The start of the current financial year brought along with it a number of legislative superannuation changes introduced by the Federal Government. One change that has the potential to provide a significant benefit to many Australians was the change to eligibility rules for claiming tax deductions for superannuation contributions.
Previously, only individuals who were substantially self-employed were eligible to make personal contributions to superannuation and claim these contributions as a tax deductible expense. If you were a salaried employee, the only way to make tax effective superannuation contributions was to commence a salary sacrifice arrangement with your employer.
Effective 1 July 2017, all Australians aged under 65 (and those between 65 and 75 who meet an additional eligibility requirement) can make personal contributions to superannuation and claim a tax deduction for these contributions. This could provide significant taxation and retirement planning opportunities for many individuals.
It is extremely important to keep in mind that your annual cap for contributions where tax deductions are claimed (referred to as concessional contributions) is $25,000 and that this cap also includes employer contributions (both legislated Superannuation Guarantee contributions, as well as those additional contributions arranged via a salary sacrifice agreement).
The following case study highlights the potential benefit of taking advantage of the new legislation:
James is 52 years of age. He is employed full-time as a draftsman in an architectural firm. His annual salary package is $109,500. This is comprised of $100,000 of net salary and $9,500 of employer superannuation guarantee contributions (SGC).
We met with James earlier this financial year and suggested he should consider salary sacrificing a portion of his salary to his superannuation fund. This would add to his retirement savings and also result in James paying less tax. At the time, James felt that due to other financial commitments he was not in a position to commence salary sacrificing to superannuation.
We have just met with James again and he has informed us that his financial commitments were less than he had expected. He has saved an additional $5,000 in his bank account and by June 2018 he will likely have saved a total of $10,000 more than anticipated. James wishes to use this $10,000 to add to his retirement savings.
Even though James is an employee and has not made any additional superannuation contributions to his superannuation fund during the financial year, any time prior to 30 June 2018 he could elect to add this saved $10,000 to his superannuation fund as a personal concessional contribution. The benefit of this strategy for James includes:
- Although 15% tax will be deducted from the additional $10,000 contribution, James will have an additional net $8,500 added to his retirement savings;
- Upon lodging his 2017/18 tax return James can claim this $10,000 superannuation contribution as a tax deductible expense on his personal tax return;
- As James’ marginal tax rate is 39% (including the medicare levy), this will represent a personal tax saving of $3,900;
- After taking into account the tax deducted on the superannuation contribution of $1,500, the net tax saving for James is $2,400;
- James total concessional contributions for the year will be $9,500 (SGC) plus $10,000 = $19,500. As such, he remains under his concessional contribution cap of $25,000.
Depending on your circumstances, you could potentially benefit from financial year end superannuation contributions (have you read our other articles about the Government Co-Contribution and Spouse Contribution Tax Offset?).
If you would like to arrange a meeting to discuss your circumstances, and how you could benefit from financial year end planning, we encourage you to touch base with us.
The above information represents general advice only and has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any general advice you should consider whether or not it is appropriate in regard to your personal objectives, financial situation and needs.