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Who can make tax-deductible contributions?

Generally speaking, you can make two types of super contributions: non-concessional (after-tax) contributions and concessional (before-tax) contributions. Concessional contributions can include tax-deductible super contributions, where an individual claims a deduction.

For the 2014/2015 year, from 1 July 2014 to 30 June 2015, an eligible individual can make concessional contributions of up to $30,000 a year if aged 48 years or under on 30 June 2014, and up to $35,000 for the year if aged 49 years or over on 30 June 2014.

Am I eligible to make tax-deductible contributions?

If you’re self-employed (or substantially self-employed) or you’re not employed, you can claim a tax deduction for your super contributions, which means these super contributions are treated as concessional contributions. However, an individual under the age of 18 can only claim a tax deduction for super contributions when his or her income comes from gainful employment, such as carrying on a business.

If you’re an employee, in nearly all circumstances you cannot claim a tax deduction for making a super contribution, although you can get a similar tax benefit by making salary sacrifice contributions. Salary sacrificing refers to including before-tax superannuation contributions as part of a salary package, which then reduces a person’s taxable salary and the amount of income tax payable.

If you’re an employee and you can satisfy the 10% income test rule (more on this later), then you may be able to claim a tax deduction for a super contribution, even as an employee.

The rules for claiming tax deductions on super contributions can be complex depending on the type of work that you do, and whether you hold down other jobs.

I suggest you confirm your ability to claim a tax deduction with the Australian Taxation Office or check the ATO website, but you can usually claim a tax deduction for super contributions if you fall into one of the following three categories:

  • You are self-employed and you’re not working under a contract principally for your labour
  • You are not employed, for example, you’re a full-time investor or looking after children.
  • You meet the 10% income test rule.

Am I eligible for the 10% income test rule?

The 10% income test rule is where you receive part of your income as an employee but less than 10% of your assessable income plus salary sacrifice contributions plus reportable fringe benefits are attributable to employment as an employee. The 10% test sounds fairly complicated but if you’re employed, and also self-employed, then you can work out step-by-step if you’re eligible to claim a tax deduction for your super contributions.

Note that employment income includes reportable employer super contributions, such as salary sacrifice contributions, but doesn’t include Superannuation Guarantee contributions. Assessable income is gross income before any deductions are allowed, and includes salary and wages, dividends, interest distributions from partnerships or trusts, business income (including personal services income), rent, foreign source income, net capital gains and a few other items. Reportable employer super contributions (such as salary sacrifice contributions) are also added back to assessable income when working out whether an individual satisfies the 10% test – the employment income divided by total income must be less than 10% for an individual to claim a tax deduction for his or her own super contributions.

Watch the tax on concessional contributions

Tax-deductible super contributions and other concessional contributions are subject to 15% tax within a super fund, which means that claiming a tax deduction for super contributions may not be tax effective if you pay less than 15 cents in the dollar tax on your income. Note that some self-employed individuals may be eligible for a refund of the 15% contributions tax paid on super contributions for the 2012/2013 year through to the 2016/2017 year. If you earn less than $37,000 a year, and your employer (or you) makes concessional (before-tax) contributions on your behalf, then you can expect a refund of the contributions tax deducted from your super account, paid directly to your superannuation account by the federal government. The federal government calls this refund of super tax, the Low Income Super Contribution (LISC).

If you’re a high-income earner and your adjusted taxable income is more than $300,000 a year, your concessional contributions will be subject to an additional 15% tax, known as Division 293 tax.

Ensure you complete the paperwork

If you plan to claim a tax deduction for a super contribution, you must notify your super fund in writing before you lodge your tax return for the financial year, or by the end of the financial year following the year the contribution was made, whichever is earlier.

If you belong to a SMSF, then as both a trustee and member of a SMSF, you have to formally notify yourself of the intention to claim a deduction. In theory, the trustee (you) isn’t aware of your intention to claim a tax deduction for your contributions until you inform the trustee.

You must lodge a ‘Notice of intent to claim a tax deduction for super contributions or vary a previous notice’ (section 290-170 notice) with your SMSF. You must receive acknowledgment of receipt of the notice from your SMSF (you), BEFORE you lodge your individual income tax return. The trustee (you) then uses the notice to determine the treatment of the contributions for benefit component purposes, and to report the nature of the contributions in the SMSF’s annual return.

 

Trish Power is co-founder of SuperGuide, a free website for consumers on superannuation in Australia, and the author of Super Freedom, DIY Super For Dummies, Superannuation For Dummies and many other books on super and investing. A version of this content was published in SuperGuide and is reproduced with permission. This article provides general information and does not address the personal circumstances of any individual.

6 Comments
Nada
April 02, 2016

I make pre tax extra salary sacrifice contributions each week,. I just noticed that my employer does not pass them onto my super account only at the end of every three months. They are very big company and would be earning big interest that we as workers miss out on. They only distribute compulsory super each three months and have read they can do this by law. In not passing it on each pay this is big financial gain for them for interest received. My question is are they also able to hold back our weekly salary sacrifice (pre tax) contributions meaning they also gain the interest that we should rightly be getting. In all my years of working in health I have never met what this private company is doing Nada

Sam Naidu
March 31, 2015

Good point David. As long as the concessional cap is not exceeded it should not matter whether a person makes personal deductible contribution from business income or employment income. I think 10% rule ought to go.

David Lennon
March 31, 2015

I agreed the SGC should be based on the OTE before salary sacrifice, some employers take advantage, and pay the SGC on the smaller value being the after salary sacrifice amt, which disadvantages the employee. I also had a client who made a large CG and couldn't make a deductible superannuation contribution, as they had worked for a few months in the year and their wage exceeded the 10%. Why can't the system allow an employee to contribute and claim a deduction, on the basis that their combined contributions (employer and personal) are under the cap.

John Harmey
March 31, 2015

Salary sacrifice is a formal arrangement between the parties and the negotiations should always include the amount and timing of the super contribution by the employer.
In my office, a staff member gets salary and SGC contributions to total to a "cost" of employment of $x. I then offer flexibility between salary and super - as long as they add to $x and the super is under the cap I am ok with it. Simple clean and no need for any changes in legislation.

Eric Taylor
March 31, 2015

I have said for a long time that the current system is flawed. Sam has raised one point. This is another. Since the limit on contributions came into existance, the exclusion of a tax deduction for employees should have been removed, as it is quite discriminatory. As examples, I cite the situation where an employer does not allow an employee to salary sacrifice. That person may not be able to contribute the full allowable amount. Similarly, and for 2015 this is my situation, where an employee ceases employment part way through a year and commences self-employment, deductible contributions may not be possible. The same can apply to someone who ceased self-employment and becomes an employee. What if that person had been making contributions for say 9-months?

We need a level playing field for all. Maximum concessional contributions ($30,000 / $35,000) for the year consisting of Super Guarantee, salary sacrifice and tax-deductible contibutions should be allowed for all, to remove this descrimination. It is time our politicians acted on this one.

Sam Naidu
March 31, 2015

As the law stands now employers have the choice to pay SGC on either the Ordinary Time Earnings before salary sacrifice or after salary sacrifice. Govt needs to change the law so that employers pay SGC on pre-salary sacrifice amount.

 

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