Make the superannuation changes work for you
Amongst the raft of changes which swept through superannuation land on 1 July 2017, the most relevant to everyday working Australians might just be the simplification of rules surrounding tax deductibility of contributions.
In short, most Australians can now claim a tax deduction for contributions to super, up to the concessional cap of $25,000. Previously, anyone who had their employer making contributions on their behalf needed to enter a salary sacrifice arrangement to take advantage of the tax deduction.
This adds a great deal of flexibility to employees with regards to tax planning, increasing the benefits of using super to build for retirement.
So what do you need to know to make this work for you?
For starters, concessional contributions are taxed within your super fund at a flat rate of 15%. If you expect to pay less tax than this hold off or make a non-deductible contribution. We say hold off because from 1 July 2018, another clever rule change allows unused contributions in previous financial years to be carried forward. We will come back to this strategy shortly.
For now, let’s walk through an example and see if we can make this work.
Take Marty, a 52 year old teacher, who is looking to build funds for retirement. Marty earns $85,000 a year, has paid off the family home and is looking towards retirement. If Marty’s employer contributes 9.5% of his salary then Marty can add another $16,925 to his super which can be claimed as a tax deduction in his annual tax return.
If Marty chooses to contribute the maximum allowed, the net benefit would be a reduction in Marty’s tax payable (including Medicare levy and contributions tax) of around $3,300. The benefit varies based on your marginal tax rate and how much cap you have left, but this is quite easy to calculate. Depending on your own salary and employer contributions, expect there to be a neat little spot where you can reduce your tax while keeping within cap limits.
Of course, many people will recognise the similarities here with regular salary sacrificing.
And while we would recommend the benefits of regular contributions (such as dollar cost averaging and ease of management), in some cases reducing your take home pay each fortnight might not be feasible. Sometimes your income is lumpy due to one off capital gains and performance related bonuses, while your expenses drone away constantly. Some employers use the fact that salary sacrifice arrangements render their super obligations unnecessary.
Knowing that you can direct some of the additional income to super and reduce your tax bill is appealing. No agreements are needed with your employer and depending on your circumstances at the time, you can manage the overall benefit to suit your individual needs.
Let’s use another example to demonstrate how unused contributions can be carried forward. Assume Marty doesn’t add any further contributions to his super, other than his employer’s SG, and is thinking about selling an investment property. If Marty plans correctly, part or all of the capital gain received from the selling the property can be contributed to super and claimed as a tax deduction. If Marty sells the property in 3 years’ time and realises a capital gain of $80,000, capital gains tax would be applied to 50% after the 12 month CGT discount, and Marty would need to pay tax on $40,000.
Given Marty has not claimed any other contributions as deductions; he will have an unused concessional cap of $50,775 for the three years form 1 July 2018. By utilising his unused cap component, Marty can add the $40,000 to super, claim a tax deduction for this amount for a net benefit of $9,510, being the difference between his contributions tax and marginal tax rate on an additional $40,000.
So, the new rules add tremendous flexibility around tax planning and importantly, building retirement assets. What could go wrong?
Well, for starters, there are very specific rules with regards to claiming this deduction, which you are relying on your super fund to apply correctly to your contribution.
A complying super fund needs to have received your intention to claim a deduction on the contribution (called a Notice of Intent) before the earlier of either lodging your tax return or the end of the financial year following your contribution.
The risk here is that your Notice of Intent (NOI) is not valid, and your respective super fund advises that your claim is not valid. A non-valid claim means no deduction and little recourse exists for claims being denied by your super fund.
The simplest way to ensure your claim is valid is to have the super fund provide acknowledgement of your claim. In doing so, they will deduct 15% from your contribution and send this amount to the ATO.
Again, it is clearly a risk to claim a deduction without acknowledgement and general tax penalties will apply if you get this wrong.
What are the common reasons claims are denied?
If you roll funds out of super or into another super fund before you lodge a notice to claim then the super fund must invalidate your claim. Likewise, if you start a pension with the funds before you lodge your notice then your claim will be invalid. Why? In both cases, your super funds need a balance in the account to pay the contributions tax on your behalf. No balance, no claim, no deduction.
If you are in receipt of an account based pension then perhaps the best idea is to start a new accumulation account with another fund. Make sure any fund you contribute will treat member contributions as deductible, best to ask first.
Importantly, the contribution needs to be defined as “personal”: rollovers, benefits from a foreign retirement fund and contributions paid by your employer (including compulsory super guarantee and salary sacrifice amounts) are not considered “personal” and can’t be claimed with a NOI.
Those aged 65 to 74 will still need to meet the work test in order to be eligible to make a contribution and claim a tax deduction. Once you turn 75, the show is over and nothing further can be claimed.
Likewise, the ability to carry forward unused concessional contributions will be limited to those with a super balance under $500,000. Splitting contributions with your spouse in the lead up to a one off contribution might assist in maximising the benefit.
Of course, there are restrictions on when and how you can access funds once in super but the benefits are quite clear and now, accessible for most Australians.
For more information please see https://www.ato.gov.au/individuals/super/in-detail/growing/claiming-deductions-for-personal-super-contributions/?anchor=Areyoueligibletoclaimadeduction#Areyoueligibletoclaimadeduction