Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 186

Don't ignore tax deductions on contributions

The new superannuation rules have been passed, but judging by the emails I am receiving, many of you are more confused than ever.

One reader says, “It has been widely reported that from July 2017, superannuation contributions will be tax deductible to the limit of the concessional amount of $25,000. Does that mean then the salary sacrifice will no longer apply? Can you please explain how the salary sacrifice and the tax-deductible contributions fit in with each other? Does one exclude the other?”

It's a great question, particularly as it gives me the opportunity to highlight the opportunities that will be available for employees after 30 June 2017.

Every eligible person can claim a tax deduction

Superannuation contributions fall into two categories, concessional, and non-concessional. The former were once called deductible contributions because they came from pre-tax dollars, while the latter were called un-deducted contributions because the funds came from after-tax dollars.

Until 1 July 2017 concessional contributions are capped at $30,000 for people under 50, and $35,000 for those aged 50 and over. Non-concessional contributions are limited to $180,000 a year but in certain cases you can bring forward an extra two years’ contributions and contribute $540,000 in one year.

From 1 July, the concessional cap will fall to $25,000 a year for everybody, and the non-concessional cap to $100,000. Furthermore, no non-concessional contributions will be allowed once you hold $1.6 million in pension phase. If you have the funds available take advice about making substantial contributions before 30 June.

It's long been a bone of contention that a self-employed person could make a concessional contribution and claim a tax deduction for it, but anybody who's employer was contributing for them was not allowed the same concession. It was easy to get around for anybody who had a good employer because the concessional contribution could simply be made by salary sacrifice.

There was no logic in the system, and it created an unequal situation whereby an employee who was allowed the salary sacrifice got a better deal from the taxman than an employee who was not allowed to salary sacrifice.

From 1 July, everybody who is eligible to contribute can make concessional contributions up to $25,000 a year and claim a tax deduction. To be eligible you must be under 65. Contributions are also allowed for those aged between 65 and 75 who can pass the work test which involves working just 40 hours in 30 consecutive days.

Salary sacrifice will still be allowed, but it will no longer be necessary to do that to get a tax deduction. Keep in mind that the $25,000 limit includes contributions from all sources including the employer 9.5%. Therefore, if you earned $100,000 a year, and your employer contributed $9,500, your maximum personal contribution would be $15,500.

Case study showing advantages of super

You are 55, earn $98,000 a year plus employer superannuation of $9,310 and have a cash surplus of $15,000 a year. You could invest the money in your own name outside super where earnings would be taxed at 39%, or contribute it to super as a non-concessional contribution where the earnings will be taxed at just 15%.

From 1 July 2017, you will have another option - make a concessional contribution of $15,000. You will lose $2,250 due to the 15% contributions tax but will still have $12,750 working for you in the low tax superannuation environment. Best of all, the tax deduction of $15,000 should get you a tax refund of $5,850 which you could contribute as a non-concessional contribution. This option magically turns your $15,000 into $18,600. That's a return of 24% in the first year.

It's unfortunate that the continual changes have made many people wary of super. As I have said repeatedly, it's still the best money tool available when used in the right places.

 

Noel Whittaker is the author of Making Money Made Simple and numerous other books on personal finance. His advice is general in nature and readers should seek their own professional advice before making any financial decisions. Email: [email protected]

 

RELATED ARTICLES

Did retirees lose out when they accepted defined benefit schemes?

So, we are not spending our super balances. So what!

Global pension reforms and how Australia can improve

banner

Most viewed in recent weeks

Which generation had it toughest?

Each generation believes its economic challenges were uniquely tough - but what does the data say? A closer look reveals a more nuanced, complex story behind the generational hardship debate. 

Maybe it’s time to consider taxing the family home

Australia could unlock smarter investment and greater equity by reforming housing tax concessions. Rethinking exemptions on the family home could benefit most Australians, especially renters and owners of modest homes.

The best way to get rich and retire early

This goes through the different options including shares, property and business ownership and declares a winner, as well as outlining the mindset needed to earn enough to never have to work again.

A perfect storm for housing affordability in Australia

Everyone has a theory as to why housing in Australia is so expensive. There are a lot of different factors at play, from skewed migration patterns to banking trends and housing's status as a national obsession.

Supercharging the ‘4% rule’ to ensure a richer retirement

The creator of the 4% rule for retirement withdrawals, Bill Bengen, has written a new book outlining fresh strategies to outlive your money, including holding fewer stocks in early retirement before increasing allocations.

Simple maths says the AI investment boom ends badly

This AI cycle feels less like a revolution and more like a rerun. Just like fibre in 2000, shale in 2014, and cannabis in 2019, the technology or product is real but the capital cycle will be brutal. Investors beware.

Latest Updates

Weekly Editorial

Welcome to Firstlinks Edition 628

Australian investors have been pouring money into US stocks this year, just as they start to underperform the rest of the world. Is this a sign of things to come? This looks at 50 years of data to see what happens next.

  • 11 September 2025
Exchange traded products

Are LICs licked?

LICs are continuing to struggle with large discounts and frustrated investors are wondering whether it’s worth holding onto them. This explains why the next 6-12 months will be make or break for many LICs.

Retirement

We need a better scheme to help superannuation victims

The Compensation Scheme of Last Resort fails families hit by First Guardian and Shield losses, as well as advisers who are being wrongly blamed for the saga. It’s time for a fair, faster, universal super levy solution.

Investment strategies

5 charts every retiree must see…

Retirement can be daunting for Australians facing financial uncertainty. Understand your goals, longevity challenges, inflation impacts, market risks, and components of retirement income with these crucial charts.

Economy

How bread vs rice moulded history

Does a country's staple crop decide elements of its destiny? The second order effects of being a wheat or rice growing country could explain big differences in culture, societal norms and economic development.

Investment strategies

Small caps are catching fire - for good reason

Small caps just crashed the party like John McClane did in the movie, Die Hard - August delivered explosive gains. With valuations at historic lows, long-term investors could be set for a sequel worth watching.

Defensive growth for an age of deglobalisation, debt and disorder

Today’s new world order appears likely to lead to a lower return, higher risk investment environment. But this asset class looks especially well placed to survive, thrive, and deliver attractive returns to investors.

Economy

Will we choose a four-day working week?

The allure of a four-day week reflects a yearning for more balance in our lives. Yet the reliability of studies touting a lift in productivity is questionable and society may not be ready for such a shift anyway.

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.