Employees, you can now get a tax deduction for Lump Sum Super Contributions Prior to the 30th of June.
Previously, as an employee you could only make tax deductible contributions into Super via Salary Sacrifice Contributions. The nature of Salary Sacrifice Contributions are that they must be pre-scriptive, therefore in the event that you have a windfall, sell some assets or decide late in the financial year that you have the capacity to make extra superannuation contributions, historically it has been difficult or you haven’t been able to.
Since July 1 2017, the ten percent employment rule regarding tax-deductible super contributions has been replaced. The rule meant that a person could not claim a tax deduction on personal Super Contributions if more than ten percent of their assessable income was obtained as an employee. The new rule is now any person under age 65 now may be able to claim a tax deduction on their contributions regardless of their employment arrangement, whilst those aged between 65 and 74 need to satisfy the Work Test in order to be eligible to make a contribution, and subsequently claim a tax deduction.
The following example shows how John was able to save $3,300 in tax by taking advantage of the New Rules:
John works as an employee. He has a salary of $100,000 plus Super Guarantee Contributions of $9,500. He is focusing on reducing his mortgage and at the moment doesn’t have the cash flow to do any additional Salary Sacrifice Contributions. He has however recently decided to take a profit on some shares that he has held for a long period of time. This sale has caused a Capital Gain of $15,000 (after 50% discount).
Prior to the 1st of July 2017, as his income from employment was more than 10% of his total assessable income for the financial year, he wasn’t eligible to do anything about this gain and would simply have to add the $15,000 to his assessable income and pay approximately $5,550 in tax (plus Medicare).
Because of the changes on the 1 July 2017, he is now eligible to make a Lump Sum Tax Deductible Contribution into Super to offset the Capital Gain and reduce his taxable income by $15,000.
By contributing $15,000 into his super as a Lump Sum Tax Deductible Contribution, John is able to save $3,300 in net tax and move his wealth into the concessionally taxed super environment for future investment.
Like all strategies, your own personal circumstances need to be considered as factors such as your level of superannuation contributions (including employer contributions and the contributions caps), can trip you up and cause issues. However, when implemented correctly the new changes do open up a number of opportunities previously unavailable.
– Richard Smart –