Note: The option for employees to make tax-deductible super contributions became law on 29 November 2016, and took effect from 1 July 2017.
As an employee, the general rule when making super contributions is, you can take advantage of the concessional (before-tax) contributions rules by salary sacrificing, or by making tax-deductible super contributions. If you’re self-employed, you can take advantage of the concessional contributions rules by making tax-deductible super contributions.
Under the super rules, making voluntary concessional (before-tax) contributions to a super fund is now a less complicated business if you are faced with either of the following 3 situations:
- you work for an employer who won’t let you salary sacrifice super contributions, or
- you work for an employer who reduces your Superannuation Guarantee entitlement when you salary sacrifice (that is your SG contributions are based on the reduced salary level) (see second half of SuperGuide article Superannuation Guarantee: Many Aussies miss out on SG increase), or
- your work arrangements include both work as an employee, and work as a self-employed person.
Before July 2017, if you worked for an employer who wouldn’t agree to redirect some of your before-tax wages or salary to a super fund, then you could not make voluntary concessional contributions. Note that you still receive your employer’s compulsory Superannuation Guarantee contributions, which are also concessional contributions. Since 1 July 2017, an employee can consider making tax-deductible super contributions if an employer is not willing to set up a salary sacrifice arrangement.
Alternatively, you may work for an employer who reduces your salary for the purposes of calculating Superannuation Guarantee contributions, when you opt to commence a salary sacrifice arrangement, effectively receiving fewer super entitlements. Before July 2017, you either had to accept this unfair (but legal) behavior, or not salary sacrifice. Since 1 July 2017, instead of salary sacrificing super contributions and your employer reducing the amount of salary on which he or she bases your SG contributions, you can now make tax-deductible super contributions and retain your salary level and your expected SG entitlements.
Another possible scenario is where you are a part-time employee who is also self-employed. You may be receiving Superannuation Guarantee contributions for your work as an employee, which, before July 2017, may have precluded the opportunity to make tax-deductible super contributions (because you were receiving employer support, in terms of super). Since 1 July 2017, your employment status is irrelevant for making tax-deductible super contributions, subject to being mindful of the concessional contributions cap.
Note: Under the super rules, individuals must submit a ‘valid notice of intention to deduct’ and must also have received acknowledgement of receipt of this notice from the super fund. For more information on the paperwork requirements of tax-deductible super contributions, see SuperGuide article Concessional contributions: What form do I use to claim a tax deduction?
Important: Before July 2017, if any of the above 3 situations applied, you could only make tax-deductible super contributions if you satisfied the 10% income test for tax-deductible contributions. The 10% income test requires that an individual earns less than 10% of their income from employment-related activities, before they can claim a super contribution as a tax deduction. If a super contribution is made before 1 July 2017, but reported in a super fund’s accounts on or after 1 July 2017, the old rules apply to that super contribution, that is the 10% income test rule must be satisfied to be able to claim a tax deduction. See the end of this article for an explanation of the 10% income test rule.
For information on defined benefit funds and tax-deductible super contributions, or for more information on the old 10% income test, continue reading this article.
For more information on tax-deductible super contributions and the processes involved, see the following SuperGuide articles:
- Who can make tax-deductible super contributions?
- Tax-deductible super contributions: No longer need to meet 10% income test
- Tax-deductible super contributions: Claim no more than your income
- Concessional contributions: What form do I use to claim a tax deduction?
Can I make a tax-deductible super contribution to a defined benefit fund?
Although most Australians can now make tax-deductible super contributions (subject to the concessional contributions cap), two categories of fund members are not be able to make tax-deductible contributions under the new rules:
- Defined benefit interest in a Commonwealth public sector super scheme. The first category are members of the Commonwealth public sector superannuation schemes in which an individual has a defined benefit interest. Such a member can make tax-deductible super contributions to other types of super funds (accumulation funds), subject to meeting the other super rules covering tax-deductible contributions. Defined contribution (accumulation fund) members of these types of funds are not affected by this exemption.
- Members of untaxed schemes. The second category of super fund members that cannot claim tax deductions for super contributions are those members of untaxed schemes. Untaxed schemes do not account for concessional contributions made by the employer when calculating assessable income (it is a notional contribution rather than actual contribution). Such a member can make tax-deductible super contributions to other types of super funds (accumulation funds), subject to meeting the other super rules covering tax-deductible contributions.
Important: Additional super funds may not offer fund members the opportunity to make tax-deductible super contributions in the following instances: any State, Territory or private sector defined benefit super fund that advises the government that they face difficulties (and significant cost) in administering the new rules. Defined contribution (accumulation fund) members of these types of funds are not affected by this exemption.
Removal of 10% income test makes concessional contributions rules fairer
The 10% income test was abolished from 1 July 2017, which means those employees with difficult or unfair employers, or individuals who are both employees and self-employed, or even those individuals who work part-time but generate more than 90% of their income from investments or other passive sources, are now able to make tax-deductible super contributions, subject to the annual concessional contributions cap.
Quoting from the explanatory memorandum (Chapter 7) accompanying the legislation:
Prior to these amendments, the requirements for an individual to deduct a contribution included a requirement that, broadly, less than 10 per cent of the sum of the individual’s assessable income, reportable fringe benefits and reportable employer superannuation contributions were attributable to employment or similar activities (see section 290-160 [of ITAA]). Amounts that will generally be attributable to employment include salary, wages and benefits received from an employer. For example, an individual with total assessable income of $100,000 and no reportable fringe benefits or employer superannuation contributions would have been unable to deduct a personal contribution if they received a salary of $10,000. [7.6].
This requirement disadvantage individuals who did not work for employers that offered salary sacrifice arrangements and individuals that were substantially self-employed but who received 10 per cent or more of their income from employment. [7.7]
For more information on tax-deductible super contributions, see the following SuperGuide articles: