What's next for super?
New reforms to super to encourage personal contributions
For the first time, most employees will be able to make personal contributions to their super account and claim those contributions as a tax deduction. Up until now if an employee wanted to make voluntary contributions on a ‘pre-tax’ basis, they would have to enter into a salary sacrifice arrangement with their employer.
There are a few points that employees should be aware of when making tax deductible personal contributions:
- Tax deductible personal contributions are concessional contributions and so employees should take care the contributions are within the $25,000 concessional contribution cap. The cap applies to all ‘pre-tax’ contributions including tax deductible personal contributions; compulsory 9.5 per cent employer contributions; and salary sacrifice contributions. For example if an employee has a salary of $70,000 pa and is receiving $6,200 of super guarantee employer contributions, they can claim tax deductible personal contributions up to $18,800 under the $25,000 cap.
- To claim a tax deduction for personal contributions, the employee must first send in a notice (Notice of intent to claim tax deduction form (NAT 71121)) to their super fund identifying how much they intend to claim and receive an acknowledgement from them. Without this acknowledgement the individual can’t claim a tax deduction. The notice must be provided before the employee submits their tax return and no later than 30 June of the following tax year. The notice should also be provided before a payment from the account is requested (including a cash withdrawal, rollover or transfer to a pension).
- Most members of defined benefit plans cannot will not be able to claim a tax deduction for any personal super contributions made to their plan. They can will however, be able to open a separate accumulation super account and claim a tax deduction for personal contributions to that account.
What are the advantages of making tax-deductible personal contributions?
Contributions are made pre-tax and are taxed at only 15 per cent in the super fund. So if an employee’s marginal tax rate is above 15 per cent, there is a tax advantage in making pre-tax super contributions. For example, a member with a salary of $70,000 is taxed at a marginal rate of 32.5 per cent whereas pre-tax personal super contributions are made at a tax rate of 15 per cent. This is a tax saving of 17.5 per cent.
Employees can also apply for a variation to PAYG withholding tax on wages and salaries to take into account the tax deductible personal contributions they intend to make. The employee completes the form using information available from their current payslip and submits the form to the ATO. The ATO then assesses the application and notifies the employer to adjust PAYG withholding for that employee. PAYG withholding variation application forms are available either in paper or electronic form from the ATO website.
We believe that being able to claim a tax deduction for personal contributions will encourage more employees to make voluntary super contributions. The more contributions a member makes over their working life, the better their retirement outcome.
Many employees can already salary sacrifice into super. So what is the advantage for them?
The tax treatment of salary sacrifice (employer) contributions and tax deductible personal contributions is the same. However for cash flow reasons some employees may prefer to make tax deductible personal contributions as they can choose the timing of the contributions. For example, an employee may have greater capacity to make voluntary super contributions in the later part of a tax year, as council rates are payable during the earlier part of the year.
Also with salary sacrifice contributions, the decision to make the contribution has to be made before the employee earns the salary. With personal contributions, this decision can be made afterwards.
Are tax deductible personal contributions always the answer?
Although we encourage individuals to make voluntary contributions to super, the type of contributions will depend on the individual’s own situation. Some employees may choose not to claim a tax deduction for some or all of their personal super contributions, so they can receive the Government co-contribution. Or it may be more tax effective for spouse contributions to be made instead of personal contributions.
The Government will make a co-contribution of 50 per cent of the non-deductible personal super contribution up to $500, where a member’s income is less than $36,813. The $500 maximum co-contribution reduces for incomes over $36,813 and ceases at $51,813.
Andrew earns $40,000 pa plus 9.5 per cent employer super contributions. He wants to make $5,000 of personal contributions to super. He has worked out his maximum Government co-contribution is $394, so he chooses to claim a tax deduction for $4,212 of the personal contributions and leaves $788 as non-deductible.
If a member’s income is $37,000 or less, their spouse can make contributions and claim a tax offset of 18 per cent of the contribution up to a maximum tax offset of $540. The tax offset phases out for incomes between $37,000 and $40,000.
Helen is a casual employee who earns $19,000 plus 9.5 per cent employer super a year. Her husband, Jim, earns $80,000 pa. As Helen’s income is already under the tax-free threshold there is no benefit to her in claiming a tax deduction for personal contributions. She could, however, make $1000 of non-concessional personal contributions and receive $500 in Government co-contributions. Jim could also make spouse contributions to her account and claim tax offset of 18 per cent of the contribution (up to a maximum tax offset of $540).
And finally – making voluntary super contributions to save for first home
In the 2017 Budget the Government announced it would introduce legislation that would allow first home buyers to withdraw voluntary super contributions (and amount of earnings calculated by the ATO). Under the proposal, a member can make pre-tax voluntary contributions (tax deductible personal or salary sacrifice contributions) from 1 July 2017 and withdraw those contributions (net of 15 per cent contributions tax) after 1 July 2018 to help purchase a first home. The maximum contributions that can be withdrawn will be $15,000 per year or $30,000 in total. More information will be available when the legislation has passed.