From 1 July 2017, the 10% test that previously applied to personal deductible contributions has been removed. As a result, all individuals under the age of 75 (including those aged 65 to 74 who satisfy the work test) will be eligible to claim a tax deduction for personal superannuation contributions.
Prior to 1 July 2017, individuals who were employees at any time in the financial year must have earned less than 10% of their income from employment (the 10% test) to be eligible to claim a tax deduction for personal super contributions. This generally meant that only individuals who were self-employed or not employed (eg. retirees) were eligible.
The predominate benefit of making a personal deductible contribution is that individuals are able to claim the contribution amount as a tax deduction to offset their assessable income.
The tax saving for individuals is the difference between their marginal tax rate (including Medicare levy) and contributions tax of 15% on every dollar they make as a personal deductible contribution.
From 1 July 2017, the concessional contributions cap is $25,000 for all individuals regardless of age. Concessional contributions include employer superannuation guarantee contributions, salary sacrifice contributions and personal contributions for which the individual is claiming an income tax deduction.
Salary Sacrifice v Personal Deductible Contributions
In terms of tax savings, there's little difference between making ongoing salary sacrifice contributions and making regular personal contributions into super followed by a Notice of Intent to Claim within required timeframes.
However, there are some differences worth noting:
• Cashflow – Compared to salary sacrificing, making regular personal contributions from after tax income will leave the individual with less net take home income. If individuals are going to make one-off or irregular personal deductible contributions they need to save up after tax income to do so.
• Administration – both salary sacrifice agreements and personal deductible contributions have challenges. A salary sacrifice agreement must be agreed upon in advance with the employer. A personal deductible contribution requires the individual to lodge a valid Notice of Intent to Claim within required timeframes and claim the deduction in their tax return.
If you would like specific advice regarding the relevance of the changes to personal tax deductible contributions on your personal situation, please speak to Twomeys' Financial Advisor Michael Gay on 02 69 420 300.