Financial Planners and Investment Advisers Sydney North Shore  1300 623 936 rob@mcinvest.com.au

Tax-deductible contributions

Did you know, most working Australians can claim a tax deduction on after-tax personal super contributions?

Up until a few years ago, only the self-employed, unemployed, retirees, or those who earned less than 10% of their income as an employee, could claim a tax deduction on an after-tax super contribution. But now it’s an opportunity a lot more people can take advantage of, if they wish to.

How do tax-deductible contributions work?

Tax-deductible super contributions are made from your after-tax income. This income may be from a variety of sources such as your take-home pay, savings, an inheritance or from the sale of assets.

Whatever the source, you can make a payment to your super fund from your bank account either as a one-off payment or a periodic direct debit.

You can then claim a tax deduction on the amount of that contribution in your tax return. There may be a financial benefit in this as these contributions will generally be taxed at 15% (or 30% if your income is greater than $250,000) which is often lower than what most people pay on their taxable income.

In essence, if you claim a tax deduction for a personal (after-tax) super contribution, it switches from being treated as a non-concessional (after-tax) contribution, to a concessional (before-tax) contribution.

What’s the benefit to me?

Putting money into super and claiming it as a tax deduction is of particular benefit if you receive some extra money that you’d otherwise pay tax on at your full marginal tax rate.

Likewise, if you’ve sold an asset that you have to pay capital gains tax on, you may decide to contribute some or all of that money into super, so you can claim it as a tax deduction, which could reduce or even eliminate the capital gains tax that’s owing altogether.

In addition, there could be further tax benefits once the money is in super, due to the favourable tax environment that super offers. Earnings you make on money within super are taxed at a maximum of 15%. The same investment earnings held outside super may be taxed at your marginal tax rate. This could make a big difference when you do eventually retire and start to withdraw your super savings.

Eligibility

You’re eligible to claim a deduction for personal contributions if you receive your income from:

  • salary and wages
  • a personal business (for example, people who are self-employed contractors, or freelancers)
  • investments (including interest, dividends, rent and capital gains)
  • government pensions or allowances
  • super
  • partnership or trust distributions
  • a foreign source.

Age matters

Anyone who’s eligible to contribute to super can claim a tax deduction on their after-tax contributions but those aged 67 or over need to meet a ‘work test’ before being able to make voluntary super contributions. Under the ‘work test’, a person aged 67 or over must show that they’ve been gainfully employed during the financial year for at least 40 hours over a period of no more than 30 consecutive days.

Meanwhile, those under 18 can only claim a tax deduction on a super contribution if they’ve earned income as an employee or a business operator during the year.

Mind your contribution limits

The amount you choose to contribute is up to you, but remember, you can’t contribute more than $25,000 per year, or penalties will apply. If you’re using the carry-forward rule you may be able to contribute more than the $25,000 cap.

Remember that personal tax-deductible contributions aren’t the only contributions that count towards this cap. Others include:

  • Compulsory contributions paid by your employer under the Superannuation Guarantee;
  • Contributions from any other jobs you may have held in the same financial year, and
  • Salary sacrifice contributions.

No double-dipping…

After-tax super contributions that you claim a tax deduction on will not be eligible for a super co-contribution from the government. Also note, downsizing contributions are not tax deductible.

How do I claim a tax deduction on my personal contribution?

If you decide this is a good option for you, you’ll need to first make the contribution to your super fund. Your fund will be able to tell you how you can make this payment. Usually, it’s as simple as a bank transfer or BPAY transaction.

The next step is to lodge a notice of intent form with your super fund. Your super fund will send you a written acknowledgement, telling you they’ve received a valid form from you.

When you complete your tax return, you can claim a deduction for the amount of the contribution stated on your notice of intent.

Some simple examples

The examples below illustrate the net tax benefit for a range of scenarios, for low, middle and high-incomes.

Each example applies the current concessional contributions cap of $25,000. For people applying the carry-forward rules, a higher cap may apply.

We’ve also assumed that in each case the person is receiving the super guarantee contribution of 9.5% from their employer. 

Low-income scenario

Taxable Income $36,000
Tax payable $3,382
Super Guarantee Contribution (9.5%) $3,420
Amount remaining until cap is reached $21,580
Deductible personal contribution $5,000
Contribution tax on deductible contribution (15%) $750
Net contribution $4,250
Tax deduction claimed $5,000
Tax payable on reduced income (as per ATO tax calculator) $2,432
Tax reduction as result of deduction $950
Net tax benefit, after contribution tax $200

 

Middle-income scenarios

Taxable income $70,000 $70,000
Tax payable (as per ATO tax calculator) $14,297 $14,297
Super Guarantee Contribution (9.5%) $6,650 $6,650
Amount remaining until cap is reached $18,350 $18,350
Deductible personal contribution $5,000 $10,000
Contribution tax on personal contribution (15%) $750 $1,500
Net contribution $4,250 $8,500
Tax deduction claimed $5,000 $10,000
Tax payable on reduced income $12,672 $11,047
Tax reduction as result of deduction $1,625 $3,250
Net tax benefit, after contribution tax $875 $1,750

 

High-income scenarios

Taxable income $150,000 $150,000 $250,000
Tax payable (as per ATO tax calculator) $42,997 $42,997 $85,597
Super Guarantee Contribution (9.5%) $14,250 $14,250 $23,750
Amount remaining until cap is reached $10,750 $10,750 $1,250
Deductible personal contribution $5,000 $10,000 $1,250
Contribution tax on personal contribution (15%) $750 $1,500 $188
Net contribution $4,250 $8,500 $1,063
Tax deduction claimed $5,000 $10,000 $10,000
Tax payable on reduced income (as per ATO tax calculator) $41,147 $39,297 $85,035
Tax reduction as result of deduction $1,850 $3,700 $562
Net tax benefit, after contribution tax $1,100 $2,200 $375

 

General disclaimer

This content is intended only to provide a summary and general overview of the subject matter covered. It is not intended to be comprehensive nor does it constitute advice. We attempt to ensure that the content is accurate and current but we do not warrant the content nor its currency. You should seek professional advice before acting or relying on any of the content.

How can we help?
If you’d like to know more, please call us on 1300 623 936 to arrange a time to meet and we can discuss your particular requirements in more detail.

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