Deductibility of contributions after 1 July is a big deal

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With all the news about the superannuation changes for 1 July 2017 focussed on the negative impacts for investors, it’s easy to lose sight of any possible opportunities.

While the changes have largely deleterious effects for those with very large balances or who are wishing to substantially increase their super balance through contributions, two changes will actually improve the opportunity for some to boost their savings.

Opportunity 1: Abolition of ‘10% test’

The first is the abolition of the ‘10% test’. Until 1 July 2017, a person must earn less than 10% of their income from eligible employment if they want to claim a personal tax deduction for a contribution to super.

A technical definition of ‘total income’ exists, which includes assessable income for tax purposes as well as reportable fringe benefits and reportable superannuation contributions (but not Superannuation Guarantee contributions, which are mandated). For the majority of people, this means they can only claim a tax deduction for personal contributions if they are self-employed, or not earning a salary at all (ie, retired or unemployed).

If you’re an employee, you may be able to salary sacrifice. If not, you are currently unable to claim a deduction for any personal contributions to super. This byzantine set of rules creates an uneven playing field.

While it appears a panacea for employees wishing to increase their super contributions, salary sacrifice arrangements can range from the advantageous to the seriously detrimental. Salary sacrifice is not a defined term under the law, and exists as an arrangement between an employer and an employee, with no requirements as to how that arrangement must be enacted. As a result, arrangements vary widely, and each individual needs to ensure that salary sacrificing through their employer is in their best interests.

Many employers offer no salary sacrifice arrangement, leaving an employee with no ability to make voluntary concessional contributions at all. Another employer could, for example, offer you the ability to reduce your salary through contributions to super, but then pay your mandated Superannuation Guarantee on the new lower amount. To illustrate, if you are earning $100,000 per annum, you would ordinarily receive an additional $9,500 per year in contributions to super (as per the current 9.5% Superannuation Guarantee rate).

If you have an unscrupulous employer, your decision to salary sacrifice $10,000 a year would reduce your salary to $90,000 per annum, and your SG payment to $8,550 (9.5% of the new $90,000 salary), a drop in super of $950 a year. An even more unscrupulous employer would cease paying your SG altogether, as the $10,000 per annum you are salary sacrificing technically meets the employer’s obligation to pay 9.5% of your salary to super. This results in a $9,500 reduction in overall benefits. An employee who doesn’t read the fine print could be severely disadvantaged without any recourse to their employer.

On the flip side, many employers offer generous matching arrangements through their salary sacrifice packages. This usually gives the employee a greater employer contribution if a sacrifice of some of the existing salary, for example, an extra 1% employer contribution for each 1% of salary sacrificed.

Employees are often left to determine the benefits of each or seek the assistance of a financial adviser who is familiar with the employer’s scheme, if such an adviser exists.

One of the further challenges with salary sacrifice is that it requires long-term planning. All arrangements must be prospective in nature, and therefore windfalls and other lump sums are generally only contributed to super as non-concessional contributions if you’re employed. Some employers give the option to salary sacrifice a bonus on a prospective basis (i.e. before entitlement to it, but this is difficult to plan for without knowing how large the bonus will be).

For many people the simple decision to have super contributions deducted from their salary on a fortnightly or monthly basis by their employer is an excellent method of forced saving. For others, it doesn’t reflect the reality of variable income and expenses, and particularly unexpected cash flows from the sale of assets and other sources. For those with no ability to salary sacrifice, being unable to claim a tax deduction can reduce the incentive to contribute to super at all.

The abolition of the 10% test has the effect of doing away with all these challenges.

Individuals up to the age of 65 will be able to contribute to super and claim a deduction in their personal tax return; those between 65 and 75 will also be able to take advantage so long as they meet the work test to be able to contribute.

Salary sacrifice arrangements will continue where employers offer them. Employees can then consider whether salary sacrifice or personal contributions are more beneficial, or even consider a combination of both. A notice of intent must be submitted to claim a deduction for a contribution to a super fund, and timing issues need to be considered.

Opportunity 2: Five-year carry-forward rule

The carry-forward provision will give those with broken work histories, volatile income and other variable contribution patterns the ability to better utilise their concessional caps over a five-year period.

