How do tax-deductible superannuation contributions work?

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So what are tax-deductible super contributions?
Who can make tax-deductible contributions?
How do I claim a tax deduction for a personal contribution?
The bottom line

If you’ve got cash to spare and would like to boost your retirement savings, then making a tax-deductible super contribution is a great way to get the maximum bang for your buck.

Yes, that’s right. You can boost your super and get a tax deduction to sweeten the deal. But as with everything to do with super, there are rules and limits to the government’s generosity.

For starters, you can’t claim a tax deduction for super contributions your employer makes on your behalf. This includes your employer’s 10% compulsory Super Guarantee and any reportable contributions above this amount, including any salary-sacrifice arrangements you may have.

You also can’t claim deductions for rollover payments from another fund, including foreign funds.

Need to know: On 1 July 2021, the Super Guarantee increased to 10% from 9.5%. It is scheduled to increase gradually until it reaches 12% on 1 July 2025.

So what are tax-deductible super contributions?

Tax-deductible super contributions are contributions you make from your after-tax income for which you claim a tax deduction. This income may be from a variety of sources such as your take-home pay, savings, an inheritance or from the sale of assets.

Whatever the source, you can make a payment to your super fund from your bank account either as a one-off payment or a periodic direct debit.

These contributions count towards your concessional contributions cap, which is currently $27,500 a year unless you are using the carry-forward rule.

Definition

Concessional contributions are taxed at the ‘concessional’ super rate of 15% for people on incomes of up to $250,000. For most people, 15% is lower than the marginal tax rate you pay on income. For those earning more than $250,000, an additional 15% tax may be payable on some or all your concessional contributions.

Example

Mary is a graphic designer earning $80,000 a year. Her employer makes Super Guarantee payments of $8,000 a year, which means Mary could contribute up to $19,500 a year before reaching the concessional contributions cap of $27,500. She decides she can afford to make a $10,000 personal after-tax contribution to her super fund.

After $1,500 (15%) of contributions tax is deducted, Mary is left with a net contribution to her super of $8,500.

Mary then claims a tax deduction of $10,000 in her tax return, reducing her taxable income to $70,000 for the year (ignoring any other income and deductions). As her marginal tax rate is 34.5% (including Medicare levy), she pays $3,450 less in tax. Keeping in mind the $1,500 she paid in contributions tax, her net tax saving is $1,950.

A word of warning though. If you exceed your concessional contributions cap, you may be liable for extra tax. These excess contributions will also count towards your non-concessional contributions cap, currently $110,000 a year (or $330,000 in any three-year period under the bring-forward rule).

Who can make tax-deductible contributions?

There was a time when the only people who could claim a tax deduction for super contributions were self-employed (defined in super legislation as earning less than 10% of their income from salary or wages).

But thanks to changes in super legislation on 1 July 2017, more Australians are now able to make voluntary tax-deductible, concessional super contributions.

If you are self-employed you can still do this, but now you’re also eligible if you:

Earn salary or wages as an employee
Earn investment income
Receive a government pension or allowance
Receive a partnership or trust distribution
Earn income from foreign sources
Earn superannuation income.

Before you get too excited, there’s a catch. To be eligible to claim a tax deduction for your voluntary super contributions you must also:

Be aged under 75
Meet the work test if you’re aged between 67 and 74
Not use the contribution to help fund an existing super income stream or pension
Not be splitting the contribution with your spouse (married or de facto)
Not make the contribution to an untaxed super fund or a Commonwealth public sector defined benefit fund.

If you do claim a tax deduction for your personal super co-contribution, you can’t also claim the government super co-contribution.

Note: Lower income earners may need to weigh up which of these two contributions strategies gives them the best result. If you’re on a marginal tax rate of 15% or close to it, there may be no advantage in making a tax-deductible super contribution.

How do I claim a tax deduction for a personal contribution?

Before you can claim a tax deduction for your personal super contributions, you must provide your fund with a ‘Notice of intent to claim or vary a deduction for personal super contributions’ form (NAT 71121). You can download this form from the Australian Taxation Office (ATO) website, or get it from your super fund.

When you complete the form, you must:

Provide it to your fund by the end of the financial year following the one in which you made the tax-deductible super contribution, or by the day you lodge your tax return for the financial year in which you made the contribution, whichever comes first.
Receive written acknowledgement from your super fund before you claim the tax deduction on your tax return. This acknowledgement will confirm the amount you are eligible to claim as a tax deduction.

The bottom line

If you’re eligible to make tax-deductible super contributions, it’s a strategy well worth considering. Not only will you boost your retirement savings, but you’ll be doing it in the most tax-effective way.

Whether it’s appropriate for you depends on your individual financial circumstances. Your super fund may be able to give you more information and it may also be worthwhile seeking independent financial advice

The information contained in this article is general in nature.