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.
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
- partnership or trust distributions
- a foreign source.
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
A personal contribution that is claimed as a deduction in your tax return will count towards your concessional contributions cap. So, while the amount you choose to contribute is up to you, you can’t exceed your annual concessional contributions cap of $27,500, or penalties will apply. If you’re using the carry-forward rule you may be able to contribute more than the $27,500 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.
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 $27,500. 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 10% from their employer.
|Super Guarantee Contribution (10%)||$3,600|
|Amount remaining until cap is reached||$23,900|
|Deductible personal contribution||$5,000|
|Contribution tax on deductible contribution (15%)||$750|
|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|
|Super Guarantee Contribution (10%)||$7,000||$7,000|
|Amount remaining until cap is reached||$20,500||$20,500|
|Deductible personal contribution||$5,000||$10,000|
|Contribution tax on personal contribution (15%)||$750||$1,500|
|Tax deduction claimed||$5,000||$10,000|
|Tax payable on reduced income||$11,592||$9,967|
|Tax reduction as result of deduction||$1,625||$3,250|
|Net tax benefit, after contribution tax||$875||$1,750|
|Super Guarantee Contribution (10%)||$15,000||$23,568*|
|Amount remaining until cap is reached||$12,500||$3,932|
|Deductible personal contribution||$10,000||$3,932|
|Contribution tax on personal contribution (15%)||$1,500||$590|
|Tax deduction claimed||$10,000||$3,932|
|Tax payable on reduced income||$36,867||$81,397|
|Tax reduction as result of deduction||$3,700||$1,770|
|Net tax benefit, after contribution tax||$2,200||$1,180|
* Maximum super contribution amount. For 2021 – 2022 the maximum superannuation contribution base is $58,920 per quarter. So if an employee’s earnings exceed $58,920 for the quarter, an employer does not need to pay contributions on their earnings above this limit.
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