the income year in which the contribution was made.
Once the notice is submitted, it can’t be revoked or withdrawn. It can only be varied to the extent that amount intended to be claimed as a deduction relating to the contribution is to be reduced. This includes reducing the amount to nil. Further, the notice can only be varied before the earlier of the day the income tax return was lodged for the year the contributions were made, and the end of the income year after the income year in which the contribution was made. However if the deduction is not allowable, the notice can be varied after this date to reduce the amount intended to claim as a deduction by the amount that is not allowable.
5) Fund acknowledgement
The super fund has acknowledged the notice of intent and agreed to the amount that the individual intends to claim as a deduction.
What to watch out for:
- Super co-contributions
If a personal contribution is claimed as a deduction, the amount that is claimed is not eligible for the government co-contribution. Instead, the amount of the individual’s assessable income will be reduced by the amount of the contribution and the fund will pay 15% tax, so only 85% will be credited to the super fund. Alternatively, by not claiming the deduction and contributing the amount as a non-concessional contribution, the fund will not pay 15% tax so the full contribution will be credited to their account. If eligibility requirements are met, they will also receive the government co-contribution.
Careful consideration should be given as to which strategy provides the better outcome.
- Implications on income
Personal super contributions claimed as a deduction are included in the super fund’s assessable income and taxed at 15%. While the amount of the deduction in respect of the contribution reduces the individual’s taxable income, it will be counted towards their reportable super contributions. These reportable contributions will also affect the income tests for certain tax offsets, deductions, concessions, the Medicare levy surcharge, and other government benefits.
- Watch out for the caps
The personal contribution claimed as a deduction will form part of the concessional contribution and therefore will be subject to the concessional contribution cap. Ensure that the amount contributed is not greater than the caps to avoid excess contributions tax.
- Deductible contribution exceeding taxable income
If the amount of the personal deductible contribution exceeds the individual’s taxable income, the excess is classified as a non-concessional contribution and is subject to an additional 31.5% tax on top of the 15% tax paid by the fund. Should this occur, watch out if the non-concessional cap has already been used, as another penalty tax of 46.5% will apply to the excessive contribution. By breaching both the concessional and non-concessional caps, the contribution could lead to a total tax bill of 93%, an outcome one would want to avoid.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.
