How do tax-deductible superannuation contributions work?

In this guide

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 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.

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.

Making a personal tax-deductible contribution can be a great way to offset capital gains you make on assets held outside super.

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. You may be able to contribute even more if you have unused caps from previous financial years using the carry-forward rule.

Definition: Concessional contributions are taxed at the ‘concessional’ super rate of 15% for people whose income plus concessional super contributions is below $250,000. For most people, 15% is lower than the marginal tax rate you pay on income. For those earning more than $250,000 when concessional super contributions are included, an additional 15% tax is payable on some or all your concessional contributions.

Example

Mary is a graphic designer earning $80,000 a year. Mary decides she can afford to make a $10,000 personal deductible 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 32% (including Medicare levy), she pays $3,200 less in tax. Keeping in mind the $1,500 she paid in contributions tax her net tax saving is $1,700.

A word of warning though. If you exceed your concessional contributions cap, you will be liable for extra tax. These excess contributions will also count towards your non-concessional contributions cap, unless you choose to withdraw the excess from super.

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.

Good to know: If your employer doesn’t allow salary sacrifice, or if you have built up savings outside super you would like to contribute, then you can make a personal tax-deductible contribution instead. For employees, salary-sacrifice and personal tax-deductible contributions give the same result.

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 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 contribution, it will not attract the government super co-contribution. You may however make an additional after-tax personal contribution to qualify for the scheme.

Note: Lower income earners may need to weigh up which of these two contributions strategies gives them the best result. If you’re on low marginal rate, there may be no advantage in making a tax-deductible super contribution but the government co-contribution could provide a welcome super boost.

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.

Need to know: Splitting amounts to your spouse

If you’re planning to split all or part of your contributions with your spouse but you also want to claim a tax deduction for them, you must give the notice of intent to claim a deduction first. You can then lodge a superannuation contributions splitting application (NAT 15237).

You can’t lodge the forms the other way around because until your request to claim a deduction is processed your contribution is recorded as a non-concessional amount. Non-concessional contributions are not splittable.

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.