If you have total superannuation balances of less than $500,000, you will have the opportunity to utilise the unused portions of your concessional caps from previous years (up to five years’ worth) in the following financial year, or future years. After five years, any unused amount will expire. The catch is that this change will not come into effect until 1 July 2018, so the first year to use a carried forward amount will be 2019-20.

This new rule benefits those who’ve been unable to use their concessional cap in full in prior years, such as agricultural producers with variable crop income, entertainers with periods of high and low income, and women who take time out of the workforce to have children.

The carry-forward contributions will be concessional, meaning you are claiming a personal tax deduction for them, and therefore you’ll need to have sufficient assessable income to make that deduction worthwhile. As a result, this will largely benefit higher income earners, even if that high income occurs only one year in five.

For those with predictable periods of high income over several years, there may be benefits in planning concessional contributions for periods of higher income using carried-forward amounts in order to maximise the deduction. This change is a couple of years away giving time to plan.

Prior to these changes coming into effect, if the $1.6 million general transfer balance cap isn’t likely to be an issue for you, consider using the current higher contribution caps while you are able.

 

Gemma Dale is Director, SMSF & Investor Behaviour at nabtrade, a sponsor of Cuffelinks. This information is general and does not take into account the personal circumstances or financial objectives of any reader. Readers should seek independent advice before acting on any information.

Whether you’re starting your investing journey or a seasoned trader, nabtrade can help you be a better investor. Click here to learn more about nabtrade and the benefits of joining its platform.

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8 Responses to Deductibility of contributions after 1 July is a big deal

  1. Alex March 16, 2017 at 12:50 PM #

    Thanks, agree this has not been highlighted enough. The biggest change is that someone can time their deductions, for example, make a contribution on 1 June and receive a $25,000 tax deduction which they cannot do at the moment if they can only salary sacrifice.

  2. hank March 16, 2017 at 1:14 PM #

    Thanks for the excellent article – very poignant indeed.

    Does that mean that for FY 2019-20, using the carry forward rule I could theoretically contribute the cumulative remaining balances of my $25,000 p.a. for the each of the preceding 5 years? (i.e. FY 2018-19, 2017-18, 2016-17, 2015-16 & 2014-15)

    Thanks

  3. Graham Hand March 16, 2017 at 1:37 PM #

    Hi Hank, unfortunately, that’s not how it will work. It’s a carry-forward rule, not a look back. For example, if you are unable to make contributions in a year, you can carry forward the unused amount into a subsequent year (FY 2019/20 and beyond), provided your super is less than $500,000.

    If your unused concessional contribution entitlement is $20,000 in 2018/19 (ie you used only $5,000), you can carry it forward to make $45,000 worth of concessional contributions in 2019/20 ($20,000 carried forward plus $25,000 for 2019/20).

  4. hank March 16, 2017 at 2:13 PM #

    Damn! ….. Thanks Graham

  5. Bruce March 16, 2017 at 4:04 PM #

    Thanks for a very useful article. Can someone please clarify if personal tax deductible contributions (Opportunity 1) count towards the concessional contribution limit, ie will the $25,000 limit apply to the total of SG + salary sacrifice + tax deductible contributions?

    • Graham Hand March 17, 2017 at 3:20 PM #

      Hi Bruce, yes the $25,000 limit is for all concessional contributions, the sum of all the items you list.

    • @SMSFCoach March 19, 2017 at 5:33 PM #

      It is always worth checking if you have any Insurance in super that is paid for by your employer via extra contributions (not always clear) as this will also be counted towards the $25,000 cap. Some people in their 50’s with high premiums may need to have a hard discussion with their employer about trying to move some of these benefits outside of super or having the insurance paid from your own balance but be compensated outside of super as part of your package.

      I would be interested to hear if any readers have had that conversation yet and the outcome.

      Likewise self employed if you have adapted your insurance strategy to allow for the reduced contribution cap and rising superannuation insurance premiums as you age.

  6. Elizabeth March 20, 2017 at 11:46 AM #

    Is this the end of salary sacrifice?

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