With all the recent media coverage on the negative changes to superannuation, we thought we would explain one of the positive changes to superannuation contributions that may be of benefit to you.
If you are an employee, one of the changes to super that has come into effect as of 1 July 2017 is the ability to now claim a tax deduction for personal super contributions made outside of your employment arrangements. This is the case for most people who are under 65 years old, and even for those who are aged 65 to 74 years old who work sufficient paid hours in a month. Previously if you wanted to get the benefit of making additional super contributions in a tax effective way as an employer you had to do this slowly via salary sacrificing and potentially set this up very early in the financial year. There was previously no ability for an employee to make a one-off lump sum super contribution late in the financial year and get a tax deduction for it.
Your employer has and will continue to pay Superannuation Guarantee Contributions (SGC) into your nominated super fund (at a rate of 9.5%). However, under the new rules, it is now possible for an employee to claim a tax deduction for some or possibly all of any super contributions made personally (above what your employer is contributing).
Let’s look at an example of how this would work in practice;
Katy earns $100,000 p.a. from her job and her employer pays SGC of $9,500 (9.5%) to her super fund. Under the new rules, Katy can now claim a tax deduction for some or possibly all of any super contributions that she decides to make personally in addition to the ones made by her employer. The only limit to this is that Katy’s SGC contributions and her own personal contributions, for which she wants to claim a tax deduction, combined, cannot exceed $25,000 (this is new concessional contributions cap from the 1st of July 2017 for everyone). In other words Katy can make an additional tax deductible contribution of $15,500 before 30 June 2018.
Let’s say Katy sells some shares later on in the financial year, which triggers a large capital gain or she inherits some money. She may then decide to contribute $10,000 late in the 2018 financial year to her super fund to be able to claim a tax deduction in her 2018 personal tax return. Katy’s $10,000 contribution will then create a $3,900 personal tax saving (37% tax threshold rate plus 2% Medicare levy) for her whilst her super fund only pays $1,500 (15%) on her contribution – a net tax saving of $2,400. She has now increased her super fund balance and has reduced her tax liability.
Should Katy make this contribution? It really depends on her current financial situation and her plans for her future, but she does now have more flexibility to;
- Make tax effective contributions later on in a financial year in a lump sum.
- Better manage capital gains tax liabilities from the sale of assets.
- Better deal with one-off receipts such as inheritance money, end of year bonuses and insurance payouts.
- Have the ability to make decisions on super contributions after more information is available i.e. avoids salary sacrifice arrangements being set up presumptuously which locks up money in super that is later required.
We take the time to understand your current situation and use this along with our professional knowledge to assist you in making plans that can have a significant impact both now and also for your future life success. We would welcome the opportunity to talk through any of the above with you.