One of the frustrations many of our employee clients have is they are sometimes limited in their ability to claim tax deductions to help reduce their taxable income.

However, one of the changes made in last years’ Federal Budget is currently flying under the radar due to the focus on many of the other complex superannuation changes, particularly the $1.6 million pension cap.

This change relates to employees now being able to claim a tax deduction in their personal income return for contributions made to a complying superannuation fund.  Previously, this has never been possible due to a rule known as “the 10% rule” which basically meant if greater than 10% of your assessable income was from employment remuneration (including salaries & wages, reportable fringe benefits, reportable super contributions) then you were prevented from claiming a tax deduction for a superannuation contribution in your personal tax return.  The only way employees could increase their pre-tax contributions to superannuation was to enter into a prospective salary sacrifice arrangement with their employer.

This 10% rule has now been removed – which means if you make a personal contribution to superannuation prior to 30 June 2018, a tax deduction can be claimed.

What is the procedure?

  1. Contribute an amount to your complying superannuation fund prior to 30 June 2018;
  2. Provide your superannuation fund with a completed “Notice of Intent to claim a tax deduction” form.  These can be printed off the ATO’s website;
  3. Request your superannuation fund to provide you with a written acknowledgement which confirms your intention to claim the amount specified as a tax deduction.  This document is critical as you need to have this prior to lodging your income tax return, but not necessarily prior to 30 June 2018.  Without this document your tax deduction cannot be claimed.

How much will you save?

It is important to note any amount which is claimed as a tax deduction will incur 15% contributions tax in the superannuation fund.  Depending on your taxable income before the deduction is claimed, the amount you save in your personal return will be as follows:

Taxable Income Marginal Tax Rate (Savings)
$18,201 – $37,000 19% + Medicare Levy
$37,001 – $87,000 32.5% + Medicare Levy
$87,001 – $180,000 37% + Medicare Levy
$180,001 plus 45% + Medicare Levy

Example – if your taxable income is $56,000 and you make an extra tax deductible contribution of $5,000 this will save you $1,725 (inc Medicare Levy) in your personal tax return, but $750 contributions tax will be payable by your superannuation fund.

What else do you need to consider?

Contribution Limits – Any amount you claim as a tax deduction is called a “concessional contribution”.   Amounts your employer contributes to your superannuation fund as Superannuation Guarantee obligations or any award superannuation obligations also count as “concessional contributions” as do any amounts you salary sacrifice into your super fund.  The concessional contribution limit for the 2018 financial year is $25,000.

Preservation Rules – any amounts contributed to a superannuation fund will be preserved until you at least meet Preservation Age.  This is currently 56 but is gradually increasing to 60.  It is tipped the Preservation Age will eventually to increase to age 65.  Preservation is a restriction that prevents a member from accessing their superannuation benefits until retirement or until they meet a Condition of Release.  HOWEVER – this can also be a good thing as you are setting aside amounts for your retirement and also allowing COMPOUNDING RETURNS (the 8th wonder of the world!!) to work on your savings.

How good are compounding returns?

$10,000 contributed to superannuation each year for 35 years and claimed as a tax deduction (therefore – being hit with 15% contributions tax) will turn into $1,004,027 (with a 6% return), $1,257,264 (with a 7% return), $1,581,868 (with a 8% return), $1,998,560 (With a 9% return) and $2,534,078 (with a 10% return).  All we are trying to emphasise is to START EARLY with investing, because the longer you invest for, the greater the compounding benefit will be in the later years.

Make sure you don’t leave this too close to 30 June 2018 to make your decision – your superannuation fund needs to receive your contribution prior to this date to be able to claim the deduction.