Salary sacrificing into super is a popular strategy for clients looking to tax effectively maximise their retirement savings. As of 1 July 2017, many individuals now have the additional option of making personal deductible contributions. This means everyone now has greater flexibility around how they make tax effective contributions to super.
What has changed?
Since 1 July 2017, all individuals under the age of 65 (and those aged 65 to 74 who meet the work test), may claim a tax deduction for personal super contributions. Prior to 1 July, only those who derived less than 10% of total income from employment sources were eligible to claim a tax deduction.
Previously, the only way for employees to contribute to super tax effectively was via a salary sacrifice agreement with their employer. Under this arrangement, employees set aside some pre-tax employment income from their regular pay to make contributions. Now, individuals also have the option to make personal deductible contributions directly (rather than having money deducted from their regular pay) at a time that suits their situation.
What are my options?
If you’re already making salary sacrifice contributions you now have additional options. You can:
- Continue with your existing arrangements
- Switch to making Personal Deductible Contributions, or
- Opt for a combination of both.
How might the new options benefit me?
Personal deductible contributions and salary sacrifice contributions are taxed in your super fund at 15%. If you pay personal income tax, this rate may be lower than your marginal tax rate of up to 45% plus Medicare. By claiming a tax deduction for contributions, or making regular salary sacrifice contributions, you can save tax that would otherwise be payable.
If your employer does not offer salary sacrifice, you may now have the ability to contribute to super tax effectively.
If you have sold property or shares that create a Capital Gain, you may be able to reduce the tax payable by making a personal deductible contribution to superannuation.
Making a contribution closer to year end can help with managing contribution caps especially with a new $25,000 limit. For example, Super Guarantee is payable on employee bonuses which are not usually 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.
It is important to weigh these benefits with those of regular salary sacrifice contributions, including the regular savings and cash flow management discipline it helps create.
Things to consider
Personal super contributions count towards your concessional contributions cap. Concessional contributions are now limited to $25,000 per financial year.
Many super funds only allow your Personal contributions to be made as non-concessional contributions. The super fund then alters the contribution type only upon receipt of a valid tax deduction notice. Accordingly, you need to provide the trustees of your super fund with a valid notice of intent to claim a deduction, in the approved form and within the required timeframes.
If you are over age 65, you will need to ensure you have satisfied the work test so you are able to contribute to super.
You should ensure you have sufficient taxable income before deciding to claim a deduction for any personal contributions, especially if you retire early in the financial year.
As always, if you would like to discuss what these changes mean for your situation, it is important to seek advice. Please contact your Adviser on (03) 5224 2700.