We all get a fair go now
Employees are the winners thanks to new rules for tax-deductible contributions
Let’s kick off the new year with some good news. Recent rule changes to super make the system fairer, more flexible and easier to understand for employees wishing to make tax-deductible contributions.
First, they can now contribute directly to their fund and claim a tax deduction for doing so. Second, a rort that allows employers to minimise their 9.5% super guarantee (SG) obligation faces the chop. This is long overdue. But more on that later.
Previously, if you wanted to maximise your concessional contributions, capped at $25,000 this financial year, you needed to
BEFORE THE CHANGES
Blaine works part time in an accounting firm. During 2016-17 he earned $60,000 in salary and wages.
He is also a qualified swim coach and in his spare time runs a small learn-to-swim business at a local school. During the year he earned $11,000 before tax.
Blaine made personal (after-tax) super contributions of $3000.
He cannot claim a deduction for his personal super contributions in his 201617 tax return because the income from his employment with the accounting firm ($60,000) is more than 10% of his combined assessable income, reportable fringe benefits and reportable employer super contributions ($71,000 × 10% = $7100). Source: ATO
WORK TEST
If you are aged 65-74 at the end of the income year in which you made a contribution, you need to satisfy a work test to be eligible to claim a deduction. This means you must work at least 40 hours during a consecutive 30-day period each financial year in order for your fund to accept a personal super contribution for which you can claim a deduction. make salary sacrifice arrangements with your employer. However, not all employers facilitate it, so while it was good for some, others missed out. Such arrangements are no longer necessary. Control is now in employees’ hands. Since July 2017 an employee can make a personal tax-deductible contribution to super and claim a deduction. But they need to stay within the $25,000 limit, which includes the SG.
All you need to do is fill in a form – a notice of intent to claim a deduction – which can be found on most funds’ website. Once it’s sent off you should receive acknowledgement from your fund. You can then claim the deduction in your tax return for that year’s contributions.
People who are self-employed but also work part time for an employer benefit from changes as well. Previously, to be eligible to claim a deduction for personal super contributions you had to earn less than 10% of your income from employment.
The 10% income test rule no longer applies, which means affected individuals can also claim a tax deduction for personal super contributions this financial year.
Now for the SG rort. The federal government is finally cracking down on a legal loophole that allows employers to take advantage of employees who salary sacrifice by paying them less in compulsory super. It undermines the whole purpose of salary sacrificing. Legislation, due to apply from July 1, 2018, has been proposed to ensure salary sacrifice contributions do not reduce an employer’s SG obligations.
“The loophole allowed employers to reduce the SG entitlement by netting out the salary sacrifice contributions their employee was making,” says Ben Marshan, head of policy at the Financial Planning Association and a certified financial planner. “For example, where an employee was earning $80,000 and salary sacrificing $10,000 the employer was able to pay SG on $70,000. They will be required to pay it on the full $80,000.”
The employer might also count the salary sacrifice contribution as its own SG contribution. Either way, the employee’s total salary package is effectively being reduced.
Marshan says many employees have no idea they are being short-changed. It’s only when it’s pointed out to them by their financial planner or accountant that they become aware of it. He says the FPA has been asking for this loophole to be closed for a decade. Until that happens, opening up tax-deductible contributions to all means employees can now outfox an unscrupulous employer by making their own tax-deductible contributions instead of salary sacrificing.
Marshan also welcomes the end of the 10% work test rule. “It made super more confusing and limited the ability of many people to save for their retirement. Contractors in particular were in a disadvantaged position where they didn’t get employer SG but because of the way the law applies around contract work they weren’t considered to be self-employed either.
Super is the most tax-effective way to save for retirement, he says. “We know Australians love to save tax and invest in their future and the government has just given us a flexible and efficient way to do this. Keep in mind the contribution cap and that contributions to super are preserved until you meet a condition of release, such as retirement.”