How do tax-deductible superannuation contributions work?

Tax-deductible super contributions are made from your after-tax income. 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 $25,000 a year unless you are using the carry-forward rule.

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 $100,000 a year (or $300,000 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 super contributions you must also:

• Be aged under 75
• Meet the work test if you’re aged between 65 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.

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 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.