Q: I have been made redundant and would like to know if any contribution in super is tax deductible while I’m unemployed, even if I would find work in the next couple of weeks?
Yes, it’s possible to make concessional contributions while an individual is unemployed. Since 1 July 2017, an employee has been able to make voluntary concessional contributions in the form of tax-deductible super contributions, in addition to making super contributions as part of a salary sacrifice arrangement, subject to the annual contributions cap.
For the 2016/2017 financial year however, if a person had been an employee during the financial year, it was not automatic that such a person would be able to make tax-deductible super contributions.
Apart from an employer’s compulsory Superannuation Guarantee contributions, an employee can also make concessional contributions via a salary sacrifice arrangement. And since July 2017, any type of employee can make tax-deductible super contributions, keeping in mind the annual contributions cap of $25,000 (for the 2018/2019 year, and also for the 2017/2018 year).
Note: For the 2016/2017 financial year, the option of tax-deductible super contributions however was not normally an option for an employee (if they had been an employee during the financial year) unless the person had been substantially self-employed (or not employed) in the financial year. I explain this rule further down the page.
Another preliminary issue for anyone considering making super contributions, is whether such a strategy is the appropriate option, in light of the person’s age, the person’s level of assessable income, and other personal circumstances.
Note: If a person is under the age of 65, they don’t have to be working to make super contributions. A person can be unemployed or otherwise not working and still make super contributions. If a person is aged 65 years or over, then he or she must meet a work test before contributing (see SuperGuide article Work test: Making super contributions over 65).
It’s a tax thing
Now, whether an individual who is unemployed wants to make concessional (before-tax) contributions really depends on the income that person earns during the financial year in which he intends to make the concessional contributions. Concessional contributions are subject to a contributions tax of 15% (and an additional 15% tax if a person earns more than $250,000), which generally means such a strategy is only tax-effective if a person pays more than 15 cents in the dollar tax on personal income: for the financial year in which the super contributions are made (for more information about tax rates see SuperGuide article Income tax: Australian tax brackets and rates (2018/2019 and previous years)).
Note: Since 1 July 2012, if an individual earns less than $37,000 a year, and they, or their employer makes concessional (before-tax) superannuation contributions on the employee’s behalf, then the employee can expect a refund of the contributions tax that has been deducted from their super account, paid directly to the individual’s superannuation account by the federal government. The refund of super tax is called the Low Income Superannuation Tax Offset (LISTO). Note that 10% or more of an individual’s total income must be derived from business or employment to be entitled to the LISC. (For more information about LISTO see SuperGuide article Superannuation tax refund: 10 things to know about LISTO).
Warning: It is not possible for an individual to claim a tax deduction for more than they earn, that is, the individual cannot end up with a tax refund when making a tax-deductible super contributions. For more information on this issue, see SuperGuide article Tax-deductible super contributions: Claim no more than your income.
For the 2016/2017 year, could an ex-employee claim a tax deduction?
For the 2016/2017 financial year, if an individual had an employer who made super contributions on their behalf during the financial year, then it may not have been possible for an individual who became unemployed, or self-employed, to make concessional contributions during that same financial year.
For the 2016/2017 year, for an unemployed individual to make a tax-deductible contribution, he or she must have either, received no employer super contributions during the financial year, or, earnings as an employee must be below a specified percentage. For information on the 10% rule (in place until 30 June 2017), see SuperGuide article Tax-deductible super contributions: No longer need to meet 10% income test.
For the 2016/2017 year, according to the ATO, you could claim a deduction on personal contributions, even if you received some income as an employee, as long as you satisfied the ‘maximum earnings as an employee’ condition. Under this condition, the amount you earnt as an employee must be less than 10% of your combined assessable income and reportable fringe benefits for that income year. This is the case regardless of whether your employer has paid super on your behalf. (For more information on tax-deductible super contributions see SuperGuide article Who can now make tax-deductible super contributions?).
Note: Since 1 July 2017 the federal government has removed this 10% income test for making tax-deductible super contributions. For more information on the rules applying to tax-deductible super contributions from the 2017/2018 year onwards, see SuperGuide article Employees can now make tax-deductible super contributions.
You can find more information on concessional contributions generally in the SuperGuide article Super concessional (before-tax) contributions: 2018/2019 survival guide.